{"id":500,"date":"2023-12-19T19:51:33","date_gmt":"2023-12-19T19:51:33","guid":{"rendered":"https:\/\/pressbooks.ccconline.org\/accinvestments\/?post_type=chapter&#038;p=500"},"modified":"2023-12-19T19:51:33","modified_gmt":"2023-12-19T19:51:33","slug":"1-5-short-term-investments-revisited-%e2%80%92-a-place-to-park-your-money","status":"publish","type":"chapter","link":"https:\/\/pressbooks.ccconline.org\/accinvestments\/chapter\/1-5-short-term-investments-revisited-%e2%80%92-a-place-to-park-your-money\/","title":{"raw":"1.5: Short-Term Investments Revisited \u2012 A Place to Park Your Money","rendered":"1.5: Short-Term Investments Revisited \u2012 A Place to Park Your Money"},"content":{"raw":"<p class=\"lt-biz-79466\"><iframe id=\"iFrameResizer0\" title=\"Chapter 01 - Slides 55-73 - Short-term Investments\" src=\"https:\/\/wonderprofessor.com\/123\/Chap01\/Chap01_Slides_54_to_72\/Chap01_Slides_54_to_72.html\" width=\"640\" height=\"480\" allowfullscreen=\"allowfullscreen\" data-mce-fragment=\"1\"><\/iframe><\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Short-term<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/shorterminvestments.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>\u00a0investments<\/u><\/a>\u00a0are vehicles that we use when we need the money to be safe because we are going to be using it soon. For example, we are setting aside our financial aid for living expenses for the coming semester. We are building a down payment fund for a car or house. Hence, we often say that a\u00a0short-term investment\u00a0is a place to park your money. We don\u2019t want the value to decrease. We don\u2019t want to lose the money. We want the money to be there when we need it. For this reason,\u00a0short-term\u00a0investments are typically guaranteed or pretty darned close.\u00a0Short-term\u00a0investments are also very liquid; we can get our money very quickly, usually within a day. Some even allow us to write a check. These are the advantages and benefits of\u00a0short-term investments.<\/div>\r\n<div aria-expanded=\"false\"><\/div>\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">What are the disadvantages of short-term investments? As we have seen, the returns from short-term investments are very low. Low risk? Low return! In fact, for many years since the 2008 Global Financial Crisis, many short-term investments were paying almost nothing. Short-term interest\u00a0rates started to climb very slowly starting in 2015 and were actually approaching respectable amounts in 2019 as the economy was finally shaking off the lingering effects of the economic devastation a decade earlier. And then Covid hit and\u00a0short-term\u00a0rates again fell close to zero. (Darned, stupid microbe!) In 2022, the Federal Reserve Bank started raising\u00a0short-term\u00a0rates and as of this writing, they are once again paying typical returns of between 1% to 4%.<\/div>\r\n<div aria-expanded=\"false\">\r\n<h2 class=\"lt-biz-79466 editable\">Stated Rate of\u00a0Interest versus Discount Basis<\/h2>\r\n<p class=\"lt-biz-79466\">As we explore the various\u00a0short-term investment\u00a0alternatives, we will see that some offer the\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/stated-annual-interest-rate.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>stated rate of\u00a0<\/u><\/a>interest<u><\/u>\u00a0method of paying\u00a0interest\u00a0and some offer the\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/b\/bankdiscountbasis.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>discount basis<\/u><\/a>\u00a0method. The stated rate of\u00a0interest\u00a0is the method that we are already familiar with if we have ever opened a\u00a0savings account. The bank will tell us that they will pay us 1% on our money. If we deposit $100, after one year, we will earn 1% of $100 or $1. This is very straightforward.<\/p>\r\n<p class=\"lt-biz-79466\">The\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/b\/bankdiscountbasis.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>discount basis<\/u><\/a>\u00a0is a bit trickier. This method of earning\u00a0interest\u00a0entails purchasing the\u00a0security at a price below its redemption value, also known as the par value, maturity value, or\u00a0face value. The difference between the purchase price and redemption value is the\u00a0interest\u00a0earned. Since the securities are negotiable, the value of the\u00a0investment\u00a0grows as it approaches its\u00a0maturity date. We say the\u00a0interest\u00a0\u201caccrues\u201d on the\u00a0short-term investment. On the date of maturity, the current owner of the\u00a0security\u00a0receives the maturity value. An example: You purchase a\u00a0security\u00a0now for $4,800 that will be redeemed for $5,000 in ten months. Your\u00a0interest\u00a0would be $200. If you were to sell the\u00a0security\u00a0in five months, \u2012 one half the time until maturity \u2012 the value would likely have accrued to $4,900. One half of the $200 would be $100 of\u00a0interest\u00a0and that would be added to the price of the\u00a0security.<\/p>\r\n\r\n<\/div>\r\n<div id=\"section_1\" class=\"mt-section\">\r\n<h2 class=\"lt-biz-79466 editable\">Risks of\u00a0Short-Term\u00a0Investments<\/h2>\r\n<p class=\"lt-biz-79466\">\u201c<em>Risks of\u00a0<\/em>short-term<em>\u00a0investments!? Wait a minute! You told me that these investments were\u00a0<\/em>risk<em>-free!<\/em>\u201d Yes,\u00a0short-term\u00a0investments are\u00a0risk-free regarding the loss of\u00a0principal, also known as the\u00a0<u><\/u>risk<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/d\/defaultrisk.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>\u00a0of default<\/u><\/a>. We are not going to lose our money. However, there are other risks when investing. There is the\u00a0risk\u00a0that we may lose\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/p\/purchasingpower.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>purchasing power<\/u><\/a>. Over time,<\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">short-term\u00a0investments have barely kept up with inflation. Currently, they are losing to inflation. There is also the\u00a0risk\u00a0of lost\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/o\/opportunitycost.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>opportunity cost<\/u><\/a>. Opportunity cost is an annoyingly nebulous concept that you would discuss in detail in your ECON 101 class. It is real, though. Whenever we make a choice, we must think about the opportunities that we forego by making that choice. What else could we have done with our money? If we choose\u00a0short-term\u00a0investments for money that we won\u2019t need for the long term, we will almost certainly have done much worse than by carefully researching and choosing prudent,\u00a0long-term\u00a0investments. You first saw this in the graphics discussing the returns of stocks versus bonds versus\u00a0short-term\u00a0investments in the previous presentation and we will see examples of this throughout the semester.<\/div>\r\n<p class=\"lt-biz-79466\">Sadly, you will sometimes come across individuals who have placed all their investable savings into\u00a0short-term\u00a0\u201ccash\u201d investments. This is usually money that they are saving for<\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">long-term\u00a0goals such as retirement. These people need to take Introduction to Investments! In time, Dear Readers, you will be the\u00a0Investment\u00a0Gurus for your friends, family, and colleagues. You will gently but firmly educate and guide them in choosing prudent,\u00a0long-term\u00a0oriented investments that will clobber the meager returns they were getting from their<\/div>\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">short-term\u00a0investments. You will speak with authority. They will thank you profusely. We will be proud of you. You may even decide that you want to pursue a career in the<\/div>\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">investment\u00a0services industry.<\/div>\r\n<p class=\"lt-biz-79466\">That\u2019s just the first of many pep talks. Stay tuned for more because the industry needs you. For now, it is time to run through the various types of\u00a0short-term\u00a0investments. Don\u2019t do this before bedtime \u2026 unless you are prone to insomnia. Again, these choices are not very exciting but then again, they are not meant to be exciting. They are meant to ensure safety of<\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">principal. With\u00a0short-term\u00a0money, boring is good.<\/div>\r\n<div aria-expanded=\"false\">\r\n<h2 class=\"lt-biz-79466 editable\">Demand Deposit Accounts<\/h2>\r\n<p class=\"lt-biz-79466\"><a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/d\/demanddeposit.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Demand deposit accounts<\/u><\/a>\u00a0are offered by\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/c\/commercialbank.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>commercial banks<\/u><\/a>\u00a0and\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/c\/creditunion.