Logan decided to use the excess cash to pay off the British loan. However, a friend advised him to invest the cash in British Treasury bills, stating that
Logan decided to use the excess cash to pay off the British loan. However, a friend advised him to invest the cash in British Treasury bills, stating that “the loan provides an offset to the pound receivables, so you would be better off investing in British Treasury bills than paying off the loan.” Is the friend correct? What should Logan do?
Here is a tip:
Cost is directly related to the rate of interest.
The rate of interest on treasury bill of Country B is lower by 3 percent as compared to the interest rate of Country B's loan. Investing in Country B's treasury bill is not a good option because it will not provide an offset to pound receivables. This means that Individual L should not consider the advice given by their friend. Instead, they should pay the loan to Country B by using the excess cash.
The friend is not correct. Individual L should not go with their friend's advice. This is because the loan is 3 percent more than the treasury bill's interest rate, which means that Individual L should use the excess cash to pay the British loan.