Cash Equivalents

Cash equivalents refer to investment securities that are aimed at short-term investing; they include high credit quality and are also highly liquid. Cash equivalents called "cash and equivalents," are among the three main asset classes in financial investment in addition to stocks and bonds. These securities tend to have a low-risk, low-return profile. Visit MultiBank Group

Types of Cash Equivalents

Treasury Bills

Treasury bills are generally known as “T-bills." These are securities that the United States Department of Treasury issues. When it is issued to companies, companies basically lend the government money. T-bills could be sold from a minimum of $100 to as much as $5 million. While they don’t pay any interest, they are provided at a discounted rate. The yield of T-bills can be calculated as the difference between the price of purchase and the redemption value.

Commercial Papers

Commercial papers can be used by major companies to receive funds in order to answer short-term debt obligations such as corporations’ payroll. They are backed by issuing banks or companies which agree to fulfil and pay the face amount on pre pre-decided date of maturity mentioned on the note.

Marketable Securities

Marketable securities refer to financial assets as well as instruments which could be easily turned into cash which makes them extremely liquid. Marketable securities are liquid since they mature in a year or less. The rates at which these could be traded have a little impact on prices.

Money Market Funds

Money market funds act as checking accounts which offer greater interest rates on the deposited money. Money market funds offer an efficient and effective tool for companies as well as organizations to manage their money as they happen to be relatively more stable than different types of funds such as mutual funds. Its share price remains steady at $1 per share.

Short-Term Government Bonds

Short-term government bonds are offered by governments to fund government projects. These are issued with the help of a nation’s domestic currency. Investors take into account political risks, interest rate risks, and inflation as they invest in government bonds.

Certificate of Deposits (CD)

Certificates of deposits refer to agreements with a financial institution to allow the bank access to your capital for a certain time period. In return for giving up the liquidity over your funds,  the financial institution agrees to pay you greater interest for the capital. 

Bankers' Acceptances

Bankers acceptances refer to forms of payments that are guaranteed by a bank and not an individual account holder. Since it is the bank that guarantees payments, the short-term issuance by a bank is believed to be close enough to cash. Bankers' acceptances are commonly used for facilitating transactions where there is a minimum risk for either party.

Bottom Line

In case a company chooses to earn some interest on its money as it plans its long-term strategy, it could choose to invest its capital in cash equivalents. These happen to be short-term, low-risk, highly liquid investments that might not earn a lot of money, though cash equivalents tend to earn more than banks where it lies in a savings account.