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>credit unions<\/u><\/a>. The name comes from the fact that depositors can withdraw the funds at any time; the funds are available upon demand. However, there are sometimes certain restrictions upon this ability such as when you want to withdraw a large amount of money in cash. Demand deposit accounts at banks and credit unions have a very important benefit: They are typically guaranteed by an agency of the Federal government. You may have heard of the\u00a0<u><\/u>Federal Deposit Insurance Corporation (FDIC)<u><\/u>\u00a0or the\u00a0<u><\/u>National Credit Union Administration (NCUA)<u><\/u>. Your money is safe. Practically all banks and credit unions belong to these entities. If you are unsure if your bank or credit union belongs, just ask. For each account at each bank or credit union, you are currently insured up to $250,000. If you have more than $250,000, you can simply distribute that amount into separate banks or credit unions. (If you have more than $250,000 and this is not\u00a0short-term\u00a0money, you need to take Introduction to Investments and learn where to allocate your investable assets more effectively and prudently for\u00a0long-term growth\u00a0of\u00a0capital\u00a0and\u00a0income. My apologies if you have heard this before but it bears repeating. The opportunity cost of keeping\u00a0long-term\u00a0money in\u00a0short-term\u00a0investments is very high.)<\/p>\r\n<p class=\"lt-biz-79466\">Common examples of demand deposit accounts are\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/c\/checkingaccount.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>checking accounts<\/u><\/a>\u00a0and\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/savingsaccount.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>savings accounts<\/u><\/a>\u00a0at banks and\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/share-draft-account.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>share-draft accounts<\/u><\/a>\u00a0and share accounts at credit unions. Those of you who use credit unions have probably never heard of share-draft or share accounts. That is because no one at the credit union uses those terms; they just use the same terms that the banks use, checking and savings. Even though there are legal differences, as far as we retail customers are concerned, there are no differences. They both work the same way. For many years, the regulators would not allow checking accounts to pay\u00a0interest. For this reason, banks and credit unions offered\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/n\/nowaccount.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Negotiable Order of Withdrawal (NOW)<\/u><\/a>\u00a0accounts. Again, no one called them that; they just called them checking accounts that paid\u00a0interest. That restriction was removed in 2010 so now, NOW accounts are not as popular as they once were. (And no, that is not a double word typo.) Lastly, banks and credit unions can offer\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/m\/moneymarketaccount.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>money market accounts<\/u><\/a>, also known as money market demand accounts. Money market accounts typically pay more than checking and savings accounts. These accounts are very similar to the money market mutual funds. In fact, the banks and credit unions simply copied the concept from the<\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">mutual fund\u00a0industry. The main difference between money market accounts and money market mutual funds is that the money market accounts at banks and credit unions have the same $250,000 guarantee as other demand deposit accounts; money market mutual funds at\u00a0mutual fundcompanies do not have this guarantee. We will discuss money market mutual funds a bit later on.<\/div>\r\n<p class=\"lt-biz-79466\">We mentioned that there may be some restrictions on your ability to withdraw your funds upon demand. An example of this would be if you were to walk into your neighborhood bank and ask to withdraw the entire $187,000 in your\u00a0savings account\u00a0\u2012 in cash! The bank would most likely ask you to wait until tomorrow because they simply don\u2019t keep that much cash on hand. (There\u2019s over $250,000 in the ATM next door, though. Shows you how safe and secure the banks believe their ATMs are.) The bank would also contact the FBI and report a \u201csuspicious transaction.\u201d This is courtesy of the Patriot Act, hurried through Congress within a month after the attacks on the World Trade Towers on September 11th, 2001. Some people will tell you that a deposit or withdrawal of $5,000 or $10,000 constitutes a \u201csuspicious transaction.\u201d This is not true. There is no specific dollar amount. The bank or credit union must determine what is a \u201csuspicious transaction,\u201d depending upon the circumstances. Kinda\u2019 creepy, huh? The FBI will check up on you for carrying around your own money.<\/p>\r\n\r\n<h2 class=\"lt-biz-79466 editable\">Certificates of Deposits (CDs)<\/h2>\r\n<p class=\"lt-biz-79466\"><a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/c\/certificateofdeposit.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Certificates of Deposits (CDs)<\/u><\/a>\u00a0are also offered by banks and credit unions and have the same guarantees as demand deposit accounts, namely the $250,000 deposit insurance guarantee. Unlike demand deposit accounts, though, CDs are\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/t\/timedeposit.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>time deposit accounts<\/u><\/a>, also known as\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/t\/termdeposit.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>term deposits<\/u><\/a>. They have a\u00a0maturity date. You agree to keep your money on deposit for a certain time, anywhere from seven days to several years. Typically, the longer the time period, the higher the rate of\u00a0interest\u00a0a CD investor will receive. The\u00a0rate of return\u00a0is usually better than demand deposit accounts such as savings accounts or money market accounts. What are the disadvantages? If you need to withdraw the money before the\u00a0maturity date, there will be a penalty. Also, your\u00a0rate of return\u00a0is fixed and typically does not change. If\u00a0interest\u00a0rates rise, your CD will not rise with them. For this reason, many banks and credit unions offer\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/b\/bumpupcd.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Bump-Up CDs<\/u><\/a>. If\u00a0interest\u00a0rates have risen, the Bump-Up CD allows an investor to \u201cbump up\u201d their initial\u00a0interest\u00a0to the current\u00a0interest\u00a0rate. CD investors need to be aware of the\u00a0<a class=\"link-https\" href=\"https:\/\/www.consumerfinance.gov\/ask-cfpb\/what-is-a-certificate-of-deposit-cd-rollover-or-renewal-en-923\/\" target=\"_blank\" rel=\"external noopener nofollow\"><u>rollover or renewal provision<\/u><\/a>\u00a0of some CDs. Some banks or credit unions will automatically renew your CD at the end of the time period. The bank or credit union is required to notify you of the upcoming renewal. You typically have the option of requesting that the funds be automatically deposited into your savings or checking account. It definitely pays to shop around for the best CD\u00a0interest\u00a0rates. CD rates vary widely and as long as your bank or credit union belongs to the FDIC or NCUA, you can do business with institutions in the United States and its territories and have the same guarantee of\u00a0principal.<\/p>\r\n<p class=\"lt-biz-79466\">Some brokerage firms and some banks offer\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/b\/brokered-cd.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Brokered CDs<\/u><\/a>. The brokerage firm has invested a great deal of money with a bank and that generates more\u00a0income\u00a0than a typical retail investor will receive. The brokerage firm then can offer these higher rates to their customers. Also, unlike typical CDs, they can be bought and sold on the open market as are other securities. An investor does not have to wait until the maturity to receive their\u00a0principal. The downside is that Brokered CDs are not FDIC-insured. For this reason, it is important that Brokered CD investors deal with a reputable brokerage firm.<\/p>\r\n\r\n<h2 class=\"lt-biz-79466 editable\">Money Market Mutual Funds<\/h2>\r\n<p class=\"lt-biz-79466\"><a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/m\/money-marketfund.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Money market mutual funds<\/u><\/a>\u00a0are\u00a0short-term\u00a0investments offered by\u00a0mutual fund\u00a0companies. Recall that a\u00a0mutual fund\u00a0is a company that pools the\u00a0capital\u00a0of a large number of investors. A\u00a0money market mutual fund\u00a0uses their investors\u2019\u00a0capital\u00a0to invest exclusively in\u00a0short-term\u00a0securities. They are also known as mutual money funds, or more simply and more typically, money markets. Because they are offered by\u00a0mutual fund\u00a0companies and not banks or credit unions, they do not have the same protections that money market accounts at banks and credit unions have, namely the $250,000\u00a0principal\u00a0protection guarantee. However, in practice, they are considered essentially as safe as their counterparts at banks and credit unions. Why? There is a long history of the government and the industry doing their parts to ensure that money market clients do not lose a penny! In practice, that is exactly what can happen. Your money market fund can \u201c<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/b\/breaking-the-buck.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>break the buck<\/u><\/a>.\u201d When that happens, the whole world sits up and takes notice. Just type \u201cbreaking the buck\u201d into any Internet search engine and see how many millions of results you get. There are tremendous forces allied against any money market ever breaking the buck.