Cash and Cash Equivalents

Last updated Dec 10, 2022 Edit Source

• Securities

Synonym

Also known as “money market securities”.

Under Construction

This site is still in the works. The content on this page is still being written.

There may also be links to non-existent pages (these will be greyed out, like this)

• Purpose: Businesses use Cash and Equivalents as a buffer against bad times, or to make strategic acquisitions.
  • The first line of a corporation’s Balance Sheet is “Cash and Equivalents,” listed under “Current Assets”.
  • When a business invests its excess cash in short-term interest-bearing securities, they are investing in Money Market Securities as opposed to long-term bonds, to earn interest at a lower risk.
• Definition: Money market securities are debt securities maturing one year or less.
  • As opposed to: Debt securities maturing >1 year, which are sometimes called “Funded Debt”.
• 👉 Remember: The exam may refer to money market securities as “cash equivalents” because they are as good as cash.
• ➕ Pros: Money Market Instruments are better than cash, because they are earning interest. It’s not a high interest, but you are not risking it in the stock or bond markets.
• ➖ Cons:
  • Money Market Instruments do not tend to keep pace with inflation
  • The opportunity cost of cash: Investors miss out on opportunities if they hang onto too much cash, such as if the stock or bond market rallies.