To Make a Higher
Return Near-cash investments such as Treasury bills and
commercialpaperareliquidand havelittleor norisk,but
they also earn low returns. When firms have substantial
amountsinvestedinmarketablesecurities,theycanexpectto
earn considerably higher returns by investing in riskier
securities. For instance, investing in corporate bonds will
yieldahigherinterestratethaninvestinginTreasurybonds,
andtheratewillincreasewiththeriskinessoftheinvestment.
Investing in stocks will provide an even higher expected
return, though not necessarily a higheractual return, than
investingincorporatebonds.Figure10.6summarizesreturns
on risky investments—corporate bonds and equities—and
compares them to the returns on near-cash investments
between 1995 and 2005.
FIGURE 10.6Returns on Investments, 1995–2005
Source:Federal Reserve.