Question

Q:1 The average rate of return on investments in large stocks has outpaced that on investments in Treasury bills by about 7% since 1926. Why, then, does anyone invest in Treasury bills?

Answer 1

Firstly investements are made by common people by scarificing some part of their present income so as to enjoy a little extra income in their future or at the time of reitrement. Investment can be made in many forms like buying plots FD, stocks, shares, bonds and many other things.An average investor usually invest in shares, stocks and bonds which may be issued by government of by wellknown companies. But the fact remains that the real benefit of the investment can be seen only at the time of maturity that is the value may appreciate or depreciate as the time and market conditions prevail. Investment made depends on the rate of return which is subjected to market conditions, poitical conditions and socialconditions also. In the case of stocks , shares bonds it mainly depends on the Company assets, working capital and its performance in the market past and presentbut. Due to all such constrains and a risk factor involved but an investor always try to be on the safer side.

Treasury Bills are one of such zero risk investment which is a short term or long term. Treasury Bills  is a short term government obligation mainly for a period of  maturity of one year or less may be weeks are called short term T-Bills.T-bills for 5-years, 10-year or more are Long term T-Bills which are profitable. In USA treasury bill are in denomination of $1000 and may go to even a higher amount upto 5 million . As these are issued by the government there is less of risk factor. As an investor rightly always is in search of a low risk investment Treasury Bills serve it very purpose. Longer the period of maturity higher is the return. One of the main advantage of T- Bill is that it has a fixed rate interest whereas Stock investements have fluctuating rates but T-Bills have a fixed rate of return. T-Bills have a face value like 100, 500 or 1000. When an investore intends to purchase they are offered at a discounted value. But on maturity the investor will receive the full value along with interest. Short term T-Bills are preferr ed by small investeors as they do not burden them with intial investment but offers a marginal profit. Short term T-Bills may not makeyou rich but may only add to an investorsavings.

Even though the rate of return factor on largestocks is much larger that in T-Bills . A research has shown that many people like to largestocks which involve huge risk factor as they may be risk factor oriented. But for a average investor ,loss in invesment may give him a heart blow.

As per the study by CRSP (Center of Research for Securtity Prices) a databse in US indicates that since 1926 has shown that nearly 4% of the best performing best listed companies have the net gain for the entire collective stocks have collectively matched T-Bills. More than half of common stocks issued in the market tend to show a negative returns as per the CRSP reseach. A single stock market has showed an underperformance in the rate of return then a one-month T-BIll over a period from 1926 - 2016 by 73%.

The overall fact is that stock market generates long term returns but it may possibllly puzzel the investor whereas individual stocks fail to match the Treasury Bills.

Therefore even though of all the pro and cons of large stock investment and T-Bill investment and ordinary ,average,and potential investor will decide to invest in T-Bills to be on the safer side.

T-Bills have an assured return so since 1926 as per the CRSP investment though investment in large stocks have high return and people even today prefer T-Bills

A