Question

1. Suppose the U.S. Government were to default on its Treasury obligations. What would be the probable effect on T-bill rates?

2. What is a ‘sinking fund’? Do investors like securities with this feature? (that is, will investors accept a relatively lower yield if this feature is present?

Answer 1

1. The t-bill rates will have to increase if the Governmnet defaults on it's obligations. The investors might not perceive it as the most safest instrument to invest, hence they would demand a higher yield while they invest in the T -bills.

2. Sinking fund is a feature , where the issuer regualrly keeps aside a certain sum of money to pay back the bond holders when the bond matures . Yes, investors like this feature as it provides them with security and the presence of this feature lowers the yield that they would demand from the securities due to the security of a sum of moeny kept aside to pay back to the investors.