Chapter 1, Problem 1Q

The Economics of Money, Banking an...

11th Edition
Frederic S. Mishkin
ISBN: 9780133836790

Chapter
Section

The Economics of Money, Banking an...

11th Edition
Frederic S. Mishkin
ISBN: 9780133836790
To determine

The relationship among the interest rates of three-month Treasury bills, long-term Treasury bonds, and Baa corporate bonds.

Explanation

The investor of a treasury bill does not receive any interest on them. The source of profit for the investor becomes the difference between the discounted value at which he purchases these securities and the value he receives at par.

On the other hand, long-term Treasury bonds are the most extensive form of securities issued by the government which possesses the maturity period of 20 or 30 years. Moreover, the investor of a treasury bond receives interest on these securities semi-yearly.

This means that three-month treasury bills are the securities preferred for the short-term investment because firstly it is only for a maximum period of 52 weeks and also it does not offer any interest.

Baa Corporate Bond is type bond in which credit rating (where Baa is a rating) is given to various bonds to ensure their worthiness. Baa rating is given to those bonds which are considered to be of Medium- Grade where grade A is the rating for High rated bonds and grade C for the low rated bonds. There are no interest considerations on these credit ratings.

Concept

Introduction:

Three month Treasury bill are those securities which are issued at a discounted rate but yield no interest. These can be issued for a time period up to 52 weeks.

Long-Term Treasury Bonds are the saleable securities which have a maturity period of more than 10 years. Baa Corporate bonds refer to those corporate bonds which are considered to be of medium grade on the scale of bond rating.

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