What is it

1
What is it?

• Investments in cash and cash equivalents
• Not just physical money
• Includes investments in bank certificates of
  deposit, bank savings accounts, short-term United
  States Treasury issues, and money market mutual
  funds

2
What is it?

• Certificate of Deposit (CDs)
• A debt instrument issued by a bank in exchange
  for a deposit made by an investor
• Usually issued in minimum amounts of 5,000
• Terms can range from 7 days to ten years
• Interest rates on these certificates are
  frequently tied to the rate paid on U.S. Treasury
  investments of comparable maturity range

3
What is it?

• Money Market Fund
• A mutual fund that invests solely in short-term
  debt instruments.
• The term money market is applied to high
  quality, short-term debt instruments that mature
  in one year. These include
• U.S. Treasury bills
• Certificates of Deposit
• Commercial Paper
• Bankers Acceptances
• Municipal Paper
• Eurodollar Investments

4
What is it?

• U.S. Treasury bills
• Short-term certificates issued by the federal
  government
• Typically mature in three months to one year
• Certificates of Deposit
• Includes certificates of foreign banks as well as
  domestic institutions
• Foreign CDs pay a slightly higher rate of return
  because of the somewhat higher risk associated
  with them
• Commercial Paper
• Short-term debt of major industrial corporations
• Typically matures in 60 days to one year

5
What is it?

• Bankers Acceptances
• Short-term (30 to 360 days) drafts drawn on a
  major bank
• Typically used to finance international
  import/export transactions
• Municipal Paper
• Issued by state, county, or local governments or
  agencies
• Interest is exempt from federal income taxes and
  state and local income taxes depending on the
  investors residency

6
What is it?

• Eurodollar Investments
• Time deposits denominated in U.S. dollars
• Held in banks outside of the U.S. or in foreign
  branches of U.S. banks
• Typically, the minimum investment is 1,000,000
• Trading is very active in maturities up to six
  months.
• The term Eurodollar does not strictly apply to
  deposits held in Europe
• Applies on a worldwide basis

7
When is the use of this tool Indicated?

• When an investor desires a high degree of
  liquidity
• The investor wants the ability to convert an
  investment into cash quickly with little or no
  cost involved.
• Ideal for investors possessing large amounts of
  idle cash who wish to invest it for a short time
  period
• When there is a need for a high degree of safety
  of principal
• The combination of short maturities and the high
  quality of the issuers of money market securities
  provide this desired security.

8
When is the use of this tool Indicated?

• When an investor desires a higher rate of return
  than a passbook-type of account and more
  flexibility than longer-term investments
• When immediate access or availability of the
  funds is desired
• A penalty may be imposed in the case of a
  premature redemption of a CD

9
Advantages

• CDs are generally insured by the federal
  government up to a maximum of 100,000 per
  account ownership title
• Mutual fund money market funds are not guaranteed
  by any federal agency.
• An investment in a money market fund can be
  converted easily and conveniently into cash
• Almost all banks will redeem their CDs prior to
  maturity on demand
• There are penalties for early withdrawal of funds
  from CDs, which can include a withdrawal penalty
  and a reduction in the rate of interest earned.

10
Advantages

• Shorter maturity period than bonds and common
  stocks
• Most money market funds offer shareholder
  personalized check writing services and the
  ability to wire transfer money from the fund to
  the investors bank account.
• Provide a secure investment
• This is due to the financial strength of the
  issuers of the underlying assets held by money
  market funds.
• There will be little or no fluctuation in the
  market value of the investment.
• The return of capital is virtually assured.

11
Advantages

• The rate of return offered by money market funds
  is highly sensitive to changes in short-term
  interest rates.
• Most money market funds do not impose a sales
  charge on purchases of the fund or a redemption
  fee when shares are sold.
• Management fees of approximately 0.2 to 0.7 of
  the fund are applied annually
• An administrative charge may apply to accounts
  with balances below a certain level, such as
  10,000.

12
Advantages

• CDs may be laddered in maturity dates to manage
  interest rate risk
• If liquidity is needed (taking away long-term CDs
  as an investment option) or interest rates rise,
  an investment staggered into 6-month, 12-month,
  18-month, 24-month, and 30-month maturities will
  give a higher interest rate than simply a 6-month
  maturity.
• It also gives the opportunity to reinvest at
  higher rates as each 6-month CD matures and is
  reinvested 6 months beyond the longest maturity.
• Money market mutual funds are available for
  tax-exempt investors

13
Disadvantages

• The rate of return on CDs is lower than rates
  typically available on higher risk alternatives.
• A substantial penalty is charged if the investor
  redeems the certificate prior to maturity.
• This penalty can greatly reduce the overall rate
  of return on the investment.
• Money market funds do not pay as high a rate of
  return as longer-term investments such as bonds.

14
Disadvantages

• All of the income generated by a money market
  investment such as CDs will be taxed as ordinary
  income.
• The investor has no control over the timing of
  income received and must report all income
  currently.
• Investments in money market funds are not insured
  or guaranteed by any federal agency.
• Monkey market funds are relatively unregulated
  and do not have the federally mandated reserve
  requirements of banks.