<\/p>\r\n<p class=\"lt-biz-79466\">Money markets are very versatile and popular. Virtually every\u00a0mutual fund\u00a0company offers one or sometimes several different types of money market funds. Many money markets allow you to write checks, although in practice, most investors simply link their money market funds to their checking and savings accounts at their banks and credit unions and electronically withdraw funds as needed. Money markets allow you to easily exchange funds to and from your\u00a0stock\u00a0and\u00a0bond\u00a0mutual funds at your\u00a0mutual fund\u00a0company. Money market funds typically pay\u00a0interest\u00a0rates higher than checking and savings accounts and only a bit less than CDs. However, unlike CDs, the\u00a0interest\u00a0rates on money market funds change daily. Therefore, if\u00a0interest\u00a0rates rise, your money market\u00a0interest\u00a0rate will rise with them. There is much to like about money market mutual funds.<\/p>\r\n\r\n<h2 class=\"lt-biz-79466 editable\">Series EE, HH, and I Savings Bonds<\/h2>\r\n<p class=\"lt-biz-79466\"><a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/u\/ussavingsbonds.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Savings bonds<\/u><\/a>\u00a0are\u00a0short-term\u00a0investments that are offered by the United States Treasury. The Treasury currently offers both\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/serieseebond.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Series EE<\/u><\/a>\u00a0and\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/seriesibond.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Series I<\/u><\/a>\u00a0savings bonds. The\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/serieshhbond.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Series HH<\/u><\/a>\u00a0bonds were discontinued in 2004 and will all mature and disappear by 2024. The Series EE savings bonds use the discount basis of accruing<\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">interest. In other words, for example, you might buy a Series EE savings\u00a0bond\u00a0for $50 and it will pay its maturity value of $100 in 20 years. Currently, though, Series EE bonds purchased online electronically are purchased at\u00a0face value\u00a0and earn\u00a0interest\u00a0in the stated rate of\u00a0interest\u00a0manner. Savings bonds are exempt from state\u00a0income\u00a0taxes. (We will discuss more about the tax relationship of the Federal government and the state and local governments later in the class.) If you use the proceeds from your savings\u00a0bond\u00a0for\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/q\/qhee.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>qualified higher education expenses<\/u><\/a>, then the\u00a0interest\u00a0is also exempt from Federal\u00a0income\u00a0taxes.<\/div>\r\n<p class=\"lt-biz-79466\">The \u201cI\u201d in Series I savings bonds stands for Inflation. Series I bonds were introduced in 1998 to cater to those investors worried about inflation. Like Series EE savings bonds, Series I bonds do come with a fixed\u00a0rate of return\u00a0but that\u00a0rate of return\u00a0is far less than other types of\u00a0short-term\u00a0investments, including Series EE bonds. Instead, Series I bonds add an\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/ask\/answers\/111414\/what-difference-between-ee-and-i-bonds.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>inflation-adjusted\u00a0<\/u><\/a>interest<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/ask\/answers\/111414\/what-difference-between-ee-and-i-bonds.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>\u00a0amount<\/u><\/a>\u00a0every six months that varies with the rate of inflation. Hence, Series I bonds are guaranteed to keep pace with inflation. Series I bonds became immensely popular with the investing public in 2022 when inflation spiked.<\/p>\r\n<p class=\"lt-biz-79466\">The yearly purchase limits are currently $10,000 for Series EE bonds Series I bonds. For decades, United States savings bonds were popular gifts to newborns. Grandparents and aunts and uncles would buy them at their local bank for the new arrival to the family. The bonds would be tucked away in a drawer somewhere and promptly forgotten about until the parents passed away and the adult kids and adult grandkids were tasked with clearing everything out of the house. The Treasury has done away with paper savings bonds for Series EE bonds and are phasing out paper savings bonds for Series I bonds. All bonds are now available for purchase and safekeeping at\u00a0<a class=\"external\" href=\"http:\/\/www.treasurydirect.gov\/\" target=\"_blank\" rel=\"external noopener nofollow\"><u>www.<\/u><\/a>TreasuryDirect.gov<u><\/u>.\u00a0TreasuryDirect.gov\u00a0is the subject of one of your chapter 1 assignments.<\/p>\r\n\r\n<div id=\"section_7\" class=\"mt-section\">\r\n<h2 class=\"lt-biz-79466 editable\">Treasury Bills<\/h2>\r\n<p class=\"lt-biz-79466\"><a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/t\/treasurybill.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Treasury Bills<\/u><\/a>\u00a0are\u00a0short-term\u00a0investments that are also offered by the United States Treasury. They are often informally referred to as T-Bills. T-Bills all have maturities that are less than one year. The most typical periods are one month (4-week), three months (13-week), and six months (26-week), although two months (8-week) and twelve months (52-week) are also available. Treasury Bills are often considered the safest of all investments. As mentioned, when the\u00a0investment community wants to report the current risk-free rate of return, they often use the rate for three-month Treasury Bills.<\/p>\r\n<p class=\"lt-biz-79466\">T-Bills are usually sold in $1,000 increments and use the discount basis method for paying\u00a0interest. For example, you may purchase a six-month $1,000\u00a0Treasury Bill\u00a0for $990 that will mature at $1,000. The $10 difference would be your\u00a0interest\u00a0received. Along the way to the six-month\u00a0maturity date, because these are securities, you could sell your\u00a0Treasury Bill, again, at a discount to the $1,000 maturity value. As the date of maturity becomes nearer, your\u00a0Treasury Bill will increase in value. The price would depend upon the prevailing market rates but any\u00a0volatility\u00a0would be close to zero. Remember, Treasury Bills are very safe. At the date of maturity, the T-Bill would be redeemed for the full $1,000\u00a0face value.<\/p>\r\n<p class=\"lt-biz-79466\">Like the Series EE and I savings bonds,\u00a0interest\u00a0from Treasury Bonds is tax-exempt at the state and local level. Unlike Series EE and I savings, though, the\u00a0interest\u00a0is not tax-exempt if used for the qualified higher education expenses.<\/p>\r\n<p class=\"lt-biz-79466\">Also like the Series EE and I savings bonds, Treasury Bills are available for purchase at\u00a0<a class=\"external\" href=\"http:\/\/www.treasurydirect.gov\/\" target=\"_blank\" rel=\"external noopener nofollow\"><u>www.<\/u><\/a>TreasuryDirect.gov<u><\/u>.\u00a0TreasuryDirect.gov\u00a0offers you and me, the common retail investors, the same prices as the big boys and girls on Wall Street. It is a very well done website and, as mentioned, the subject of one of your chapter 1 assignments. The Mexican government has a website very similar to\u00a0TreasuryDirect.gov. It is called\u00a0<a class=\"link-https\" href=\"https:\/\/www.cetesdirecto.com\/\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Cetes Directo<\/u><\/a>. Your Humble Author had the good fortune to meet the project manager during a visit to Mexico City. He acknowledged that they essentially copied\u00a0TreasuryDirect.gov verbatim. We love to complain when our government screws up. Hence, we should rightly praise them when they do something well. Thanks, United States Treasury!<\/p>\r\n\r\n<\/div>\r\n<div id=\"section_8\" class=\"mt-section\">\r\n<h2 class=\"glossarizer_replaced\" aria-expanded=\"false\">Commercial Paper\u00a0and Banker\u2019s Acceptance Notes<\/h2>\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Commercial paper<u><\/u>\u00a0investments are\u00a0short-term, unsecured promissory notes (IOUs) issued by corporations with very high credit standings. Corporations typically use these vehicles when they need a very\u00a0short-term loan for payroll or maybe for the large purchase of goods in anticipation of a coming increase in business activity such as major retailers preparing for the Christmas surge. Instead of going to a bank, the\u00a0corporation\u00a0can go to the\u00a0investment\u00a0community and get a much better rate than the bank would charge. Like Treasury Bills,<\/div>\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">commercial paper\u00a0investments use the discount basis and are sold at a discount to their maturity\u00a0face value\u00a0and have\u00a0short-term\u00a0maturity periods of one, three, six, and nine months. Unlike Treasury Bills,\u00a0commercial paper\u00a0investments are typically denominated in $100,000 increments and\u00a0commercial paper dealers\u00a0normally want you to buy many of them at one time. Hence, they are usually purchased by financial institutions such as life insurance companies and pension funds. Money market mutual funds are also eager buyers of<\/div>\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">commercial paper. You and I are not going to buy\u00a0commercial paper\u00a0except indirectly through our investments in money markets. (If you are indeed in the market for\u00a0commercial paper\u00a0and can afford multiples of $100,000 denominations, then congratulations but I have a sneaking suspicion that you have your own private\u00a0broker.)