Thomas can invest $10,000 by purchasing a 1-year T-bill for $9,585, or he can place the $10,000...

Question:

Thomas can invest $10,000 by purchasing a 1-year T-bill for $9,585, or he can place the $10,000 in a 12-month deposit paying 6.22%.

Which investment will provide a higher return? In addition to return, what else should Thomas consider when making his investment decision?

Investment:

Investment is analyzed based on the risk related to the collectibility of the amount and the periodicity of cash inflow related to the investment. The investment that provides a higher return is preferred for the investment.

Answer and Explanation:

The investment of $10,000 in a 12-month deposit paying 6.22% investment will provide a higher return.

Explanation: The investment by Thomas for $10,000 by purchasing a 1-year T-bill for $9,585 would provide a yearly return of 4.33% {($10,000 - $9,585)/$9,585 x 100} which is lesser than the 6.22% interest rate.

Thomas should consider the following factors while making his investment decision: -

(1) The risk related to the collectibility of the amount.

(2) Periodic cash inflow related to the investment.


Learn more about this topic:

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Investment Risks: Definition & Types

from Finance 305: Risk Management

Chapter 3 / Lesson 3
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