Question

Why Treasury rates are significantly lower as compared to other rates?

A Treasury bills and bonds are purchased by the financial institutions for fulfilling their various regulatory requirements. For the bulk purchase, their prices rise and yields turn low. Correct Answer Incorrect Answer
B The amount of capital a bank is required to hold in support of investment in treasury bills and bonds is lower as compared to capital to be held for other instruments with very low risk. Correct Answer Incorrect Answer
C Treasury bonds are considered risk-free assets, meaning there is no risk that the investor will lose their principal Correct Answer Incorrect Answer
D All of the above Correct Answer Incorrect Answer
E None of the above Correct Answer Incorrect Answer

Solution

Treasury bonds are considered risk-free assets, meaning there is no risk that the investor will lose their principal i.e. investors that hold the bond until maturity are guaranteed their principal or initial investment. There is no credit risk and with lower risk, the return is also lower. Furthermore, Treasury bills and bonds are purchased by the financial institutions for fulfilling their various regulatory requirements (like SLR). For the bulk purchase, their prices rise and yields turn low. The amount of capital a bank is required to hold in support of investment in treasury bills and bonds is lower as compared to capital to be held for other instruments with very low risk.

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