Question

After selling your house and purchasing a new house you have $25,000 left you wish to invest. The first option you have is a one year T-Bill with a par value of $25,000 which costs $23,250. Your second option is to invest in a 12 month CD with a 6.5% interest rate. Of these two available options which would allow you to receive a higher rate of return. Make sure to show your calculations

Answer 1

T-Bill

Explanation:

Comparing the two options:

T-Bill with a par value of $25% costing $23,250 with a one year maturity:

Rate of return = (25,000 - 23,250) / 23,250 = 0.07764 or 7.764%

CD with a 6.5% interest rate and a 12-month maturity:

Rate of return = (25,000 x 6.5%) / 12 = 0.05625 or 5.625%

So, investing in the T-Bill would give you a higher rate of return than the CD. The T-Bill is a very safe and liquid investment option, whereas the CD is also safe but less liquid. If you want a higher rate of return and are willing to accept the risk of a one-year maturity, the T-Bill is the better option. If you want to have more flexibility to withdraw your funds before one year or if you prefer a fixed rate of return, the CD may be a better choice.