A three-month Treasury bill rate is not free of risk for a five- or ten-year period, since interest and principal received at maturity must be reinvested at three month intervals.

Question

Quizplus · Accepted Answer

The statement is true. The risk of reinvestment exists when the maturity of a security is shorter than the investment horizon, as the investor will have to reinvest the principal and interest received at maturity at potentially different rates. In the case of a three-month Treasury bill, the investor would have to continuously reinvest the funds every three months to maintain the same investment duration, which exposes them to interest rate risk.

A Three-Month Treasury Bill Rate Is Not Free of Risk