Wednesday, August 26, 2009

Changing yields on paper issues

Because yields on commercial paper are open-market rates, they fluctuate daily with the ebb and flow of supply and demand forces in the marketplace. In the wide swings between easy and tight money which characterized the 1970s and early 1980s, commercial paper rates fluctuated between extreme highs and lows. For example, in 1977-a year of modest economic growth and moderate credit demands- paper rates averaged only about 5.5 percent. early in 1981,however, when intense credit demands and rapid inflation characterized the economic situation, paper rates ranged upward to nearly 18 percent, or more than three times as high as in 1977. The commercial paper market is highly volatile and difficult to predict. This is why many corporations eligible to borrow there still maintain close working relationships with commercial banks and other institutional lenders.

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