Cash and Cash Equivalents

The whole unit on one sheet: what is insured, what is not, and the maturities, discounts, and taxes the exam loves.

Which One-Liners Win Points?

• FDIC insurance covers bank deposits only: checking, savings, money market deposit accounts, and certificates of deposit (CDs). Not stocks, bonds, mutual funds, annuities, or money market funds, even if bought at a bank branch.
• The word "fund" versus "account" changes everything: a money market fund is a security (not FDIC insured, can lose value); a money market deposit account is a bank deposit (FDIC insured).
• Both negotiable and non-negotiable CDs are FDIC insured; the difference is transferability, not safety.
• Negotiable (jumbo) CDs have $100,000 or more face value and trade in a secondary market; non-negotiable CDs must be held to maturity or redeemed at the bank (early withdrawal penalty).
• Commercial paper is short-term unsecured corporate debt, sold at a discount, not FDIC insured.
• Treasury bills (T-bills) are sold at a discount, virtually risk-free, and the benchmark for the risk-free rate.
• Banker's acceptances are bank-guaranteed drafts used in international trade.
• Repurchase agreements (repos) are collateralized short-term loans; federal funds are overnight interbank loans of excess reserves.

Which Numbers Matter Most?

Which Tax and Insurance Distinctions Are Tested?

• T-bills (and all U.S. Treasury securities) are subject to federal income tax but exempt from state and local tax, which helps investors in high-tax states.
• Commercial paper stays at or below 270 days to qualify for the Securities Act of 1933 registration exemption, not because of investor preference.
• The $250,000 FDIC limit is per ownership category, so one depositor can insure more than $250,000 at one bank across individual, joint, retirement, and trust categories.

Which Gotchas Trip Students Up?

• Money market funds are NOT FDIC insured and can "break the buck" if the net asset value (NAV) falls below $1.00; money market deposit accounts ARE insured up to $250,000.
• A mutual fund bought at a bank branch is still not FDIC insured.
• The federal funds rate is not set by the Fed: the Federal Open Market Committee (FOMC) sets a target range, but the actual rate is market-determined by interbank supply and demand.
• Commercial paper's short maturity is about the registration exemption, not investor demand.
• Money market funds are regulated by the Securities and Exchange Commission (SEC) under the money-market-fund quality and maturity rule (Investment Company Act of 1940); deposit accounts are regulated by the FDIC and banking regulators.

What Is the Memory Aid for Fund Versus Account?

If the name includes "fund," it is a security and is NOT FDIC insured. If the name includes "account," it is a bank deposit and IS FDIC insured. The word "fund" versus "account" is your signal.

One-Breath Recap

Cash equivalents split cleanly into insured bank deposits and uninsured money market instruments, and the exam lives on that line. Federal Deposit Insurance Corporation (FDIC) coverage of $250,000 per depositor, per bank, per ownership category applies to checking, savings, money market deposit accounts, and certificates of deposit, both negotiable and non-negotiable, but never to stocks, bonds, mutual funds, annuities, or money market funds. Commercial paper (1 to 270 days) and Treasury bills (state and local tax exempt) are the discount securities to know by maturity, and banker's acceptances, repurchase agreements, and federal funds round out the instruments tested. A money market fund is a security that can break the buck while a money market deposit account is an insured deposit, and the federal funds rate is market-determined, not Fed-set.

Need more than the recap? Read the full Cash and Cash Equivalents unit.