<\/div>\r\n<p class=\"lt-biz-79466\"><a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/b\/bankersacceptance.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Banker\u2019s acceptance notes<\/u><\/a>\u00a0are cousins to\u00a0commercial paper\u00a0investments. They, too, are sold at a discount, are tradable securities, are typically denominated in $100,000 increments, and mature quickly. Banker\u2019s acceptance notes usually mature in 90 days but the\u00a0maturity date\u00a0can be up to 180 days. They are often used to facilitate\u00a0domestic\u00a0and\u00a0international\u00a0trade for companies that do not have the prestige and financial wherewithal to issue their own\u00a0commercial paper\u00a0in the marketplace. The company petitions the bank for help and the bank issues the acceptance notes which the company can sell on the open market. The company then uses the proceeds to facilitate the trade. The company must pay the bank the\u00a0face value\u00a0at the<\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">maturity date\u00a0so that ultimate holders of the notes can be paid. If the company defaults, the bank must make good on the notes.<\/div>\r\n<p class=\"lt-biz-79466\">By keeping the maturity periods to less than one year, the issuers of\u00a0corporate paper\u00a0and banker\u2019s acceptance notes are not required to register their securities with the Securities and Exchange Commission. This helps keep the fees associated with these\u00a0short-term\u00a0investments low.<\/p>\r\n\r\n<\/div>\r\n<div id=\"section_9\" class=\"mt-section\"><span id=\"Which_Short-Term_Investment_Is_Right_for_Me.3F\"><\/span>\r\n<h2 class=\"lt-biz-79466 editable\">Which\u00a0Short-Term Investment\u00a0Is Right for Me?<\/h2>\r\n<p class=\"lt-biz-79466\">We have explored the various\u00a0short-term investment\u00a0alternatives. It is time for you to answer the question, \u201cWhich\u00a0short-term investment\u00a0is right for me?\u201d Everyone is different and so that question can only be answered by you. Here are our observations: Because of their costs,\u00a0commercial paper\u00a0and banker\u2019s acceptance notes are usually only suitable for institutional investors. Savings bonds used to make cute gifts for newborns in paper form but now that they are all electronic, will the proud new parents still coo and awe when the card is opened only to say that their newborn\u2019s savings\u00a0bond\u00a0is safely tucked away at\u00a0TreasuryDirect.gov? Many savvy investors purchase Treasury Bills directly from the Treasury at <a class=\"external\" href=\"http:\/\/www.treasurydirect.gov\/\" target=\"_blank\" rel=\"external noopener nofollow\"><u>www.<\/u><\/a>TreasuryDirect.gov<u><\/u>. Certificates of Deposit are okay for those that are sure that they will not need the money until maturity. In our opinion, their flexibility and ease of use make money market mutual funds and money market deposit accounts the preferred choice of most investors, especially since every bank, credit union, brokerage firm, and<\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">mutual fund\u00a0company offers them. Sadly, many uninformed savers still use a passbook\u00a0savings account\u00a0from a bank or credit union. (They have not taken this course yet. Such a shame!)<\/div>\r\n<\/div>\r\n<div id=\"section_10\" class=\"mt-section\"><span id=\"Emergency_Fund_Debate\"><\/span>\r\n<h2 class=\"lt-biz-79466 editable\">Emergency Fund Debate<\/h2>\r\n<p class=\"lt-biz-79466\">If you watch the financial media outlets and listen to any of the talking heads with their perfect hair and immaculate dental implants, they will vehemently insist that you have an\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/e\/emergency_fund.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>emergency fund<\/u><\/a>. An emergency fund is essentially a liquid,\u00a0short-term investment\u00a0in which you place three, six, nine, or even twelve or more months of\u00a0income. This is a self-insurance program in case of losing your source of\u00a0income\u00a0or another costly emergency arises. Some experts, most notably\u00a0<a class=\"link-https\" href=\"https:\/\/en.wikipedia.org\/wiki\/David_Chilton_(businessman)\" target=\"_blank\" rel=\"external noopener nofollow\"><u>David Chilton<\/u><\/a>, author of\u00a0<a class=\"link-https\" href=\"https:\/\/en.wikipedia.org\/wiki\/The_Wealthy_Barber\" target=\"_blank\" rel=\"external noopener nofollow\"><u><em>The Wealthy Barber<\/em><\/u><\/a>, do not agree with this strategy. Of course, no one is advocating that you have $17.87 in your rainy day\u00a0savings account; some substantial amount socked away for that rainy day is obviously a great benefit to your financial well-being. However, for those still working, assuming you have a marketable skill that would allow you to find gainful employment in a reasonable amount of time, there can be better uses for that money. You can use those funds to pay down expensive debt or increase your monthly retirement or\u00a0investment\u00a0contributions. There are exceptions, though. Anyone who works in sales or has their own business or works in a seasonal industry definitely needs a substantial emergency fund. We would be remiss if we forgot to ask one last thing: You do have proper and adequate insurance, yes? For more discussion about emergency funds and insurance and all topics related to personal finance, please consider taking BUS-121,\u00a0<a class=\"link-https\" title=\"https:\/\/wonderprofessor.com\/121\/\" href=\"https:\/\/wonderprofessor.com\/121\/\" target=\"_blank\" rel=\"external noopener nofollow\">Principles of Money Management<\/a>, at Southwestern Community College.<\/p>\r\n\r\n<\/div>\r\n<div id=\"section_11\" class=\"mt-section\"><span id=\"The_Federal_Reserve_Bank_and_Short-Term_Interest_Rates\"><\/span>\r\n<h2 class=\"lt-biz-79466 editable\">The Federal Reserve Bank and\u00a0Short-Term InterestRates<\/h2>\r\n<p class=\"lt-biz-79466\">We mentioned that\u00a0short-term interest\u00a0rates change over time. You may be wondering, \u201cWell, who sets these\u00a0short-term interest\u00a0rates?\u201d For a more thorough investigation, you will want to take an Introduction to Economics class. The short answer, though, is that the\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/f\/federalreservebank.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Federal Reserve Bank<\/u><\/a>\u00a0is responsible for setting\u00a0short-term interest\u00a0rates in the United States. It is often referred to as the Fed. They are the nation\u2019s\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/c\/centralbank.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>central bank<\/u><\/a>\u00a0and are often called the bankers\u2019 bank since the banks of our nation use the Fed as their bank. The Fed has major two objectives. They are charged with keeping the nation\u2019s economy at full employment while at the same time, keeping inflation under control. These two objectives are often at odds with one another. The Fed has tremendous power and the Chairperson of the Federal Reserve Bank is often called, \u201cthe second most powerful person in the nation.\u201d (The most powerful person, of course, is the President, who is the Commander in Chief of the military.) The Federal Reserve Bank\u00a0was designed to be independent and not subject to political pressures. That does not stop politicians and other high-profile individuals from criticizing their actions. In fact, many vocal critics even claim that the Federal Reserve Bank is\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/ask\/answers\/082115\/why-do-some-people-claim-federal-reserve-unconstitutional.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>unconstitutional<\/u><\/a>. Suffice to say that no system we humans have ever created is perfect, and that includes the Fed. However, for over 100 years, the Fed has bumbled along and sometimes has executed brilliantly and sometimes has failed miserably. We don\u2019t call Economics the \u201cDismal Science\u201d for nothing, Dear Students.<\/p>\r\n\r\n<\/div>\r\n<footer class=\"mt-content-footer\">\r\n\r\n<hr class=\"autoattribution-divider\" \/>\r\n\r\n<div class=\"autoattribution\">\r\n\r\nThis page titled\u00a0<a class=\"internal mt-self-link\" href=\"https:\/\/biz.libretexts.org\/Bookshelves\/Finance\/Introduction_to_Investments_(Paiano)\/01%3A_Chapter_1\/01%3A_Introduction_Overview_and_Risk_versus_Return\/1.05%3A_Short_Term_Investments_Revisited__A_Place_to_Park_Your_Money\" target=\"_blank\" rel=\"internal noopener\">1.5:\u00a0<\/a>Short-Term<a class=\"internal mt-self-link\" href=\"https:\/\/biz.libretexts.org\/Bookshelves\/Finance\/Introduction_to_Investments_(Paiano)\/01%3A_Chapter_1\/01%3A_Introduction_Overview_and_Risk_versus_Return\/1.05%3A_Short_Term_Investments_Revisited__A_Place_to_Park_Your_Money\" target=\"_blank\" rel=\"internal noopener\">\u00a0Investments Revisited \u2012 A Place to Park Your Money<\/a>\u00a0is shared under a\u00a0<a href=\"https:\/\/creativecommons.org\/licenses\/by-nc-sa\/4.0\" target=\"_blank\" rel=\"nofollow noopener\">CC BY-NC-SA 4.0<\/a>\u00a0license and was authored, remixed, and\/or curated by\u00a0<a href=\"https:\/\/wonderprofessor.com\/\" target=\"_blank\" rel=\"nofollow noopener\">Frank Paiano<\/a>.