Question

You can buy a 1 year UST today at 1%, or a 6 month bill today at 1% - which do you choose, and what are your implicit assumptions about the direction of short term rates over the next few months? What is the 6 month rate, 6 months forward called and why is it important?

Answer 1

I will be prefering to invest into 6 month bill at 1% because of my expectations in the economy of being highly volatile so I am thinking that short term rates in next few months is going to be highly volatile and they are going to provide with a higher rate of return but they are going to go lower and then go higher again, so I can help myself by having a lower duration exposure in order to take the benefit of the liquidity and re-invest at the lower prices so that I will be having benefit of investing at perfect entry points.

6 month rate will be termed differently in different parts of the world and in some part of the world, it will be called Libor, Mibor.

These are generally future exchange rates which will be reflecting the short term investment options for the investors and they will provide with optimum flexibility in investment.

These rates are important because this will be providing with the direction of economy in this short period of time and we can correlate it with yield curve in order to to determine the risk related to investment and expectation of Returns.