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Saturday, July 26, 2008

Cash Investments

From The Hoss's Mouth


This issue of Hoss Cents Free Financial Money Magazine is about cash investments. Investing in cash or cash equivalents is like betting on the favorite in a race. It gives you your best odds on making a profit, but provides a relatively low rate of return compared to other types of investments. The Hoss will get his binoculars out and take a close look at each of the various types of cash investments.

cash

  • Interest Yielding Bank Account: Very low risk and a very low rate of return. Provides easy access to your money.
  • Savings Bond: A loan you make to the government, usually for a period of a year or more. They can be purchased from banks, credit unions, trust companies and investment dealers. They usually provide a fixed rate of return for each year to maturity. However, some have a variable rate of return dependent on market conditions, and they have a minimum guaranteed rate. Cashability varies, as some must be held to maturity, others can be redeemed at predetermined intervals, and some allow redemption at any time. Savings bonds are guaranteed by the issuing government; and given their taxation powers, there is little or no risk of default. A relatively safe cash investment.

  • Treasury Bill (T-Bill): A short-term loan (less than a year) you make to the government. They are sold by investment dealers and come in large denominations. You buy T-Bills for less than their maturity value. The difference between your cost and the value at maturity is your profit, or if you prefer, interest. As with savings bonds, there is little or no risk of default. Although T-Bills are not redeemable before maturity, they can be sold back to the investment dealer, but this will mean a lower rate of return for you.

  • Guaranteed Investment Certificate (GIC): A financial institution's certificate of deposit. GIC investment terms usually range from 30 days to 10 years and are sold by banks, credit unions and trust companies. Most provide a fixed rate of return to maturity, but some are based on the performance of a stock market index. This type of GIC provides an opportunity for higher interest, but also could result in little or no profit at all. In most cases, the issuer guarantees the GIC, and an insurance agency, such as the Canada Deposit Insurance Corporation, may insure the principal up to a certain limit. Consequently, it is unlikely (but not impossible) that you will lose the principal on this cash investment.
  • Money Market Fund: Available only as a mutual fund, and as such, must be purchased through registered dealers. You may wonder why The Hoss chose to list a mutual fund in the Cash or Cash equivalent grouping. Simply put, it's because Money Market Funds invest in short-term fixed income securities and are usually redeemable at any time. The Hoss will provide in-depth information about Mutual Funds in a later post.

This completes today's issue about cash investments. It's time for The Hoss to put the binoculars away and return to the barn for some oats.

Stay on track,

The Hoss

Next Hoss Cents Free Financial Money Magazine Post: Fixed Income Securities

Previous Post: Types of Investments

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