Cash Equivalents

Cash Equivalents is a term that refers to assets that have a short maturity (e.g. 3 month T-bills), low risk and are readily exchangeable for cash.

Since inflation erodes the purchasing power of cash, investors are more willing to invest their cash in assets with higher returns and hold little cash equivalents in their portfolio. The long term return on T-bills with short maturities is close to the long term rate of inflation (around 3% annually.) However, investors (both institutional and individual) tend to hold more cash equivalents in their portfolio when equities are uncertain, due to their creditworthiness, reliability and liquidity.

Related Terms

Popular Articles