Chapter 2, Problem 30PS

Summary Introduction

To determine:

The impact on the spread between yields on commercial paper and Treasury bills if the economy were to enter a steep recession

Introduction:

Recession − A business cycle contraction where the economic activities slow down. This decline in the economic activities continues for month and is seen in different sectors like trade, industrial production, income, employment.

Treasury bills − These are the bills that the government uses to borrow money from the public. This is the simplest borrowing form. These are short terms government securities. These securities are given at discount from the face value and return to face value amount on maturity.

Commercial paper − The short term unsecured debt notes which are given to the public directly by the large well-known companies are called commercial papers. The companies use this for borrowing instead of borrowing from the banks. These may be backed by the bank line of credit.