This question is about t bills.

Question

Is the market price higher for a shorter maturity date? If so, then can someone please give a brief explanation?

Also can someone please explain the relationship between the market price and interest rates? 

Any help will be greatly appreciated.

Answer 1

If you lend money to someone for a month, there is a good chance you will be paid back. If you lend money to someone who promises to pay you back 10 years from now, you really don't know what the chance is that you will get your money back. Short-term lending carries less risk than long-term lending. For that reason, loans, bonds, and mortgages that will mature years from today usually have a higher interest rate than loans that will be repaid in a year or 30 days. the higher interest rate compensates for the higher risk.

 

Of course, risk also depends on the borrower. Lending to the US government is safer than lending to the local car dealer. The US government has never defaulted on a debt. Therefore government bonds and notes have a lower interest rate than similar term loans made to businesses that don't have a good record of earning profits. AT&T can borrow at a lower interest rate than a young company manufacturing fiberglass boats. Interest is the price you pay for renting someone's money, and it also compensates for the risk the lender is taking.