\r\n\r\n<\/div>\r\n<\/footer><\/div>\r\n<\/div>","rendered":"<p class=\"lt-biz-79466\"><iframe loading=\"lazy\" id=\"iFrameResizer0\" title=\"Chapter 01 - Slides 55-73 - Short-term Investments\" src=\"https:\/\/wonderprofessor.com\/123\/Chap01\/Chap01_Slides_54_to_72\/Chap01_Slides_54_to_72.html\" width=\"640\" height=\"480\" allowfullscreen=\"allowfullscreen\" data-mce-fragment=\"1\"><\/iframe><\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Short-term<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/shorterminvestments.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>\u00a0investments<\/u><\/a>\u00a0are vehicles that we use when we need the money to be safe because we are going to be using it soon. For example, we are setting aside our financial aid for living expenses for the coming semester. We are building a down payment fund for a car or house. Hence, we often say that a\u00a0short-term investment\u00a0is a place to park your money. We don\u2019t want the value to decrease. We don\u2019t want to lose the money. We want the money to be there when we need it. For this reason,\u00a0short-term\u00a0investments are typically guaranteed or pretty darned close.\u00a0Short-term\u00a0investments are also very liquid; we can get our money very quickly, usually within a day. Some even allow us to write a check. These are the advantages and benefits of\u00a0short-term investments.<\/div>\n<div aria-expanded=\"false\"><\/div>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">What are the disadvantages of short-term investments? As we have seen, the returns from short-term investments are very low. Low risk? Low return! In fact, for many years since the 2008 Global Financial Crisis, many short-term investments were paying almost nothing. Short-term interest\u00a0rates started to climb very slowly starting in 2015 and were actually approaching respectable amounts in 2019 as the economy was finally shaking off the lingering effects of the economic devastation a decade earlier. And then Covid hit and\u00a0short-term\u00a0rates again fell close to zero. (Darned, stupid microbe!) In 2022, the Federal Reserve Bank started raising\u00a0short-term\u00a0rates and as of this writing, they are once again paying typical returns of between 1% to 4%.<\/div>\n<div aria-expanded=\"false\">\n<h2 class=\"lt-biz-79466 editable\">Stated Rate of\u00a0Interest versus Discount Basis<\/h2>\n<p class=\"lt-biz-79466\">As we explore the various\u00a0short-term investment\u00a0alternatives, we will see that some offer the\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/stated-annual-interest-rate.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>stated rate of\u00a0<\/u><\/a>interest<u><\/u>\u00a0method of paying\u00a0interest\u00a0and some offer the\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/b\/bankdiscountbasis.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>discount basis<\/u><\/a>\u00a0method. The stated rate of\u00a0interest\u00a0is the method that we are already familiar with if we have ever opened a\u00a0savings account. The bank will tell us that they will pay us 1% on our money. If we deposit $100, after one year, we will earn 1% of $100 or $1. This is very straightforward.<\/p>\n<p class=\"lt-biz-79466\">The\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/b\/bankdiscountbasis.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>discount basis<\/u><\/a>\u00a0is a bit trickier. This method of earning\u00a0interest\u00a0entails purchasing the\u00a0security at a price below its redemption value, also known as the par value, maturity value, or\u00a0face value. The difference between the purchase price and redemption value is the\u00a0interest\u00a0earned. Since the securities are negotiable, the value of the\u00a0investment\u00a0grows as it approaches its\u00a0maturity date. We say the\u00a0interest\u00a0\u201caccrues\u201d on the\u00a0short-term investment. On the date of maturity, the current owner of the\u00a0security\u00a0receives the maturity value. An example: You purchase a\u00a0security\u00a0now for $4,800 that will be redeemed for $5,000 in ten months. Your\u00a0interest\u00a0would be $200. If you were to sell the\u00a0security\u00a0in five months, \u2012 one half the time until maturity \u2012 the value would likely have accrued to $4,900. One half of the $200 would be $100 of\u00a0interest\u00a0and that would be added to the price of the\u00a0security.<\/p>\n<\/div>\n<div id=\"section_1\" class=\"mt-section\">\n<h2 class=\"lt-biz-79466 editable\">Risks of\u00a0Short-Term\u00a0Investments<\/h2>\n<p class=\"lt-biz-79466\">\u201c<em>Risks of\u00a0<\/em>short-term<em>\u00a0investments!? Wait a minute! You told me that these investments were\u00a0<\/em>risk<em>-free!<\/em>\u201d Yes,\u00a0short-term\u00a0investments are\u00a0risk-free regarding the loss of\u00a0principal, also known as the\u00a0<u><\/u>risk<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/d\/defaultrisk.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>\u00a0of default<\/u><\/a>. We are not going to lose our money. However, there are other risks when investing. There is the\u00a0risk\u00a0that we may lose\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/p\/purchasingpower.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>purchasing power<\/u><\/a>. Over time,<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">short-term\u00a0investments have barely kept up with inflation. Currently, they are losing to inflation. There is also the\u00a0risk\u00a0of lost\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/o\/opportunitycost.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>opportunity cost<\/u><\/a>. Opportunity cost is an annoyingly nebulous concept that you would discuss in detail in your ECON 101 class. It is real, though. Whenever we make a choice, we must think about the opportunities that we forego by making that choice. What else could we have done with our money? If we choose\u00a0short-term\u00a0investments for money that we won\u2019t need for the long term, we will almost certainly have done much worse than by carefully researching and choosing prudent,\u00a0long-term\u00a0investments. You first saw this in the graphics discussing the returns of stocks versus bonds versus\u00a0short-term\u00a0investments in the previous presentation and we will see examples of this throughout the semester.<\/div>\n<p class=\"lt-biz-79466\">Sadly, you will sometimes come across individuals who have placed all their investable savings into\u00a0short-term\u00a0\u201ccash\u201d investments. This is usually money that they are saving for<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">long-term\u00a0goals such as retirement. These people need to take Introduction to Investments! In time, Dear Readers, you will be the\u00a0Investment\u00a0Gurus for your friends, family, and colleagues. You will gently but firmly educate and guide them in choosing prudent,\u00a0long-term\u00a0oriented investments that will clobber the meager returns they were getting from their<\/div>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">short-term\u00a0investments. You will speak with authority. They will thank you profusely. We will be proud of you. You may even decide that you want to pursue a career in the<\/div>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">investment\u00a0services industry.<\/div>\n<p class=\"lt-biz-79466\">That\u2019s just the first of many pep talks. Stay tuned for more because the industry needs you. For now, it is time to run through the various types of\u00a0short-term\u00a0investments. Don\u2019t do this before bedtime \u2026 unless you are prone to insomnia. Again, these choices are not very exciting but then again, they are not meant to be exciting. They are meant to ensure safety of<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">principal. With\u00a0short-term\u00a0money, boring is good.<\/div>\n<div aria-expanded=\"false\">\n<h2 class=\"lt-biz-79466 editable\">Demand Deposit Accounts<\/h2>\n<p class=\"lt-biz-79466\"><a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/d\/demanddeposit.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Demand deposit accounts<\/u><\/a>\u00a0are offered by\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/c\/commercialbank.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>commercial banks<\/u><\/a>\u00a0and\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/c\/creditunion.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>credit unions<\/u><\/a>. The name comes from the fact that depositors can withdraw the funds at any time; the funds are available upon demand. However, there are sometimes certain restrictions upon this ability such as when you want to withdraw a large amount of money in cash. Demand deposit accounts at banks and credit unions have a very important benefit: They are typically guaranteed by an agency of the Federal government. You may have heard of the\u00a0<u><\/u>Federal Deposit Insurance Corporation (FDIC)<u><\/u>\u00a0or the\u00a0<u><\/u>National Credit Union Administration (NCUA)<u><\/u>. Your money is safe. Practically all banks and credit unions belong to these entities. If you are unsure if your bank or credit union belongs, just ask. For each account at each bank or credit union, you are currently insured up to $250,000. If you have more than $250,000, you can simply distribute that amount into separate banks or credit unions. (If you have more than $250,000 and this is not\u00a0short-term\u00a0money, you need to take Introduction to Investments and learn where to allocate your investable assets more effectively and prudently for\u00a0long-term growth\u00a0of\u00a0capital\u00a0and\u00a0income. My apologies if you have heard this before but it bears repeating. The opportunity cost of keeping\u00a0long-term\u00a0money in\u00a0short-term\u00a0investments is very high.)