Investments, tenth edition

  risk-free  asset    .

Their short-term nature 

makes their values 

insensitive to inter-

est rate fluctuations. 

Indeed, an investor can 

lock in a short-term 

nominal return by buy-

ing a bill and holding it 

to maturity. Moreover, 

inflation uncertainty 

over the course of a few 

weeks, or even months, 

is negligible compared 

with the uncertainty of 

stock market returns. 

 

In practice, most 

investors use a broad 

range of money market 

instruments as a risk-

free asset. All the money market instruments are virtually free of interest rate risk because 

of their short maturities and are fairly safe in terms of default or credit risk. 

 Most money market funds hold, for the most part, three types of securities—Treasury 

bills, bank certificates of deposit (CDs), and commercial paper (CP)—differing slightly 

in their default risk. The yields to maturity on CDs and CP for an identical maturity, for 

example, are always somewhat higher than those of T-bills. The recent history of this yield 

spread for 90-day CDs is shown in  Figure 6.3 . 

  Money market funds have changed their relative holdings of these securities over time 

but, by and large, T-bills make up only about 15% of their portfolios.  

2

   Nevertheless, the risk 

of such blue-chip short-term investments as CDs and CP is minuscule compared with that of 

most other assets such as long-term corporate bonds, common stocks, or real estate. Hence 

we treat money market funds as the most easily accessible risk-free asset for most investors.