Question

You work as the treasurer of a large manufacturing corporation where earnings are down substantially as a result of COVID-19. In an environment where interest rates are going to decline over the next three to six months, you want to invest in fixed-income securities to make as much money as possible for the firm. The board recommends investing in one of the following securities:

• Three-month Treasury Bill • Twenty-year Corporate Bonds • Twenty-year zero-coupon Treasury Bonds

Describe a suitable strategy based on your knowledge of bond theory, which may allow the company to maximize its profit if it were to undertake one of these investments. Further, advise the board on what is best for the company at this time given your knowledge of other investment options in the market.         

Answer 1

Because of this epidemic COVID-19 almost all businesses are struggling and they are facing the crunch in revenue and because of that their cash flow has been significantly affected. From the perspective of investment it is better for the company to stick to highly liquid securities and securities where the safety is high because most people are expecting that the effect of this pandemic is not going to go very soon and most economist and companies are expecting fall in the revenue for their company, in these circumstances it better for the board to choose to invest in 3 Month treasury bill. Corporate bond at this time would be a high risky option, corporate bonds do well when the economy is doing well and other factors are doing great but in times of distress the probability of default increases. 20 Year zero coupon would be too pessimistic so the better option is the three-month treasury bills.

At this time the board should avoid investing in high risky projects and focus on investing cash in treasury bills, they will provide small returns but at least your capital will be safe. Venturing in risky market at this time might not be a good idea.