<\/p>\n<p class=\"lt-biz-79466\">Common examples of demand deposit accounts are\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/c\/checkingaccount.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>checking accounts<\/u><\/a>\u00a0and\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/savingsaccount.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>savings accounts<\/u><\/a>\u00a0at banks and\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/share-draft-account.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>share-draft accounts<\/u><\/a>\u00a0and share accounts at credit unions. Those of you who use credit unions have probably never heard of share-draft or share accounts. That is because no one at the credit union uses those terms; they just use the same terms that the banks use, checking and savings. Even though there are legal differences, as far as we retail customers are concerned, there are no differences. They both work the same way. For many years, the regulators would not allow checking accounts to pay\u00a0interest. For this reason, banks and credit unions offered\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/n\/nowaccount.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Negotiable Order of Withdrawal (NOW)<\/u><\/a>\u00a0accounts. Again, no one called them that; they just called them checking accounts that paid\u00a0interest. That restriction was removed in 2010 so now, NOW accounts are not as popular as they once were. (And no, that is not a double word typo.) Lastly, banks and credit unions can offer\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/m\/moneymarketaccount.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>money market accounts<\/u><\/a>, also known as money market demand accounts. Money market accounts typically pay more than checking and savings accounts. These accounts are very similar to the money market mutual funds. In fact, the banks and credit unions simply copied the concept from the<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">mutual fund\u00a0industry. The main difference between money market accounts and money market mutual funds is that the money market accounts at banks and credit unions have the same $250,000 guarantee as other demand deposit accounts; money market mutual funds at\u00a0mutual fundcompanies do not have this guarantee. We will discuss money market mutual funds a bit later on.<\/div>\n<p class=\"lt-biz-79466\">We mentioned that there may be some restrictions on your ability to withdraw your funds upon demand. An example of this would be if you were to walk into your neighborhood bank and ask to withdraw the entire $187,000 in your\u00a0savings account\u00a0\u2012 in cash! The bank would most likely ask you to wait until tomorrow because they simply don\u2019t keep that much cash on hand. (There\u2019s over $250,000 in the ATM next door, though. Shows you how safe and secure the banks believe their ATMs are.) The bank would also contact the FBI and report a \u201csuspicious transaction.\u201d This is courtesy of the Patriot Act, hurried through Congress within a month after the attacks on the World Trade Towers on September 11th, 2001. Some people will tell you that a deposit or withdrawal of $5,000 or $10,000 constitutes a \u201csuspicious transaction.\u201d This is not true. There is no specific dollar amount. The bank or credit union must determine what is a \u201csuspicious transaction,\u201d depending upon the circumstances. Kinda\u2019 creepy, huh? The FBI will check up on you for carrying around your own money.<\/p>\n<h2 class=\"lt-biz-79466 editable\">Certificates of Deposits (CDs)<\/h2>\n<p class=\"lt-biz-79466\"><a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/c\/certificateofdeposit.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Certificates of Deposits (CDs)<\/u><\/a>\u00a0are also offered by banks and credit unions and have the same guarantees as demand deposit accounts, namely the $250,000 deposit insurance guarantee. Unlike demand deposit accounts, though, CDs are\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/t\/timedeposit.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>time deposit accounts<\/u><\/a>, also known as\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/t\/termdeposit.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>term deposits<\/u><\/a>. They have a\u00a0maturity date. You agree to keep your money on deposit for a certain time, anywhere from seven days to several years. Typically, the longer the time period, the higher the rate of\u00a0interest\u00a0a CD investor will receive. The\u00a0rate of return\u00a0is usually better than demand deposit accounts such as savings accounts or money market accounts. What are the disadvantages? If you need to withdraw the money before the\u00a0maturity date, there will be a penalty. Also, your\u00a0rate of return\u00a0is fixed and typically does not change. If\u00a0interest\u00a0rates rise, your CD will not rise with them. For this reason, many banks and credit unions offer\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/b\/bumpupcd.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Bump-Up CDs<\/u><\/a>. If\u00a0interest\u00a0rates have risen, the Bump-Up CD allows an investor to \u201cbump up\u201d their initial\u00a0interest\u00a0to the current\u00a0interest\u00a0rate. CD investors need to be aware of the\u00a0<a class=\"link-https\" href=\"https:\/\/www.consumerfinance.gov\/ask-cfpb\/what-is-a-certificate-of-deposit-cd-rollover-or-renewal-en-923\/\" target=\"_blank\" rel=\"external noopener nofollow\"><u>rollover or renewal provision<\/u><\/a>\u00a0of some CDs. Some banks or credit unions will automatically renew your CD at the end of the time period. The bank or credit union is required to notify you of the upcoming renewal. You typically have the option of requesting that the funds be automatically deposited into your savings or checking account. It definitely pays to shop around for the best CD\u00a0interest\u00a0rates. CD rates vary widely and as long as your bank or credit union belongs to the FDIC or NCUA, you can do business with institutions in the United States and its territories and have the same guarantee of\u00a0principal.<\/p>\n<p class=\"lt-biz-79466\">Some brokerage firms and some banks offer\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/b\/brokered-cd.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Brokered CDs<\/u><\/a>. The brokerage firm has invested a great deal of money with a bank and that generates more\u00a0income\u00a0than a typical retail investor will receive. The brokerage firm then can offer these higher rates to their customers. Also, unlike typical CDs, they can be bought and sold on the open market as are other securities. An investor does not have to wait until the maturity to receive their\u00a0principal. The downside is that Brokered CDs are not FDIC-insured. For this reason, it is important that Brokered CD investors deal with a reputable brokerage firm.<\/p>\n<h2 class=\"lt-biz-79466 editable\">Money Market Mutual Funds<\/h2>\n<p class=\"lt-biz-79466\"><a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/m\/money-marketfund.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Money market mutual funds<\/u><\/a>\u00a0are\u00a0short-term\u00a0investments offered by\u00a0mutual fund\u00a0companies. Recall that a\u00a0mutual fund\u00a0is a company that pools the\u00a0capital\u00a0of a large number of investors. A\u00a0money market mutual fund\u00a0uses their investors\u2019\u00a0capital\u00a0to invest exclusively in\u00a0short-term\u00a0securities. They are also known as mutual money funds, or more simply and more typically, money markets. Because they are offered by\u00a0mutual fund\u00a0companies and not banks or credit unions, they do not have the same protections that money market accounts at banks and credit unions have, namely the $250,000\u00a0principal\u00a0protection guarantee. However, in practice, they are considered essentially as safe as their counterparts at banks and credit unions. Why? There is a long history of the government and the industry doing their parts to ensure that money market clients do not lose a penny! In practice, that is exactly what can happen. Your money market fund can \u201c<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/b\/breaking-the-buck.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>break the buck<\/u><\/a>.\u201d When that happens, the whole world sits up and takes notice. Just type \u201cbreaking the buck\u201d into any Internet search engine and see how many millions of results you get. There are tremendous forces allied against any money market ever breaking the buck.<\/p>\n<p class=\"lt-biz-79466\">Money markets are very versatile and popular. Virtually every\u00a0mutual fund\u00a0company offers one or sometimes several different types of money market funds. Many money markets allow you to write checks, although in practice, most investors simply link their money market funds to their checking and savings accounts at their banks and credit unions and electronically withdraw funds as needed. Money markets allow you to easily exchange funds to and from your\u00a0stock\u00a0and\u00a0bond\u00a0mutual funds at your\u00a0mutual fund\u00a0company. Money market funds typically pay\u00a0interest\u00a0rates higher than checking and savings accounts and only a bit less than CDs. However, unlike CDs, the\u00a0interest\u00a0rates on money market funds change daily. Therefore, if\u00a0interest\u00a0rates rise, your money market\u00a0interest\u00a0rate will rise with them. There is much to like about money market mutual funds.