Figure

Spread between three-month CD and T-bill rates

Yields on Money Market Instruments

Although most money market securities are of low risk, they are not risk-free. As we noted earlier, the commercial paper market was rocked by the Penn Central bankruptcy, which precipitated a default on $82 million of commercial paper. Money market investments became more sensitive to creditworthiness after this episode, and the yield spread between low- and high-quality paper widened.

The securities of the money market do promise yields greater than those on default-free T-bills, at least in part because of greater relative riskiness. Investors who require more liquidity also will accept lower yields on securities, such as T-bills, that can be more quickly and cheaply sold for cash. Figure 2.2 shows that bank CDs, for example, consistently have paid a risk premium over T-bills. Moreover, that risk premium increases with economic crises such as the energy price shocks associated with the Organization of Petroleum Exporting Countries (OPEC) disturbances, the failure of Penn Square Bank, the stock market crash in 1987, or the collapse of Long Term Capital Management in 1998.

2.2 ! THE BOND MARKET

The bond market is composed of longer-term borrowing or debt instruments than those that trade in the money market. This market includes Treasury notes and bonds, corporate bonds, municipal bonds, mortgage securities, and federal agency debt.

These instruments are sometimes said to comprise the fixed-income capital market, because most of them promise either a fixed stream of income or stream of income that is determined according to a specified formula. In practice, these formulas can result in a flow of

TREASURY BONDS, NOTES & BILLS

Thursday, October 18, 2001 Representative Over-the-Counter quotation based on transactions of $ 1 million or more.

Treasury bond, note and bill quotes are as of mid-afternoon. Colons In bid-and-asked quotes represent 32nds; 101:0! means i 01 1/32. Net changes in 32nds, n Treasury note, i-lnflatlon-lndexed issue. Treasury bill quotes in hundredths, quoted on terms of a rate of discount. Days to maturity calculated from settlement date. At! yields are to maturity and based on the asked quote. Latest 13-week and 26-week bilte are boldfaced. Few bonds callable prior to maturity, yields are computed to the earliest cafl date for Issues quoted above par and to the maturity date for issues below par. * When issued. Source; Telerate/Cantor Fitzgerald

U.S. Treasury strips as of 3 p.m. Eastern time, ateo based on transactions of $1 million or more. Colons in bid-anci-asked quotes represent 32nds; 99:01 means 99 1/32. Net changes in 32nds. Yields.calcuiated on the asked quotation, ci-stripped coupon interest. bp-Treasury bond, stripped principal. np-Treasury note, stripped principal. For bonds callable prior to maturity, yields are computed to the earliest call date for issues quoted above par and to the maturity date for issues below par. Source: Bear, Stearns & Co. via Street Software Technology Inc._

GOVT. BOND & NOTES

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