Final answer:
The yield on commercial paper is higher than on T-bills due to the higher credit risk associated with corporations compared to the near-risk-free status of U.S. government backed securities. Investors demand higher yields as compensation for the additional risk. The creditworthiness and market conditions also influence the interest rates of these securities.
Step-by-step explanation:
The yield on commercial paper is typically higher than the yield on a T-bill with the same maturity primarily due to differences in credit risk. Commercial paper is an unsecured form of promissory note that is issued by corporations. These corporations are generally not considered to be as creditworthy as the U.S. government, which backs T-bills. As a result, investors require a higher yield as compensation for the increased risk of potential default associated with corporate issuers.
Treasury bills (T-bills), on the other hand, are considered risk-free in the sense that they are backed by the full faith and credit of the U.S. government, and therefore, they offer a lower yield. Interest rates also reflect market factors such as supply and demand for funds, general economic conditions, and perceptions of creditworthiness. These differences are illustrated in Figure 17.5, which compares the bond yield of 10-year Treasury bonds ("notes") and AAA-rated corporate bonds, showing that corporate bonds typically offer higher interest rates.