Cash and cash equivalent investments include money in your bank account and investments that are like cash because they are generally very safe and give you quick access to your money. However, they have relatively low rates of return compared to other kinds of investments.
These investments include savings bonds, T- bills, GICs, and money-market mutual funds.
A savings bond is a loan to a government that is secured by the general credit and taxation powers of the government.
Savings bonds offer terms of one year or more. You can buy them from most banks, trust companies, credit unions and investment dealers. They are usually offered for sale at certain times of the year. There may be limits on how much you can buy.
Most savings bonds guarantee a fixed rate of interest for each year to maturity. Some have a minimum rate of interest that can be increased by the issuer if market conditions change.
There is virtually no risk of default because savings bonds are guaranteed by the government that issued them.
Some savings bonds must be held until maturity. Others let you redeem at any time or only at certain times, for example, every six months. You generally can’t sell or transfer your savings bonds to someone else.
Treasury bills, or T-bills are short-term loans to a government. Terms are less than one year. T-bills are usually sold in large denominations. You buy them from an investment dealer. Commissions are built into the price of the T-bill.
T-bills do not make interest payments but are sold at a discount and mature at face value. The difference is your interest income.
There is virtually no risk of default. The short-term nature of T-bills means there is low risk that changes in interest rates will cause their market value to change significantly.
You can’t redeem a T-bill before maturity but you can easily sell it back to the investment dealer. However, this may result in a lower rate of return.
This was the second post in our summer Investments at a Glance series. Next week, we look at more cash equivalent investments: GICs and money market funds.