Series 65

AAA

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.

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.
The Federal Reserve
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