<\/p>\n<h2 class=\"lt-biz-79466 editable\">Series EE, HH, and I Savings Bonds<\/h2>\n<p class=\"lt-biz-79466\"><a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/u\/ussavingsbonds.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Savings bonds<\/u><\/a>\u00a0are\u00a0short-term\u00a0investments that are offered by the United States Treasury. The Treasury currently offers both\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/serieseebond.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Series EE<\/u><\/a>\u00a0and\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/seriesibond.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Series I<\/u><\/a>\u00a0savings bonds. The\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/serieshhbond.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Series HH<\/u><\/a>\u00a0bonds were discontinued in 2004 and will all mature and disappear by 2024. The Series EE savings bonds use the discount basis of accruing<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">interest. In other words, for example, you might buy a Series EE savings\u00a0bond\u00a0for $50 and it will pay its maturity value of $100 in 20 years. Currently, though, Series EE bonds purchased online electronically are purchased at\u00a0face value\u00a0and earn\u00a0interest\u00a0in the stated rate of\u00a0interest\u00a0manner. Savings bonds are exempt from state\u00a0income\u00a0taxes. (We will discuss more about the tax relationship of the Federal government and the state and local governments later in the class.) If you use the proceeds from your savings\u00a0bond\u00a0for\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/q\/qhee.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>qualified higher education expenses<\/u><\/a>, then the\u00a0interest\u00a0is also exempt from Federal\u00a0income\u00a0taxes.<\/div>\n<p class=\"lt-biz-79466\">The \u201cI\u201d in Series I savings bonds stands for Inflation. Series I bonds were introduced in 1998 to cater to those investors worried about inflation. Like Series EE savings bonds, Series I bonds do come with a fixed\u00a0rate of return\u00a0but that\u00a0rate of return\u00a0is far less than other types of\u00a0short-term\u00a0investments, including Series EE bonds. Instead, Series I bonds add an\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/ask\/answers\/111414\/what-difference-between-ee-and-i-bonds.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>inflation-adjusted\u00a0<\/u><\/a>interest<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/ask\/answers\/111414\/what-difference-between-ee-and-i-bonds.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>\u00a0amount<\/u><\/a>\u00a0every six months that varies with the rate of inflation. Hence, Series I bonds are guaranteed to keep pace with inflation. Series I bonds became immensely popular with the investing public in 2022 when inflation spiked.<\/p>\n<p class=\"lt-biz-79466\">The yearly purchase limits are currently $10,000 for Series EE bonds Series I bonds. For decades, United States savings bonds were popular gifts to newborns. Grandparents and aunts and uncles would buy them at their local bank for the new arrival to the family. The bonds would be tucked away in a drawer somewhere and promptly forgotten about until the parents passed away and the adult kids and adult grandkids were tasked with clearing everything out of the house. The Treasury has done away with paper savings bonds for Series EE bonds and are phasing out paper savings bonds for Series I bonds. All bonds are now available for purchase and safekeeping at\u00a0<a class=\"external\" href=\"http:\/\/www.treasurydirect.gov\/\" target=\"_blank\" rel=\"external noopener nofollow\"><u>www.<\/u><\/a>TreasuryDirect.gov<u><\/u>.\u00a0TreasuryDirect.gov\u00a0is the subject of one of your chapter 1 assignments.<\/p>\n<div id=\"section_7\" class=\"mt-section\">\n<h2 class=\"lt-biz-79466 editable\">Treasury Bills<\/h2>\n<p class=\"lt-biz-79466\"><a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/t\/treasurybill.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Treasury Bills<\/u><\/a>\u00a0are\u00a0short-term\u00a0investments that are also offered by the United States Treasury. They are often informally referred to as T-Bills. T-Bills all have maturities that are less than one year. The most typical periods are one month (4-week), three months (13-week), and six months (26-week), although two months (8-week) and twelve months (52-week) are also available. Treasury Bills are often considered the safest of all investments. As mentioned, when the\u00a0investment community wants to report the current risk-free rate of return, they often use the rate for three-month Treasury Bills.<\/p>\n<p class=\"lt-biz-79466\">T-Bills are usually sold in $1,000 increments and use the discount basis method for paying\u00a0interest. For example, you may purchase a six-month $1,000\u00a0Treasury Bill\u00a0for $990 that will mature at $1,000. The $10 difference would be your\u00a0interest\u00a0received. Along the way to the six-month\u00a0maturity date, because these are securities, you could sell your\u00a0Treasury Bill, again, at a discount to the $1,000 maturity value. As the date of maturity becomes nearer, your\u00a0Treasury Bill will increase in value. The price would depend upon the prevailing market rates but any\u00a0volatility\u00a0would be close to zero. Remember, Treasury Bills are very safe. At the date of maturity, the T-Bill would be redeemed for the full $1,000\u00a0face value.<\/p>\n<p class=\"lt-biz-79466\">Like the Series EE and I savings bonds,\u00a0interest\u00a0from Treasury Bonds is tax-exempt at the state and local level. Unlike Series EE and I savings, though, the\u00a0interest\u00a0is not tax-exempt if used for the qualified higher education expenses.<\/p>\n<p class=\"lt-biz-79466\">Also like the Series EE and I savings bonds, Treasury Bills are available for purchase at\u00a0<a class=\"external\" href=\"http:\/\/www.treasurydirect.gov\/\" target=\"_blank\" rel=\"external noopener nofollow\"><u>www.<\/u><\/a>TreasuryDirect.gov<u><\/u>.\u00a0TreasuryDirect.gov\u00a0offers you and me, the common retail investors, the same prices as the big boys and girls on Wall Street. It is a very well done website and, as mentioned, the subject of one of your chapter 1 assignments. The Mexican government has a website very similar to\u00a0TreasuryDirect.gov. It is called\u00a0<a class=\"link-https\" href=\"https:\/\/www.cetesdirecto.com\/\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Cetes Directo<\/u><\/a>. Your Humble Author had the good fortune to meet the project manager during a visit to Mexico City. He acknowledged that they essentially copied\u00a0TreasuryDirect.gov verbatim. We love to complain when our government screws up. Hence, we should rightly praise them when they do something well. Thanks, United States Treasury!<\/p>\n<\/div>\n<div id=\"section_8\" class=\"mt-section\">\n<h2 class=\"glossarizer_replaced\" aria-expanded=\"false\">Commercial Paper\u00a0and Banker\u2019s Acceptance Notes<\/h2>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Commercial paper<u><\/u>\u00a0investments are\u00a0short-term, unsecured promissory notes (IOUs) issued by corporations with very high credit standings. Corporations typically use these vehicles when they need a very\u00a0short-term loan for payroll or maybe for the large purchase of goods in anticipation of a coming increase in business activity such as major retailers preparing for the Christmas surge. Instead of going to a bank, the\u00a0corporation\u00a0can go to the\u00a0investment\u00a0community and get a much better rate than the bank would charge. Like Treasury Bills,<\/div>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">commercial paper\u00a0investments use the discount basis and are sold at a discount to their maturity\u00a0face value\u00a0and have\u00a0short-term\u00a0maturity periods of one, three, six, and nine months. Unlike Treasury Bills,\u00a0commercial paper\u00a0investments are typically denominated in $100,000 increments and\u00a0commercial paper dealers\u00a0normally want you to buy many of them at one time. Hence, they are usually purchased by financial institutions such as life insurance companies and pension funds. Money market mutual funds are also eager buyers of<\/div>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">commercial paper. You and I are not going to buy\u00a0commercial paper\u00a0except indirectly through our investments in money markets. (If you are indeed in the market for\u00a0commercial paper\u00a0and can afford multiples of $100,000 denominations, then congratulations but I have a sneaking suspicion that you have your own private\u00a0broker.)<\/div>\n<p class=\"lt-biz-79466\"><a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/b\/bankersacceptance.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Banker\u2019s acceptance notes<\/u><\/a>\u00a0are cousins to\u00a0commercial paper\u00a0investments. They, too, are sold at a discount, are tradable securities, are typically denominated in $100,000 increments, and mature quickly. Banker\u2019s acceptance notes usually mature in 90 days but the\u00a0maturity date\u00a0can be up to 180 days. They are often used to facilitate\u00a0domestic\u00a0and\u00a0international\u00a0trade for companies that do not have the prestige and financial wherewithal to issue their own\u00a0commercial paper\u00a0in the marketplace. The company petitions the bank for help and the bank issues the acceptance notes which the company can sell on the open market. The company then uses the proceeds to facilitate the trade. The company must pay the bank the\u00a0face value\u00a0at the<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">maturity date\u00a0so that ultimate holders of the notes can be paid. If the company defaults, the bank must make good on the notes.