Marketable securities are cash equivalents. To understand why, you must know what constitutes marketable security. In general, marketable securities are financial instruments that can be quickly converted into cash at a reasonable price.
To make the cut as a cash equivalent, a marketable security must be liquid or converted into cash. Marketable securities have durations of less than one year, have high trading volumes and sustain very little price fluctuations. Banker's acceptance, commercial paper, Treasury bills and other money market instruments are examples of marketable securities. Each of these instruments can easily be converted into cash and are often included as part of cash balances.
A banker's acceptance is one of the world's oldest financial instruments and dates to the 12th century. Essentially, a banker's acceptance is an agreement to pay a specified amount of money to the holder on a specified date. In a banker's acceptance transaction, a bank agrees to accept or guarantee a future payment between two parties.
Commercial credit is unsecured debt issued by corporations with high credit ratings for short-term funding needs. Commercial paper has a maturity of two days to 270 days. Because of the short duration and creditworthiness of its issuers, commercial paper has a lower interest rate than other debts.
A Treasury bill (T-bill) is debt issued and backed by the United States government. T-Bills sell at a discount from the face value with terms ranging from a few days to 52 weeks. Instead of paying the par or face value of $1,000 T-bill, an investor pays $990 but receives $1,000 when the T-bill matures. The difference between what he pays for the T-bill and par value is the interest.
Other Money Market Instruments
Money market instruments include certificates of deposit euro dollars, and repos. Euro dollars refer to U.S. dollar deposits held in foreign banks, usually in high denominations with a maturity of less than six months. A repo, or repurchase agreement, is a promise by the seller of a security or asset to buy it back later. Repos mature in one day to 30 days. Banks often use the repo market to lend to one another. Certificates of deposits, euro dollars and repos are safe investments and good proxies for cash.
- St. Louis Federal Reserve Bank; Bankers' Acceptances: Yesterday's Instrument to Restart Today's Credit Markets?; Richard G. Anderson; January 2009
- TreasuryDirect: Treasury Bills
- Bloomberg Businessweek: The Commercial Paper Squeeze: Why It Hurts; September 2008
- New York Federal Reserve Bank; The Repurchase Agreement Refined: GCF Repo; Michael J. Fleming and Kenneth D. Garbade; June 2003
- Trade Center: Eurodollar Futures
- Photo Credit Jupiterimages/Photos.com/Getty Images
Are Mutual Funds Marketable Securities?
Mutual funds may be easily returned to cash, as they're liquid marketable securities. They may be closed-end securities that trade on the...
What Are Money Market Instruments?
Money market instruments are securities or investments that have high liquidity and a short-tem maturity. High liquidity means the security can be...
What Are Money Market Securities?
Global financial marketplaces feature various assets or economic resources that investors buy and sell, helping firms manage risks and seek external funds...
How to Cash a Series EE Bond
You can redeem your electronic EE bonds online in your Treasury Direct account, but paper bonds have to be cashed at a...
How to Calculate Marketable Securities
Marketable securities are classified in three categories. Calculating the measurable value will depend on the classification. Marketable security classifications are trading, available...
Marketable Alternative Investments
According to a recent survey conducted by Morningstar and Barron's magazine, more than two out of three investment advisers and institutional investors...
What Is a Cash Equivalent?
A standard 401(k) or mutual fund typically contains some cash. However, when investment professionals talk about cash accounts they are not referring...
What Are Marketable Securities in Accounting?
Marketable securities are securities that can be readily converted to cash, usually within a year. However, even though a security may be...
The Classification of Marketable Securities
Businesses frequently hold securities -- investment vehicles -- in other companies or government ventures. Marketable securities are those securities that can be...