Reviewed by Aug 27, 2020| Updated on
What is a Cash Equivalent?
Cash equivalents are short-term investment securities with assets; they have a high credit rating and are extremely liquid.
Cash equivalents, also known as "cash and equivalents," are one of the three main asset classes in financial investment along with stocks and bonds. These securities are low-risk, low-return, and include U.S. securities. Government Treasury bills, bank deposit certificates, bankers' acceptances, corporate business paper and other money market instruments.
Breaking Down Cash Equivalent
Cash equivalents also function as one of the most relevant health metrics in the financial structure of an organisation. Analysts can even predict whether investing in a specific company is good by its ability to produce cash and cash equivalents, as it represents how a company can pay its bills in a short period. Companies with large amounts of money and cash equivalents are primary targets of more prominent firms that plan to acquire smaller firms.
Treasury bills or "T-bills" are securities issued by the United States Treasury Department. When released to corporations, corporations essentially lend money to the government.
Big corporations use commercial papers to collect funds to resolve short-term debt commitments, such as the payroll of a company. They are sponsored by issuing banks or firms who agree to meet and pay the face sum on the note's specified maturity date.
Marketable securities are financial instruments and assets that are readily convertible into cash, and thus very liquid. Marketable securities are liquid, as maturities tend to occur within a year or less and the rates at which they can be traded have minimal effect on prices.
Short-Term Government Bonds
Governments include short term government bonds to finance infrastructure programmes. These are issued in the domestic currency of the country. While investing in government debt, creditors take a look at political uncertainties, interest rate threats and inflation.