Are CDs and Short Term Bonds Cash or Bonds ?

[REWahoo]

Cash Equivalents financial definition of Cash Equivalents. Cash Equivalents finance term by the Free Online Dictionary.

FASB evidently defines cash as less than 3 months maturity now.

OK, but I still see no reference to a CD with a maturity longer than 3 (or 12) months defined as a bond.

 

[pb4uski]

FWIW below is the accounting definition of cash and cash equivalents. Essentially it focuses on liquidity and lack of interest rate risk. A CD more than 3 months from maturity when purchased would typically not be considered cash because of liquidity constraints.

I consider my 5 year Pen Fed CD as part of my fixed income allocation.

Please note that the categorization of something for AA purposes can be whatever you want it to be and isn't constrained by SEC or FASB classifications. For example, I have some money market funds that if I was doing a formal financial statement I would need to report as a cash equivalent - however, since the money market represents the proceeds of some bond sales that I am just taking my time reinvesting, I consider it to be part of my fixed income for AA purposes.

Cash

Consistent with common usage, cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits in that the customer may deposit additional funds at any time and also effectively may withdraw funds at any time without prior notice or penalty. All charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it. For example, a bank’s granting of a loan by crediting the proceeds to a customer’s demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made

Cash Equivalents

Cash equivalents are short-term, highly liquid investments that have both of the following characteristics:

a. Readily convertible to known amounts of cash
b. So near their maturity that they present insignificant risk of changes in value because of changes in interest rates.​

Generally, only investments with original maturities of three months or less qualify under that definition. Original maturity means original maturity to the entity holding the investment. For example, both a three-month US Treasury bill and a three-year US Treasury note purchased three months from maturity qualify as cash equivalents. However, a Treasury note purchased three years ago does not become a cash equivalent when its remaining maturity is three months. Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an entity with banking operations)

 

[thefinancebuff]

For the modeling tools it actually makes quite a difference in success rates. Of course, one can say that if it means the difference between a success rate that I am comfortable with vs one I am not comfortable with then I probably should not ER (which would increase my OMY poll response to "too many years to count").

Modeling tools typically give lower returns to cash than to bonds. In this regard your 5-year CDs are bonds. If you want to call short-term bonds cash because they pay not much more than savings account, that's fine.

 

[obgyn65]

I count CDs as fixed income. Not bonds nor cash.

Good luck finding a consensus here on this question.

If I count these as cash then my AA is 50 / 30 / 20. If I count them as Bonds it is 50 / 40 / 10. Big difference.

 

[Live And Learn]

Good luck finding a consensus here on this question.

I'm using the 1 year definition. Even if it has no real basis its easily measurable and goes along with annual withdrawals for spending, and annual rebalancing. Besides - it gives me the better success rate; I have enough contingencies in my plan and don't need another (can you believe I said that, REWahoo ?)

 

[mrfeh]

I don't consider cash a separate category. I look at my portfolio as equities:fixed income, where FI is comprised of bonds, CDs and cash.

 

[youbet]

+3

An exception for me are the IBonds I own which I count as cash in my AA, since their principal is guaranteed by the US Treasury. YMMV

30 yr gov't bonds are also guaranteed by the US Treasury.

 

[Gearhead Jim]

I prefer not to get caught up in definitions, but rather to focus on what the intended purpose is. If you have an AA strategy that includes keeping a portion of your investments in fixed income, you can select from CDs, bonds, money markets, or other similar types of investments. The purpose of the fixed income portion of your portfolio is to provide some stability against the volatility of the stock markets.

It could be argued that in today's bond environment, only very short term bonds may actually provide this stability, or at least the perception of it, since we have no idea how long interest rates will stay this low.

For purposes of AA strategy, I see no problems with substituting a 5 year CD in place of an intermediate term bond fund. The yield is currently higher and there is no real volatility since the principal is guaranteed. Intermediate and long term bond funds actually introduce enough volatility that it could be argued they are counter to the purpose of having fixed income in your portfolio.

+1

 

[Alan]

30 yr gov't bonds are also guaranteed by the US Treasury.

Can you cash them after 1 year or any time after that with no loss of principal like you can an IBond?