Compare 3 months government bond and time-deposit (consider risk level and expected reurn). Which one doyou...

Compare 3 months government bond and time-deposit (consider risk level and expected reurn). Which one doyou prefer to invest your money? Explain your answer.

Expert Solution

Sl. No.	Parameter	3 months government bonds	3 months time deposits
1.	Exepcted return (interest)	Slightly higher and better than time deposits of equal duration	Relatively lower. There can be a spread of usually 0.24% - 0.40% on annual basis.
2.	Risk level	Relatively safer: Since they are issued by government, they are considered to be risk free.	Relatively riskier: Can't be completely risk free theoretically but they are very safe.
3.	Pre mature withdrawl	No penalty, but can be redeemed only during government auctions which are held very frequently	Can be withdrawn any time, but you have to pay penalty for pre mature withdrawl
4.	Taxation	Tax exempted	Interest income is taxable and get taxed at marginal tax rate

I will prefer to invest the money in 3 months government bonds. They are risk free and tax exempted. The effective post tax yiled is higher in case of government bonds and also they are considered risk free.

jeff jeffy answered 2 years ago

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