Money market instrument to earn some interest

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Reference no: EM131995532

The current rates (discount yields) for 120-day and 180-day T-bills are 5% and 5.1% respectively. Assume the T-bill rates will remain unchanged for the next 360 days. You have $5000 set aside for a big purchase in 360 days, you want to invest in a type of money market instrument to earn some interest. Which option below will earn you more interest at the end of the 360 days?

(a) Buy 120-day T-bills and at maturity reinvest in 120-day T-bills twice. (i.e. Buy 120-day T-bills at 5%, wait 120 days until maturity, invest all the money (principal and interest) received at maturity in 5% 120-day T-bills again, wait another 120 days until maturity, invest all the money received at maturity in 5% 120-day T-bills again, and wait another 120 days until maturity.)

(b) Buy 180-day T-bills and at maturity reinvest in 180-day T-bills once. (i.e. Buy 180-day T-bills at 5.1%, wait 180 days until maturity, invest all the money (principal and interest) received at maturity in 5.1% 180-day T-bills again, wait another 180 days until maturity.)

Reference no: EM131995532

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