A:

If you only have a short period of time in which to invest your money (i.e. less than one year), there are several investment options you should consider outside of the typical checking and savings accounts, which pay very little or no interest. These alternative short-term investments are known as money market securities.

For example, you might want to consider a Treasury bill (T-bill), a U.S. government debt security with a maturity of less than one year. T-bills ares one of the most marketable securities around the world, and their popularity is mainly due to their simplicity. The maturity for a T-bill is either three, six or 12 months, and new ones are typically issued on a weekly basis. The constant issue of new T-bills and the competitive bidding process mean that T-bills can be easily cashed in at any time. Furthermore, banks and brokerages traditionally charge a very low commission on trading T-bills. You can purchase Treasury bills in the U.S. through any of the 12 Federal Reserve banks or 25 branch offices.

Commercial paper is another investment you might want to consider. It is an unsecured, short-term loan issued by a corporation, typically for financing accounts receivable and inventories. It is usually issued at a discount to reflect current market interest rates. Maturities usually range no longer than nine months and, because of their slightly higher risk, they usually offer a higher rate of return than a T-bill.

Certificates of deposits (CDs) are time deposits at banks. These time deposits may not be withdrawn on demand like with a checking account and are generally issued by commercial banks, although they can also be bought through brokerages. They carry a specific maturity date (three months to five years), a specific interest rate that is slightly higher than T-Bills and can be issued in any denomination. However, the amount of interest you can earn depends on the amount and length of the investment, the current interest rate environment and the specific bank. While nearly every bank offers CDs, rates can vary widely, so it's important to shop around.

Banker's acceptance (BA) are short-term credit investments created by non-financial companies and guaranteed by a bank. They are traded at a discount to face value in the secondary market. For corporations, a BA acts as a negotiable time draft for financing imports, exports or other transactions in goods. This is especially useful when the creditworthiness of a foreign trade partner is unknown. The advantage of BAs is that they do not need to be held to maturity and can be sold off in the secondary markets where they are constantly traded.

(For further reading on these subjects, check out Money Market Tutorial.)

RELATED FAQS

  1. Why would a company use a form of long-term debt to capitalize operations versus ...

    Learn about the different consequences of using long-term debt versus equity to raise capital for business activity, and ...
  2. How do I evaluate a debt security?

    Look at a brief overview of the important factors to consider before purchasing a debt security, such as a corporate or government ...
  3. Under what circumstances would someone enter into a repurchase agreement?

    Learn when investors want to enter into a repurchase agreement, such as to gain quick access to liquidity and enjoy flexibility ...
  4. What are the main risks to the economy of a country that has implemented a policy ...

    Learn about the main risks to a country that has implemented a policy of austerity. Austerity implies cutting government ...
RELATED TERMS
  1. Strike Width

    The difference between the strike price of an option and the ...
  2. Inverse Transaction

    A transaction that can cancel out a forward contract that has ...
  3. Reference Equity

    The underlying equity that an investor is seeking price movement ...
  4. Boundary Conditions

    The maximum and minimum values used to indicate where the price ...
  5. Delta-Gamma Hedging

    An options hedging strategy that combines a delta hedge and a ...
  6. Gamma Hedging

    An options hedging strategy designed to reduce or eliminate the ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    4 Ways You Can Invest In Gold Without ...

  2. Active Trading Fundamentals

    How To Short Amazon Stock

  3. Stock Analysis

    9 Junk Bond ETFs You Should Eye Right ...

  4. Mutual Funds & ETFs

    How to Find the Best Bets in Muni Bonds

  5. Forex Education

    Trading Forex Options: Process And Strategy

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!