Cash Equivalents and Fixed Income Securities - Cash Equivalents
There are several types of cash equivalents:
- Certificates of Deposit - CDs
- While traditional CDs are not considered negotiable, large-denomination, short-term CDs purchased by institutional investors are often negotiable.
- These are often issued in $1 million denominations, and there is an active secondary market.
- Typically, the terms are from 14 days to a maximum of six months.
- Due to their size, most individual investors take advantage of these equivalents by investing in a money market fund that buys these CDs.
Look Out!
Questions about negotiable CDs may include an option to define them as "callable." Many people with a brokerage background are aware that some negotiable CDs are callable, but for test purposes, it is assumed they are not. Any answer that includes "callable" as a characteristic is incorrect. |
- Money Market Funds
- These are mutual funds that invest solely in low-risk, short-term cash equivalents, such as CDs, commercial paper, repurchase agreements, government securities and other very liquid securities.
- Since these opportunities are generally available only in very high denominations, the best way to invest in these securities is via a money market fund.
- Because of the short duration of these instruments, money markets are considered to be very low-risk.
- Plus, they offer the convenience of check writing, so they are extremely liquid.
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For more information on money markets, refer to the tutorial:
The Money Market.
- Commercial Paper
- By definition, money market instruments mature in one year or less. But commercial paper, which is a major component of many money market funds, has a maximum maturity of up to 270 days.
- These instruments are issued by corporations to finance accounts receivable and inventories; as such, they possess a higher risk than government securities and CDs.
Treasury bills
- These are short-term (one year or less) obligations issued by the U.S. government.
- They are the standard for the "risk-free" return, used as a point of comparison for all other investments.
- Since their minimum denomination is $10,000, they are a great choice for individual investors.
- They are sold at auction at a discount to face value - basically the price you pay is the face value minus your interest. You "earn" the interest when your bill matures at face value.
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