ASSIGNMENT | 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 time frame is 9 years.

Current investment opportunity interest rates are 5% and are expected to increase to 7% in 6 months. Would you invest in the Treasury bill that you can rollover every 6 months and reinvest or leave your money in the Treasury note that will mature in 9 years? Discuss your reasoning.

SAMPLE SOLUTION

I will choose to invest in treasury bills (T-bills) as opposed to treasury notes. I like the idea of investing the $ 50,000 in a treasury bill that will be renewed every six months. The difference between T-bills and treasury notes is the time that I will require to collect my principal. T-bills are my favorite as they give me the option of cashing in a T-bill in times of emergencies. Since T-bills don’t pay periodic interest at six months’ interval, they can be said to have favorable tax treatments as well as security (Guo, 2019). Also, since they have short term renewals, they can be said to be protected from risks of interest rates as they mature relatively soon as compared to treasury notes. In this case, after the first six months, the interest rate will have increased from 5% to 7%…