What is the meaning and definition of Cash Equivalents?

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Author: Sarthak Bhalerao

Table of Contents

  1. What are Cash equivalents?
  2. Understanding Cash Equivalents
  3. List of Cash Equivalents

What are Cash Equivalents?

Cash Equivalents are investment securities that are made for the short term. Cash equivalents have high credit quality and are highly liquid. They have a maturity date of 90 days or less. Cash and Cash Equivalents are one of the three main asset classes in financial investing along with stocks and bonds. Cash equivalents include bank certificates of deposit, banker’s acceptances, treasury bills, commercial paper, money market instruments, etc. All these have low risk and low returns. As these are the most liquid assets, they are always shown on the top line of the balance sheet. 

Understanding Cash Equivalents

Cash equivalents also serve as one of the most important health indicators of a company’s financial system. Analysts can also estimate whether it is good to invest in a particular company through its ability to generate cash and cash equivalents since it reflects how a company is able to pay its bills throughout a short period of time. Companies with large amounts of cash and cash equivalents are primary targets of bigger companies that are planning to acquire smaller companies.

List of Cash Equivalents

  • Treasury Bills:

Treasury bills are securities issued by the United States Department of Treasury. When issued to companies, companies essentially lend the government money. Treasury bills are sold from a minimum of $100 to a maximum of $5 million. The yield of Treasury bills is the difference between the price of purchase and the value of redemption.

  • Commercial Papers:

Commercial papers are used by big companies to receive funds to repay short-term debt obligations like a corporations’ payroll. They are supported by issuing banks or companies that promise to fulfil and pay the face amount on the designated maturity date provided on the note.

  • Money Market Funds:

Money market funds are like checking accounts that pay higher interest rates provided by deposited money. Money market funds provide an efficient and effective tool for companies and organizations to manage their money since they tend to be more stable compared to other types of funds like mutual funds.

  • Short-Term Government Bonds:

Short-term government bonds are provided by governments to fund government projects. These are issued using the country’s domestic currency. Investors take a look at political risks, interest rate risks, and inflation when investing in government bonds.

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