WHY MIGHT THE ANNUAL INTEREST RATE PAID BY A 90-DAY TREASURY BILL DIFFER FROM THAT PAID BY A 1-YEAR T BILL?

Investors are risk averse — and expect to be paid more to take on risk. The 90-day T-Bill and the one-year Bill have different levels of risk.

There are two types of risk associated with interest rate — Price Risk and Reinvestment Risk. Usually, the market is worried about price risk. Since the one-year bill has four times as much price risk as the 90-day bill, investors usually demand a higher yield on the one-year.

Occasionally, market sentiment changes, and the market is worried about reinvestment risk. During these periods the market demands a greater return on the 90-day bill — because it has more reinvestment risk.

First of all there is no 1 year t-bill. The longest term is 6 months. In fact I do not believe the treasury issues 1 year paper at all. The next in the debt instruments after 6 month bills is 2 year notes, I believe.

Assuming that there were 1 year paper, the interest rate would be different because of the longer term of the loan. It may be greater as would normally be the case or it may be lower as is sometimes the case. The parameters that affect interest rates are economic expectations and risk. For example expectations and risk that inflation might become worse or expectations and risk that the economy might collapse as is currently the case. And also the Fed manipulation of interest rates.