Marketability, Default Risk, and Yields on Money Market Instruments*

The increase in corporate liquidity over the past ten years, together with higher levels of interest rates and growing sophistication among corporate treasurers and bank portfolio managers, have contributed to the increasing importance of various money-market instruments. The relative position of the Treasury bill has declined, and bank time certificates of deposits, short-term issues of municipalities, and commercial paper have assumed greater importance. The fundamental reason for the attractiveness of alternatives to Treasury bills is, of course, the additional yield that the investor can obtain in the substitute instruments. The differential yield spread over Treasury bills can be explained substantially by two factors—the difference in marketability and the existence of some default risk on the alternative securities.