Question

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.

Answer 1

Answer:

I would rollover.

Explanation:

It is expected an increase in the interest rate in the near future. It is better to wait for the purchase of a long-term note because, once the interest rises, the price of the TS at 9 years will decrease to match the new yield.

While doing a rollover we can make the cash work at 5% and start yielding at 7% in six month. Once the expectation of higher interest rate vanish, I can consider moving to a long Treasury Bill, which most probably will have a lower cost than today.