Please 250 words Annuities and Loans Treasury bills and Treasury notes are an in
ID: 2653077 • Letter: P
Question
Please 250 words
Annuities and Loans
Treasury bills and Treasury notes are an investment security issued by the U.S. government. A Treasury bill matures within one year and investors typically roll over the matured Treasury bill and purchase another Treasury bill the same day. Treasury notes have maturities of up to 10 years.
You are considering investing $50,000 in a Treasury bill that you will renew every 6 months or invest in a Treasury note that you will hold until maturity. Your investment timeframe is 9 years. Current interest rates are expected to increase. Would you invest in the Treasury bill or Treasury note? Discuss your reasoning.
Explanation / Answer
Ans
Difference Between Treasury note & Bill in the perspective of interest rate and market value
Treasury note and bill are issued and secured by the Government. Generally treasury bills and notes are considered as a risk free investment. However, they too carry a risk in terms of interest rate and inflation. As these are fixed income carrying securities , any increase in the interest rate will negatively impact the market value of these securities.These risks would be more in case of a note, since the note is typically issued for a longer time period rather than a bill. Hence the interest rate would be generally high incase of notes to cover the risk of interest rate.
Whether to invest in note or bill
Here the relevant factor for making the decision would be the expected increase in the interest rate. Assuming in this case investor does not concern about the liquidity of the investment,the investor generally prefers for Notes since it carries a higher interest rate as compared to bills. However, if he perceives an expected increase in interest rate more than the differential interest rate in notes, decision would change accordingly since the bills present an opportunity to reinvest the amount in the higher interest rate .