The Federal Reserve considers moderate inflation rates optimal in their oversight of the US economy. We measure inflation by comparing the price of a bundle or basket of goods over time and documenting how prices change.

One way to parse financial markets is by the maturity of financial instruments. With this dichotomy, we explored the money market and the capital market.

inflation — a general increase in prices and a reduction in purchasing power; expected rate is a key component of interest rates. bond returns — sums the periodic interest payments and the change in bond price in a given period and divides by the bond price at the beginning of the period. commercial paper (CP) — a short-term, unsecured security issued by corporations and financial institutions to meet short-term financing needs such as inventory and receivables. negotiable certificates of deposit (NCDs) — large CDs issued by financial institutions; redeemable at maturity but can trade prior to maturity in a broad secondary market.