Different Types of Short-Term Paper

Short term paper is the term that is used to describe investments that mature after a brief period of time, typically less than a year. There are different types of short term paper that individuals can use to earn a return without making an investment that will take years to pay off. The different kinds of these brief investments include Certificates of Deposit, money market accounts, money market funds, short term bonds, and Treasury bills.

Certificates of Deposit

Certificates of Deposit, also called CDs, are similar to savings accounts. Money is deposited into an account that earns a fixed interest rate for a specified period of time. The money is held in the account until it matures, which is normally several months from the date of the deposit. Many banks have CDs that will mature after three, six, or 11 months. The interest rates tend to be significantly higher than regular savings accounts or other account where the money can be easily withdrawn any time. It is possible to withdraw money from the account before maturity, however the interest on the account to date would be forfeited.

Money Market Accounts

Money market accounts are even more similar to savings accounts than CDs. This is because of the liquidity options. Basically, a sum of money is placed into the account. The amount is typically more than a thousand dollars. The dividend yield is based on conservative investments made in the market. Normally the rate is higher than that of regular savings accounts. There is a limit to the number of withdrawals that can be made from a money market account on a monthly basis. Penalties are charged for falling below the minimum balance.

Money Market Funds

Money market funds work like money market accounts, however the dividends tend to be higher and they are not FDIC insured.

Short Term Bonds

Short term bonds are a type of bond fund. A bond fund is an investment that involves purchasing a debt security. A periodic dividend is earned based on the interest payments made on the debt. The interest rates tend to be higher than that of CDs or money market accounts. Short term bonds mature in less time. This type of short term paper is popular when the market is struggling, and it can be risky. Bonds can drop in value if interest rates on debt securities are reduced.

Treasury Bills

Treasury Bills, or T-Bills, are similar to bonds because they also involve the purchase of a debt. The difference, however is that T-Bills are backed by the United States government. They typically mature within one, three, or six months, and are sold in $1,000 denominations. Rather than periodic dividends, the holder of a Treasury Bill will receive a predetermined rate at maturity. For example, if some purchases a $5,000 T-bill at a two percent rate, and the term is three months, they would receive $100 after three months. (2% x $5,000 = $100).

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