Cash and Cash Equivalents Investments

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 investor’s 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 investor’s 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 bank’s 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: • Barron’s • 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 fund’s 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 • Barron’s • Investor’s 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