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What are Cash Equivalents?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 24 March 2014
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A cash equivalent is a safe investment that carries such a low amount of risk that the outcome is virtually ensured. There are a number of different types of investments that may be properly identified as cash equivalents. These tend to be easily converted into cash if necessary, and may be used as collateral in some cases.

Interest bearing investments are one of the best examples of cash equivalents. Within this group, such items as Treasury bills and money market funds are common types of this sort of asset. Short-term municipal bonds, especially those with a maturation date of three months, are also often understood to be this type of instrument.

With the operation of a business, outstanding Accounts Receivable balances are considered to be cash equivalents. In fact, there are a number of services that will lend troubled companies the face value of the invoices generated at a given billing period, and use the payments of the invoices to pay off the loan. Generally, the lender will subtract a fee from the face value of the invoices that will be in the range of three to five percent.

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Around the home, cash equivalents may include several other financial instruments, like checks or money orders that are awaiting deposit or redemption. Gift certificates also qualify. More recently, many restaurants and other retail outlets have begun to issue private branded cash cards that can be loaded with any amount and used for purchases at a specific retail chain. These private branded cards function as cash equivalents in the same manner as gift certificates.

There are two advantages normally associated with cash equivalents. First, the financial instrument is easily negotiable, and may be converted into cash with very little trouble. Second, things such as gift cards and gift certificates make it possible to purchase goods and services without the need to carry cash or use credit cards. In both instances, cash equivalents allow individuals to achieve satisfaction in a very short period of time.

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Discuss this Article

anon941672
Post 8

If there is a time deposit which can be early withdrawn before maturity (with or without penalty), is it possible to classify it as cash equivalents even if it has a maturity of over three months?

anon329963
Post 7

How would you classify a compensating balance held in long term borrowing arrangements, cash receivables short term investments or other?

anon329962
Post 6

Is a treasury bill maturing in six months considered cash a receivable a short term investment or other?

mutsy
Post 5

I just wanted to add that treasury bills are considered cash equivalent investments, but many other people like to invest in municipal bonds. Municipal bonds are sold at different maturity dates and the nice thing about these investments is that the income that they offer is tax free because these bonds are used to help government municipalities.

There are general obligation and revenue bonds. The general obligation bonds are the safest to invest in. These investments used to really be sought after but with all of the cities and states that are becoming bankrupt many people are staying away from these investments. However, they do help with cash flow because you do get a consistent tax free check twice a year.

letshearit
Post 4

If you are just starting to consider picking up some investments that are cash equivalents, yet offer some interest gains, as well as a good level of security, what do you think is best?

I have being thinking about the U.S. savings bonds. I like how the money invested in there doesn't have to face taxes and any interest generated is free of tax until you cash the bond out.

The issue becomes whether or not leaving my money locked up for more than a year is a good idea or not.

Do you know of any other kinds of bonds or investment options that allow a little more flexibility for withdrawing funds, while still accruing hire interest?

Sara007
Post 3

One of the best cash equivalents they have come out with are the VISA and MasterCard gift cards with preloaded balances. It's wonderful to have these for tweens and teenagers who want to start online shopping.

I think that this kind of gift is secure and allows flexibility that your average gift card doesn't. While not all retailers online accept them, many do.

For in store purchases, these cards are accepted anywhere the traditional Visa and MasterCard credit cards are.

These cards are a really a good learning tool as well, as teaching tweens and teenagers how to use a card while making sure they don’t go over their ‘limit’ is a good skill to have.

anon19389
Post 2

Good questions. They would make great wiseGEEK articles. Please consider submitting them buy selecting "Suggest a Topic" in the wiseGEEK drag down menu at the top of the page.

anon19256
Post 1

What about Marketable Securities (Stocks traded on established stock exchange)? Are those so safe that they can be considered a Cash Equivalent (Albeit a volatile one)?

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