Monetary Policy and Investment Opportunities

By Laura S. Nowak | Go to book overview

6
Short-Term Fixed Income Securities

Fixed income securities are defined as securities that promise an unalterable return. Although the securities are called fixed income, the value of these securities can change while the investor holds them. In addition, the actual income stream can be different from original expectations.

Since the value (price) of most fixed income securities can change and the income stream can fall short of expectations, fixed income securities are not riskless. Nevertheless, some fixed income securities are less risky than others. Generally speaking, shorter-term securities are less risky than longer-term securities. The following is a listing of the most popular types of short-term fixed income securities. The shorter-term fixed income securities are discussed first.

Money market deposit accounts in depository institutions are not risky. They are insured by the Federal Deposit Insurance Corporation up to $100,000. The FDIC insures that the principal will be replaced in the event that the depository institution (e.g., commercial bank, savings and loan, or mutual savings bank) is bankrupt and cannot pay all of its liabilities. In almost all cases, the FDIC also pays the interest that was promised. In many, but not in all, cases, the FDIC also covers deposits in excess of $100,000. Deposits in credit unions are covered by their own insurance fund.

The investor in a money market deposit account receives a fixed interest rate on the account balance. The fixed interest rate, however, is very short term. The rate can change from day to day or week to week. The return seems more like a variable rate than a fixed rate. The return is usually

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