Characteristics, Uses and Taxation of Investments - Cash and Equivalents (Contd.)

Treasury Bills (T-Bills)
: Treasury bills are short-term loans issued by the United States Department of the Treasury. They are discount securities, i.e. they are issued at a discount from their face value. For example, you might pay $970 for a $1,000 bill. When the bill matures, you would be paid its face value, $1,000. These bills do not pay a coupon. The yield is the accrual of the amount from the purchase price to bill's face value, in this example, $30. The interest is determined by the discount rate, which is set when the bill is auctioned. As the Treasury is the largest single debt issuer in the world, the Treasury market is at once the most active and liquid. Issuance in this market is on an auction basis with the submission of both competitive (based upon yield) and non-competitive tenders (based upon quantity) allowed. These bonds trade in the over-the-counter secondary market. U.S. government securities dealers offer continuous bid (the price at which the dealer is willing to buy) and ask (the price at which the dealer is willing to sell) prices on outstanding securities. Evidence of ownership is book-entry form at the Federal Reserve Bank. Investors receive a receipt as evidence of ownership. Interest income is exempt from local and state income tax, but subject to federal income tax. The United States Treasury issues bills in 13 week, 26 week and 52 week terms. The minimum denomination is $1,000. Treasury bills are default risk-free. Their rates are often the basis for the risk-free rate of return. Such bills are subject to inflation risk. Interest on these bills is taxable only when they either mature or are sold. Bills are issued in electronic form and may be sold before maturity.


Commercial Paper: Commercial paper consists of short-term, promissory notes issued primarily by financial and nonfinancial companies. Maturities range up to 270 days but average about 30 to 50 days. Many companies use commercial paper to raise cash needed for current transactions and many find it to be a lower-cost alternative to bank loans. They also do so to avoid the necessary registration process for publicly traded debt securities with maturity dates in excess of 270 days. Consistent with shorter term rates, the yield on commercial paper is a bit higher nonetheless due to the slightly greater risk of default. Like treasury bills, commercial paper is sold at a discount, with the yield coming in the form of accrual to par. The yield is commensurate with that of other money market securities, but a bit higher due to credit, liquidity and tax risks. The paper is subject to the issuer's ability to pay, trades less frequently and interest is not exempt from state and local income taxes. Institutional investors such as money market mutual funds invest in commercial paper.

E. Banker's Acceptances: a form of acceptance financing to finance commercial transactions, it is a negotiable order to pay a specified amount of money on a future date, drawn on and guaranteed or "accepted" by a bank. These drafts are usually drawn for international trade finance purposes as an order to pay an exporter a stated sum on a specific future date for goods received. The act of a bank stamping the word "accepted" on the draft creates a banker's acceptance. These types of instruments are subject both to inflation risk, credit risk and counterparty risk (i.e. the accepting bank failing to pay the exporter). As with commercial paper and treasury bills, these instruments are sold on a discounted basis. The investors are institutional, such as money market mutual funds.

F. Eurodollars: U.S. dollar denominated deposits taken by foreign banks and foreign branches of U.S. banks. These are loans to credit-worthy foreign companies.

Individual bonds
Related Articles
  1. Investing Basics

    Fee-Only Financial Advisors: What You Need To Know

    Are you considering hiring a fee-only financial advisor or one who is compensated via commissions? Read this first.
  2. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  3. Retirement

    Two Heads Are Better Than One With Your Finances

    We discuss the advantages of seeking professional help when it comes to managing our retirement account.
  4. Personal Finance

    How the Social Security Reboot May Affect You

    While there’s still potential for some “tweaking” around your Social Security retirement benefits, I’d like to share some insight on what we know now.
  5. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  6. Entrepreneurship

    Creating a Risk Management Plan for Your Small Business

    Learn how a complete risk management plan can minimize or eliminate your financial exposure through insurance and prevention solutions.
  7. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  8. Entrepreneurship

    Identifying And Managing Business Risks

    There are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
  9. Active Trading

    10 Steps To Building A Winning Trading Plan

    It's impossible to avoid disaster without trading rules - make sure you know how to devise them for yourself.
  10. Trading Strategies

    How to Trade In a Flat Market

    Reduce position size by 50% to 75% in a flat market.
  1. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  2. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  3. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  4. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  5. Gross Exposure

    The absolute level of a fund's investments.
  6. Priori Loss Estimates

    A technique used by insurance companies to calculate loss reserves.
  1. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  2. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  3. Why are mutual funds subject to market risk?

    Like all securities, mutual funds are subject to market, or systematic, risk. This is because there is no way to predict ... Read Full Answer >>
  4. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  5. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
  6. Do financial advisors work only in banks?

    While the majority of financial advisors work for financial institutions such as banks, a large proportion of them are self-employed ... Read Full Answer >>
Hot Definitions
  1. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  2. Bullish Engulfing Pattern

    A chart pattern that forms when a small black candlestick is followed by a large white candlestick that completely eclipses ...
  3. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  4. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  5. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
Trading Center