15
Tax Implications

• All of the income from CDs and money market funds
  is fully taxable and subject to ordinary income
  tax rates.
• Dividends from a money fund are considered to
  be interest payments for tax purposes.
• There are no capital gains or losses on money
  market investments.
• CDs are redeemed at maturity for their original
  investment value.

16
Tax Implications

• Penalties paid by investors who redeem CDs prior
  to the maturity date are deductible for federal
  income tax purposes.
• On his tax return, the taxpayer must report the
  gross amount of interest paid or credited to his
  account during the year without subtracting the
  penalty.
• The penalty is deducted when calculating adjusted
  gross income.
• The entire penalty may be deducted even if it
  exceeds interest income.
• The gross interest and the penalty amount are
  reported to the taxpayer on Form 1099-INT by the
  financial institution issuing the certificate.

17
Tax Implications

• Forgone interest in the event of a premature
  redemption is not deductible.
• Money market funds are available that specialize
  in short-term, tax-exempt investments.
• Interest earned on such investments is tax free.
• Money market funds are exempt from the
  requirement that certain pass-through entities
  report to shareholders (as income) their shares
  of expenses of the fund.

18
Alternatives

• Direct purchase of Treasury bills
• The timing of maturities, safety of principal,
  and amount of required investment are comparable
  to investing in bank CDs.
• Exempt from state income tax
• U.S. Treasury bills, notes, and bonds are the
  very safest investments available and therefore
  typically pay slightly lower rates of interest
  than bank savings accounts or CDs.
• Short-term investment notes from corporations,
  such as financial service firms
• Typical maturities range from three months to one
  year.
• They generally possess higher risk and higher
  return than CDs of comparable maturity.

19
Alternatives

• Money market deposit accounts
• Offered by commercial banks, savings and loans,
  and mutual savings banks
• Lower interest rates than money market mutual
  funds
• Convenient because they can be obtained at the
  same location where the investor banks and is
  known
• Federally insured, subject to insurance limits
  and account ownership titles
• Direct purchase of Treasury bills, commercial
  paper, or other similar instruments
• Does not typically provide the diversification or
  professional management available from a money
  market fund

20
Where and How do I get it?

• Certificates of Deposit
• Virtually all commercial banks, savings and
  loans, mutual savings banks, credit unions, and
  similar financial institutions provide CDs.
• The investor makes a deposit with the bank and is
  issued a certificate.
• An investor already dealing with the bank can
  call the institution to obtain rate quotations
  and decide on the maturity date and amount to be
  purchased. His/her existing account is charged,
  and the bank holds the certificate in safekeeping.

21
Where and How do I get it?

• Certificates of Deposit
• CDs are automatically rolled over if they are not
  cashed out at maturity.
• They are rolled over into another certificate of
  maturity with a similar maturity, but at the
  banks current rate of interest.
• It is recommended that large investment amounts
  are spread over multiple certificates.
• Part of the investment can be redeemed without
  disturbing the other certificates or paying the
  premature withdrawal penalty on the entire
  amount.
• Diversification by bank and geographic location
  enhances safety of principal and convenience.

22
Where and How do I get it?

• Money Market Funds
• Almost all major brokerage firms make money
  market funds available to their customers.
• These firms encourage customers to leave the
  proceeds of any security sales or any dividends
  or interest received in the account on deposit in
  these funds.
• Many brokerage firms include a money market
  account in comprehensive investment packages in
  order to keep excess cash balances fully invested
  at all times.
• Almost all mutual fund organizations offer a
  money market fund, which enables investors to
  move assets within a family of funds
  conveniently, quickly, and with minimal cost.

23
What Fees or Other Acquisition Costs Are Involved?

• Normally, no specific fees or acquisition costs
  are associated with the purchase of CDs or money
  market funds.
• Premature redemption fees are assessed on most
  CDs.
• A lower interest rate may also be paid for the
  period of investment.
• There may be a management fee based on the total
  value of the assets owned by the money market
  fund.
• This fee often ranges from 0.2 - 0.7.
• It is deducted directly from the assets invested.
• An annual account fee may be deducted from low
  balance accounts.
• This fee is usually 10 annually on accounts
  below 10,000.

24
How Do I Select the Best of Its Type?

• CDs
• Investors should compare the interest rates
  offered by several institutions for a given
  maturity.
• Higher rates are often available from banks and
  thrift institutions in other parts of the
  country.
• Information on interest rates offered by
  out-of-state institutions may be found in
• Barrons
• The Wall Street Journal
• The New York Times
• The Investors Business Daily
• Others

25
How Do I Select the Best of Its Type?

• Money Market Funds
• Investors should compare the yields offered by
  various funds.
• Returns are generally stated in terms of the
  average yield paid by the fund during the past
  seven days or during the past 30 days.
• Funds should be selected with short average
  maturities.
• Investors should also check rating services that
  evaluate the quality of securities in a money
  market funds portfolio.

26
Where Can I Find Out More About It?

• The various financial institutions offering the
  investment products
• Financial newspapers and magazines
• Wall Street Journal
• New York Times
• Barrons
• Investors Business Daily
• Internet sources
• Bloomberg www.bloomberg.com
• MSN Money Central www.moneycentral.com
• Yahoo Finance www.finance.yahoo.com
• iMoneyNet,Inc. www.ibcdata.com
• Bankrate www.bankrate.com