Cash is an essential component of any portfolio. The purpose of cash is not to maximize return but to preserve capital and keep money liquid for planned spending and investment opportunities. Certain types of investments are so easily convertible to cash that they are considered cash equivalents and often provide a higher rate of return than a savings account.

Bonds represent a long-term loan from the investor to the issuer. The issuer (corporation, federal government or municipality) pays interest during the term of the bond and then returns the face value at maturity. Bonds are considered a lower-risk investment than stocks, since bondholders are unsecured creditors of a corporation, while stockholders are not creditors, but owners.

The information in this section presumes the reader has a basic knowledge of bonds and how they work. If you are not familiar with bonds (or just need a refresher), see the tutorial: Bond Basics.


Cash Equivalents

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