Short – Term Investing
Introduction
A treasury bill or a T-Bill is a short-term maturing promissory note, usually lasting for three months to one year. Nyawata (2012) asserts that the federal or national governments are the ones that issue T-Bills as their primary instruments of regulating the supply of money within the national economy, as well as raising funds for various government projects through open market operations. The central banks of the respective countries are the ones responsible for issuing and paying on T-Bills. According to Thau (2000) T-bills do not have any form of explicit interest, but they sell at a discount price whereby the yield increases from the difference between the price of purchasing the T-Bill and the par-value or the redemption value of the T-Bill at the time of its maturity. On the other hand, a municipal bond or a Munis is a debt obligation issued by a government entity. Munis provide investors with an opportunity to preserve their capital whilst generating tax-free income streams. According to Fischer (2013), an investor who purchases a municipal bond literally loans money to the issuer in return for interest payments over a predetermined period. The bond reaches maturity at the end of the selected period, and the investor receives the full amount of his or her original investment in the munis.
Investing in Government Issues T-Bills
Investing in government issued T-Bills is a good venture for entrepreneurs, especially considering the wide range of benefits that accrue. The benefits include extreme security of their investments, favorable tax treatment, and low cost of transactions. Investing always draws many risks in which the investor may lose his or her overall investment. However, the case of investing in T-Bills is safe because they are offered in short terms, such as four weeks, thirteen weeks, twenty-two weeks or fifty-two weeks (Nyawata, 2012). As such, the short-term nature of treasury bills makes it a safe venture for investment because the holder does not own them long enough to be affected by inflation, which may intermittently erode its values. In the same regard, the government is required by law to pay back every T-Bill it issues, which acts as a guarantee to the investors that their money will be paid back. The investor is able to predict with certainty the income stream expected from these securities. The predictability of the income is enhanced by the fact that treasuries normally do not have the provisions of call, which are common in Munis. Brigham & Ehrhardt, (2016) argue that T-bills unlike munis have varying maturity dates and periods depending, which facilitates an investor to structure their portfolio in line with their objectives and specific timelines.
T-bills are also advantageous as they receive favorable treatment on taxation. Even though T-Bills are subject to federal income tax, they are exempt from local income tax or state income tax. As such, investors living in states and localities that have relatively high taxes can increase their incomes by capitalizing on the zero taxation of T-Bills’ earnings. In addition, T-Bills have low cost transactions in the sense that the investor does not have to pay anything to purchase them, especially when buying them directly from Central Bank through its Treasury Direct Program. According to Nyawata (2012), the Central Bank issues Treasury bills in a fee and commission free manner. However, investors should also be wary of purchasing T-Bills especially in consideration of the few shortfalls that may arise during the period of their investment. Some of these shortfalls include low rates of return and short-term nature of the T-Bills. The low rate of return of T-Bill arises from its security of investment, whereby the interest paid to investors is quite low (Brigham & Ehrhardt, 2016). The short-term nature of the T-Bills is also disadvantageous because investors have to pay taxes on all earnings from T-Bills once they mature, which is quite often considering their short-term nature.
Investing in Munis
As mentioned above, munis are equally a lucrative investment option compared to T-Bills especially because of their tax treatment. As such, investors are advised to go for municipal bonds that are tax-exempt in order to enjoy the financial leverage that accrues from tax-exemption. The two types of munis that investors can buy to enjoy this leverage are revenue bonds and general obligation bonds (Fischer, 2013). The general obligation bonds are tax exempt in the sense that the full faith and credit of the issuer secures the principal and interest of the bond, which is also supported by either the limited or unlimited taxing power of the issuer. Furthermore, the voters usually second a majority of these general obligation bonds by giving their approval. On the other hand, the revenues derived from charges, tolls or rents from the facilities built with the proceeds collected from the bond issue usually secure the principal and interest on revenue bonds. For instance, some of the public projects that revenue bonds finance includes water and sewerage treatment facilities, subsidized housing, hospitals, airports, bridges, and toll roads. As such, the issuers of these bonds are special authorities created specifically to tackle a particular issue, such as infrastructure development. As a willing and able investor, I would go for these two types of munis because of their tax-exempt nature.
Status of Government Securities
Government securities remain by far the best investment options that willing investors can pursue within the market. The reason for this argument is based on the numerous risks that threaten the return on investment of certain investment options, such as the high investment risks present in stock market exchange, or the liquidity risks experienced in the real estate market. As such, investors are looking for investment options that have low risks, such as government issued T-Bills and munis (Nyawata, 2012). These two investment options are government securities that do not present investors with many risks for their investments. For one, the investors are trading with a government, which, unlike a company, cannot easily collapse and go under with its debts (Duarte, 2014). On the contrary, a government stands out as one of the most stable and secure investment partners an investor can have, and as such, these investment options provide investors with a secure and stable source of income.
Another outstanding feature of government securities stems from the fact that most of these government securities are tax exempt and short-term in nature (Fischer, 2013). Tax-exempt investments, which are usually very few in nature, enable investors to increase their scope of income by reducing their due tax liability. In this regard, the more an investor invests in government issued securities, the less tax obligations he or she has to meet. Therefore, government securities provide their investors with the right platform to earn a steady stream of income while reducing their tax obligations. On the other hand, the short-term nature of government securities makes them very safe as investment options (Brigham & Ehrhardt, 2016). Even though the interest rates applied to these securities are low, the earnings are lucrative because they come in short bits, thereby creating an opportunity for the investors to avoid any market turbulence that may be caused by economic shifts and changes such as inflation, political instability, or regime change.
On the other hand, investors are also supposed to know that by participating in the purchase of government issued securities they assist the government in raising the much needed capital for infrastructure development. Similarly, the investors also assist the government in reducing its foreign debt, as in the absence of such government securities the government would have no option but to seek foreign aid, normally given in terms of loans. The other critical role that investors play by purchasing government issued securities is the fact that they assist the central bank in controlling the circulation of money in the economy (Duarte, 2014). For instance, the central bank would not achieve its objective of monetary policy control if the public does not participate in in its policy control programs, such as T-bills and munis.
Conclusion
In conclusion, it is apparent that investors accustomed to short-term and low risk investments find a safe haven in government issued securities such as treasury bills and municipal bonds. These two investment options provide the investors with an opportunity to enjoy maximum returns on their investments while eliminating any risks that may befall their investments. The short-term nature of the government securities makes them suitable for investors who want to avoid market turbulences and economic twists and turns associated with long term investments such as inflation and economic depression. On the other hand, the low risk nature of government issued securities also makes them very lucrative instruments, for investment, especially when approached from the investment perspective of risk avoiders. The risk avoiders are investors who will do anything to secure their investment by avoiding any or all kinds of risks associated with their investments. As such, it is essential to acknowledge that investors opting for T-bills can choose various maturity timelines depending on their objectives and the available timelines. Additionally, T-bills provide the investors with a predictable income stream and the associated tax benefits.
References
Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. London: Cengage Learning.
Duarte, J. ( 2014). The Everything Investing in Your 20s & 30s Book: Learn How to Manage Your Money and Start Investing for Your Future--Now! New York: "F+W Media, Inc.".
Fischer, P. (2013).Investing in municipal bonds: How to balance risk and reward for success in today’s bond market. New York, NY: McGraw Hill Professional.
Nyawata, O. (2012). Treasury bills and/or central bank bills for absorbing surplus liquidity: The main considerations. Washington, DC: International Monetary Fund.
Thau, A. (2000). The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money. London: McGraw Hill Professional.
