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In class we discussed the Term Structure of Interest Rates, expressed graphically in what is known as the Yield Curve. Normally the X axis of
In class we discussed the Term Structure of Interest Rates, expressed graphically in what is known as the Yield Curve. Normally the X axis of the Yield Curve is the Term to Maturity of the bond, while the required return (Yield) is measured on the Y axis. Many economists believe that it is useful to distinguish two Segments along this curve, one for short-maturity instruments, called the Money Market, and one for longer term instruments, called the Capital Market. One important component of the Money Market is Commercial Certificates of Deposit (CDs), which are actually bank deposits sold in denominations of $100,000, and traded daily in an efficient market. In class, we observed that CDs currently pay extremely low interest rates approaching zero. Campbell attributes this low rate to a dramatic change on the balance sheets of commercial banks, and to a corresponding change on the balance sheet of the Federal Reserve (Fed) since 2008. What is the category on these balance sheets that Campbell believes explains very low interest rates on CDs?
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