Investments, tenth edition

  Yields on Money Market Instruments 

 Although most money market securities are of low risk, they are not risk-free. The secu-

rities of the money market promise yields greater than those on default-free T-bills, at 

least in part because of greater relative riskiness. In addition, many investors require more 

liquidity; thus they will accept lower yields on securities such as T-bills that can be quickly 

and cheaply sold for cash.  Figure 2.2  shows that bank CDs, for example, consistently have 

paid a premium over T-bills. Moreover, that premium increased with economic crises such 

as the energy price shocks associated with the two OPEC disturbances, the failure of Penn 

Square bank, the stock market crash in 1987, the collapse of Long Term Capital Manage-

ment in 1998, and the credit crisis beginning with the breakdown of the market in subprime 

mortgages beginning in 2007. If you look back to Figure 1.1 in Chapter 1, you’ll see that 

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6/18/13   7:41 PM

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