Key Takeaways
- Cash equivalents are highly liquid investments maturing in one year or less with minimal price fluctuation
- Treasury bills (T-Bills) are sold at a discount to par and mature at face value — exempt from state/local taxes
- Commercial paper is unsecured corporate debt with maturities up to 270 days, typically issued by companies with strong credit
- FDIC insures bank deposits up to $250,000 per depositor, per institution — does NOT cover investment losses
- SIPC protects securities at failed broker-dealers up to $500,000 (including $250,000 cash limit) — does NOT protect against market losses
Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid investments that can be quickly converted to cash with minimal risk of value change. They provide safety and liquidity but typically offer lower returns than longer-term investments.
Characteristics of Cash Equivalents
- Maturity: Generally one year or less
- Liquidity: Easily converted to cash
- Safety: Minimal price fluctuation
- Return: Lower yields than longer-term investments
Types of Cash Equivalents
Treasury Bills (T-Bills)
T-Bills are short-term U.S. government securities considered the safest investments available.
| Feature | Details |
|---|---|
| Issuer | U.S. Treasury |
| Maturities | 4, 8, 13, 17, 26, and 52 weeks |
| Minimum Purchase | $100 |
| Interest | Sold at discount; matures at par |
| Tax Treatment | Federal taxable; state/local EXEMPT |
How T-Bills Work: If you buy a 52-week T-Bill with a $1,000 face value for $950, you receive $1,000 at maturity. Your return is the $50 discount.
Commercial Paper
Commercial paper is short-term, unsecured debt issued by corporations to fund short-term obligations like payroll and inventory.
| Feature | Details |
|---|---|
| Issuer | Corporations with strong credit ratings |
| Maturities | Up to 270 days |
| Minimum Purchase | Typically $100,000+ |
| Security | Unsecured (backed only by issuer's creditworthiness) |
Why 270 Days? Commercial paper with maturities over 270 days must be registered with the SEC. By keeping maturities at 270 days or less, issuers avoid registration requirements.
Banker's Acceptances
Banker's acceptances are time drafts guaranteed by a bank, commonly used in international trade.
| Feature | Details |
|---|---|
| Maturities | Up to 180 days |
| Use | Financing imports/exports |
| Security | Backed by the accepting bank |
Certificates of Deposit (CDs)
CDs are time deposits at banks with fixed terms and interest rates.
| Feature | Details |
|---|---|
| Terms | Various (3 months to 5+ years) |
| FDIC Insurance | Up to $250,000 per depositor |
| Early Withdrawal | Typically incurs penalty |
| Negotiable CDs | Can be traded in secondary market |
Money Market Instruments
| Instrument | Issuer | Key Features |
|---|---|---|
| Money Market Deposit Account | Banks | FDIC insured, limited transactions |
| Money Market Mutual Fund | Investment companies | NOT FDIC insured, invests in short-term securities |
Critical Distinction
| Account Type | FDIC Insured? | Investment Risk? |
|---|---|---|
| Money Market Deposit Account | Yes | No principal risk |
| Money Market Mutual Fund | No | Minimal (but not zero) risk |
Deposit Insurance
FDIC (Federal Deposit Insurance Corporation)
FDIC insures deposits at member banks.
| Coverage | Details |
|---|---|
| Limit | $250,000 per depositor, per institution, per ownership category |
| Covered | Checking, savings, CDs, money market deposit accounts |
| NOT Covered | Stocks, bonds, mutual funds, annuities, life insurance |
SIPC (Securities Investor Protection Corporation)
SIPC protects customers when broker-dealers fail.
| Coverage | Details |
|---|---|
| Limit | $500,000 per customer (including $250,000 for cash) |
| Covered | Securities and cash at failed brokerage firms |
| NOT Covered | Market losses, bad advice, commodity futures, cryptocurrency |
Key Differences
| Feature | FDIC | SIPC |
|---|---|---|
| Protects | Bank deposits | Brokerage accounts |
| From | Bank failure | Broker-dealer failure |
| Market Losses | Not covered | Not covered |
Exam Tip: Money market DEPOSIT accounts (at banks) are FDIC insured. Money market MUTUAL FUNDS (securities) are NOT FDIC insured. This distinction is frequently tested.
Which of the following is covered by FDIC insurance?
Commercial paper typically has a maximum maturity of:
Treasury bills differ from Treasury notes and bonds in that T-Bills:
2.2 Fixed Income Securities Basics
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