Quick Answer
Cash equivalents are short-term, highly liquid instruments that preserve principal. Insured bank deposits (demand deposits and certificates of deposit) carry Federal Deposit Insurance Corporation (FDIC) coverage up to $250,000 per depositor, per bank, per ownership category. Money market securities such as commercial paper, Treasury bills, and money market mutual funds mature in one year or less and are not FDIC-insured.
The whole unit on one sheet: what counts as cash, what the FDIC covers, and the short-term securities the exam keeps confusing.
The One-Liners That Win Points
- Cash equivalents preserve principal, not maximize growth or income.
- Buying a money market instrument = lending money. The buyer is the lender; the issuer (seller) is the borrower.
- Commercial paper (CP) is short-term unsecured promissory notes from large, creditworthy corporations, sold at a discount, no periodic coupon. It is exempt from Securities and Exchange Commission (SEC) registration ONLY if maturity does not exceed 270 days.
- Treasury bills (T-bills) are U.S. government discount securities, backed by full faith and credit, zero-coupon (the return is the discount).
- Negotiable (jumbo) certificates of deposit (CDs) and brokered CDs trade in the secondary market; a standard bank CD does not (redeem at the bank, early-withdrawal penalty applies).
- Money market deposit accounts (MMDAs) at banks are FDIC-insured; money market mutual funds are securities and are NOT insured.
Numbers to Lock In
| Item | Value |
|---|---|
| Money market maturity | 1 year or less (most under 6 months) |
| Commercial paper max maturity | 270 days (9 months) |
| Commercial paper common maturity | 30 to 45 days |
| Commercial paper minimum denomination | typically $100,000 |
| T-bill maturities | 4, 6, 8, 13, 17, 26, 52 weeks |
| T-bill minimum par | $100 |
| T-bill max non-competitive bid | $10 million per auction |
| Negotiable CD minimum denomination | typically $100,000 (often $1 million or more) |
| CD maturities | 7 days to several years (most 3 months to 5 years) |
| FDIC coverage limit | $250,000 per depositor, per bank, per ownership category |
| Money market fund NAV target | $1.00 per share |
| Money market fund max weighted average maturity | 60 days |
| Money market fund max weighted average life | 120 days |
| Money market fund single-security max maturity | 397 days (13 months) |
Memory Aid: FDIC Coverage Formula
FDIC coverage = $250K per depositor, per insured bank, per ownership category. Two types of insured deposits: demand deposits (instant access, lowest return) and time deposits / CDs (locked term, higher return).
Top Gotchas
- The 270-day threshold is the single most tested CP fact. Past it, the issuer must register with the SEC; CP is unsecured (no collateral) either way.
- T-bills are quoted on a bank discount yield (360-day year, par as denominator), which understates true yield; the bond equivalent yield (365-day year, purchase price as denominator) is the fair comparison.
- All Treasury interest is exempt from state and local taxes, subject to federal income tax.
- FDIC insurance protects against bank failure, not market losses. Selling a negotiable or brokered CD before maturity when rates rise can still book a loss; insurance covers par plus accrued interest, not price change.
- Money market fund $1.00 NAV is a target, not a guarantee. "Breaking the buck" (NAV below $1.00) is rare but proves these funds are not insured.
- Do not confuse money market deposit accounts (FDIC-insured, at banks) with money market mutual funds (SEC-regulated securities, not insured).
One-Breath Recap
Cash equivalents are the safest, most liquid slice of a portfolio, built to preserve principal. Insured bank deposits (demand deposits and CDs) carry FDIC coverage of $250,000 per depositor, per bank, per ownership category, but that insurance protects against bank failure, not secondary-market losses on negotiable or brokered CDs. Money market securities mature in one year or less and are never FDIC-insured: commercial paper is unsecured corporate notes exempt from SEC registration up to 270 days, T-bills are government-backed discount securities exempt from state and local tax, and money market mutual funds chase a $1.00 NAV that is a target rather than a guarantee. Know the maturities, the denominations, and the insured-versus-security line, and this unit answers itself.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Cash and Cash Equivalents unit for the complete lesson.