<\/div>\n<p class=\"lt-biz-79466\">By keeping the maturity periods to less than one year, the issuers of\u00a0corporate paper\u00a0and banker\u2019s acceptance notes are not required to register their securities with the Securities and Exchange Commission. This helps keep the fees associated with these\u00a0short-term\u00a0investments low.<\/p>\n<\/div>\n<div id=\"section_9\" class=\"mt-section\"><span id=\"Which_Short-Term_Investment_Is_Right_for_Me.3F\"><\/span><\/p>\n<h2 class=\"lt-biz-79466 editable\">Which\u00a0Short-Term Investment\u00a0Is Right for Me?<\/h2>\n<p class=\"lt-biz-79466\">We have explored the various\u00a0short-term investment\u00a0alternatives. It is time for you to answer the question, \u201cWhich\u00a0short-term investment\u00a0is right for me?\u201d Everyone is different and so that question can only be answered by you. Here are our observations: Because of their costs,\u00a0commercial paper\u00a0and banker\u2019s acceptance notes are usually only suitable for institutional investors. Savings bonds used to make cute gifts for newborns in paper form but now that they are all electronic, will the proud new parents still coo and awe when the card is opened only to say that their newborn\u2019s savings\u00a0bond\u00a0is safely tucked away at\u00a0TreasuryDirect.gov? Many savvy investors purchase Treasury Bills directly from the Treasury at <a class=\"external\" href=\"http:\/\/www.treasurydirect.gov\/\" target=\"_blank\" rel=\"external noopener nofollow\"><u>www.<\/u><\/a>TreasuryDirect.gov<u><\/u>. Certificates of Deposit are okay for those that are sure that they will not need the money until maturity. In our opinion, their flexibility and ease of use make money market mutual funds and money market deposit accounts the preferred choice of most investors, especially since every bank, credit union, brokerage firm, and<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">mutual fund\u00a0company offers them. Sadly, many uninformed savers still use a passbook\u00a0savings account\u00a0from a bank or credit union. (They have not taken this course yet. Such a shame!)<\/div>\n<\/div>\n<div id=\"section_10\" class=\"mt-section\"><span id=\"Emergency_Fund_Debate\"><\/span><\/p>\n<h2 class=\"lt-biz-79466 editable\">Emergency Fund Debate<\/h2>\n<p class=\"lt-biz-79466\">If you watch the financial media outlets and listen to any of the talking heads with their perfect hair and immaculate dental implants, they will vehemently insist that you have an\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/e\/emergency_fund.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>emergency fund<\/u><\/a>. An emergency fund is essentially a liquid,\u00a0short-term investment\u00a0in which you place three, six, nine, or even twelve or more months of\u00a0income. This is a self-insurance program in case of losing your source of\u00a0income\u00a0or another costly emergency arises. Some experts, most notably\u00a0<a class=\"link-https\" href=\"https:\/\/en.wikipedia.org\/wiki\/David_Chilton_(businessman)\" target=\"_blank\" rel=\"external noopener nofollow\"><u>David Chilton<\/u><\/a>, author of\u00a0<a class=\"link-https\" href=\"https:\/\/en.wikipedia.org\/wiki\/The_Wealthy_Barber\" target=\"_blank\" rel=\"external noopener nofollow\"><u><em>The Wealthy Barber<\/em><\/u><\/a>, do not agree with this strategy. Of course, no one is advocating that you have $17.87 in your rainy day\u00a0savings account; some substantial amount socked away for that rainy day is obviously a great benefit to your financial well-being. However, for those still working, assuming you have a marketable skill that would allow you to find gainful employment in a reasonable amount of time, there can be better uses for that money. You can use those funds to pay down expensive debt or increase your monthly retirement or\u00a0investment\u00a0contributions. There are exceptions, though. Anyone who works in sales or has their own business or works in a seasonal industry definitely needs a substantial emergency fund. We would be remiss if we forgot to ask one last thing: You do have proper and adequate insurance, yes? For more discussion about emergency funds and insurance and all topics related to personal finance, please consider taking BUS-121,\u00a0<a class=\"link-https\" title=\"https:\/\/wonderprofessor.com\/121\/\" href=\"https:\/\/wonderprofessor.com\/121\/\" target=\"_blank\" rel=\"external noopener nofollow\">Principles of Money Management<\/a>, at Southwestern Community College.<\/p>\n<\/div>\n<div id=\"section_11\" class=\"mt-section\"><span id=\"The_Federal_Reserve_Bank_and_Short-Term_Interest_Rates\"><\/span><\/p>\n<h2 class=\"lt-biz-79466 editable\">The Federal Reserve Bank and\u00a0Short-Term InterestRates<\/h2>\n<p class=\"lt-biz-79466\">We mentioned that\u00a0short-term interest\u00a0rates change over time. You may be wondering, \u201cWell, who sets these\u00a0short-term interest\u00a0rates?\u201d For a more thorough investigation, you will want to take an Introduction to Economics class. The short answer, though, is that the\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/f\/federalreservebank.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Federal Reserve Bank<\/u><\/a>\u00a0is responsible for setting\u00a0short-term interest\u00a0rates in the United States. It is often referred to as the Fed. They are the nation\u2019s\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/c\/centralbank.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>central bank<\/u><\/a>\u00a0and are often called the bankers\u2019 bank since the banks of our nation use the Fed as their bank. The Fed has major two objectives. They are charged with keeping the nation\u2019s economy at full employment while at the same time, keeping inflation under control. These two objectives are often at odds with one another. The Fed has tremendous power and the Chairperson of the Federal Reserve Bank is often called, \u201cthe second most powerful person in the nation.\u201d (The most powerful person, of course, is the President, who is the Commander in Chief of the military.) The Federal Reserve Bank\u00a0was designed to be independent and not subject to political pressures. That does not stop politicians and other high-profile individuals from criticizing their actions. In fact, many vocal critics even claim that the Federal Reserve Bank is\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/ask\/answers\/082115\/why-do-some-people-claim-federal-reserve-unconstitutional.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>unconstitutional<\/u><\/a>. Suffice to say that no system we humans have ever created is perfect, and that includes the Fed. However, for over 100 years, the Fed has bumbled along and sometimes has executed brilliantly and sometimes has failed miserably. We don\u2019t call Economics the \u201cDismal Science\u201d for nothing, Dear Students.<\/p>\n<\/div>\n<footer class=\"mt-content-footer\">\n<hr class=\"autoattribution-divider\" \/>\n<div class=\"autoattribution\">\n<p>This page titled\u00a0<a class=\"internal mt-self-link\" href=\"https:\/\/biz.libretexts.org\/Bookshelves\/Finance\/Introduction_to_Investments_(Paiano)\/01%3A_Chapter_1\/01%3A_Introduction_Overview_and_Risk_versus_Return\/1.05%3A_Short_Term_Investments_Revisited__A_Place_to_Park_Your_Money\" target=\"_blank\" rel=\"internal noopener\">1.5:\u00a0<\/a>Short-Term<a class=\"internal mt-self-link\" href=\"https:\/\/biz.libretexts.org\/Bookshelves\/Finance\/Introduction_to_Investments_(Paiano)\/01%3A_Chapter_1\/01%3A_Introduction_Overview_and_Risk_versus_Return\/1.05%3A_Short_Term_Investments_Revisited__A_Place_to_Park_Your_Money\" target=\"_blank\" rel=\"internal noopener\">\u00a0Investments Revisited \u2012 A Place to Park Your Money<\/a>\u00a0is shared under a\u00a0<a href=\"https:\/\/creativecommons.org\/licenses\/by-nc-sa\/4.0\" target=\"_blank\" rel=\"nofollow noopener\">CC BY-NC-SA 4.0<\/a>\u00a0license and was authored, remixed, and\/or curated by\u00a0<a href=\"https:\/\/wonderprofessor.com\/\" target=\"_blank\" rel=\"nofollow noopener\">Frank Paiano<\/a>.<\/p>\n<\/div>\n<\/footer>\n<\/div>\n<\/div>\n","protected":false},"author":33,"menu_order":6,"template":"","meta":{"pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-500","chapter","type-chapter","status-publish","hentry"],"part":485,"_links":{"self":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters\/500","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/users\/33"}],"version-history":[{"count":1,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters\/500\/revisions"}],"predecessor-version":[{"id":501,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters\/500\/revisions\/501"}],"part":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/parts\/485"}],"metadata":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters\/500\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/media?parent=500"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapter-type?post=500"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/contributor?post=500"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/license?post=500"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}