Security With Shortest Term to Maturity

by Tom Streissguth

In a volatile investment market, you may be seeking a safe place to park cash, but also the ability to take advantage of good opportunities as soon as they arise. In general, short-term investments yield lower interest rates than long-term investments, but allow easier access to your cash.

Certificates of Deposit

Banks and brokerages issue certificates of deposit (CDs), which allow you to set the term to maturity as short as three months. The Federal Deposit Insurance Corporation (FDIC) insures bank-issued CDs, so they represent a safe short-term investment. If the bank fails, the FDIC reimburses you for any lost deposits or CDs, up to $250,000 per depositor, per bank. If you need the money before the maturity date, however, you will pay a penalty that will probably erase any gain from interest you earn.

Treasuries

The United States government issues U.S. Treasury bills, considered by many to be among the safest investments you can make. T-bills represent a short-term investment that matures in less than a year. You buy T-bills at a discount to their face value; the gain on the redemption at maturity represents the interest paid. The government runs the Treasury Direct program that allows you to buy and sell these investments without commission. Although the yield is quite low, even compared to most CDs, Treasuries are tax-exempt investments.

I-Bonds

The federal government also offers I-Bonds, which also represent a safe investment fully backed by the U.S. government. The government indexes I-Bonds to the rate of inflation; if the rate of inflation rises, so does the interest rate paid on the bond. You must hold an I-Bond for at least twelve months; if you redeem it before five years, you will pay a penalty amounting to the latest three month’s interest. I-Bonds are also available through the Treasury Direct program.

Corporate and Municipal Bonds

Corporate and municipal bonds are issued by companies and governments. Brokers consider bonds that mature in three years or less as short-term bonds; it’s important to remember that the interest rate remains the same on an individual bond, no matter how long the period until maturity. The bond pays interest semi-annually; to buy and sell bonds, you need a brokerage account. The market price of a bond fluctuates, so if you redeem the bond before it matures, you may gain or lose on your initial investment. You don’t pay interest on municipal bonds, which generally pay a lower rate of interest than corporate bonds.

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