CDs considered cash or bonds, ref AA

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demondeac59
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CDs considered cash or bonds, ref AA

Post by demondeac59 »

Hi,

I've always considered CDs to be in my bond bucket when figuring my
AA. However, when you use M* X-Ray it always considereds them cash. Is my thinking wrong?

Ed
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DaveTH
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Post by DaveTH »

They can either cash or bonds. CDs are like bonds in that they have a maturity date and a fixed yield. They are also like cash because your principal is safe and they can be redeemed for cash quickly (less a redemption fee)
xenial
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Re: CDs considered cash or bonds, ref AA

Post by xenial »

demondeac59 wrote:I've always considered CDs to be in my bond bucket when figuring my
AA. However, when you use M* X-Ray it always considereds them cash. Is my thinking wrong?
No, you're not wrong, but you've raised an interesting issue. The distinction between bonds and cash is unclear at times. It might be simpler to lump both together as fixed income.

Best wishes,
Ken
Buddtholomew
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Post by Buddtholomew »

Please excuse my ignorance in this area, but what is the expected return on a $10,000 investment in a Money Market account that yields approximately 4.29%?
dbr
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Post by dbr »

In my experience M* x-ray is pretty much useless for organizing cash/CD/Bond fractions of the portfolio. I prefer to carry everything in Excel and decide for myself how what I want to present as portfolio characterization (for me CD's are cash because the principal is fixed and can be accessed instantly albeit with an earnings penalty -- which is charged against yield not against principal).

Just how I have done it.
Topic Author
demondeac59
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CDs--Bonds or Cash?

Post by demondeac59 »

Thanks Ken and Dave,

I've always considered my social security, military pension and CDs to be in the fixed income/bonds bucket. I just was wondering if anyone knew why M* X-Ray considered CDs cash.

Ed
livesoft
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Post by livesoft »

I'd consider anything that was FDIC-insured to be cash.
grayfox
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The only cash is cash

Post by grayfox »

It has to do with liquidity. Cash in your checking account can be spent today. A CD that matures in 3 days is close to cash and will be converted to cash very soon. A 1 month CD or bond a little further from cash. A 3-month CD or Treasury a little further still.

The only thing that is really cash is cash but near-term bonds and CDs are close to cash. How you want to account for it is up to you.
rwwoods
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Post by rwwoods »

The general consensus is that CDs should be considered as cash, and it forms part of the fixed income portion of your porfolio. That fixed income part might also include bonds of various types and duration and other cash vehicles such as a MMF.
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Mel Lindauer
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Post by Mel Lindauer »

Buddtholomew wrote:Please excuse my ignorance in this area, but what is the expected return on a $10,000 investment in a Money Market account that yields approximately 4.29%?
Hi Budd:

$10,000 x .0429 = $429 per year.

Regards,

Mel
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grabiner
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Re: CDs considered cash or bonds, ref AA

Post by grabiner »

demondeac59 wrote:Hi,

I've always considered CDs to be in my bond bucket when figuring my
AA. However, when you use M* X-Ray it always considereds them cash. Is my thinking wrong?

Ed
I would consider a CD to be cash if it has a maturity less than one year away, and a bond otherwise, because it behaves the same way.

A 5-year CD is a guarantee to pay you X dollars five years from now; if you need the money before five years, you cannot get the account value. (If interest rates go up, the CD penalty may even go up accordingly, so that you cannot profit by cashing the CD in early and investing the proceeds in a new one.) A 5-year bond is a guarantee to pay you X dollars five years from now, and a few smaller payments along the way; if you need the money before five years, you can only get a value determined by the market, which may not be the face value.
Wiki David Grabiner
Topic Author
demondeac59
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CDs cash or Bonds ?

Post by demondeac59 »

Hi David,

I think I agree with your thoughts. I have two CDs at PFCU: one for 3 years and one for 5 years, both at 6%.

Ed

I thank all of you for the good comments that I received!
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Post by sport »

Mel Lindauer wrote:
Buddtholomew wrote:Please excuse my ignorance in this area, but what is the expected return on a $10,000 investment in a Money Market account that yields approximately 4.29%?
Hi Budd:

$10,000 x .0429 = $429 per year.

Regards,

Mel
Hi Mel,
I would say that the "expected return" on a money market fund is unknown. The "yield" that is stated is only for the last seven days (for funds), which is in the past, not the future. While the current rate may be the best guess at what may be expected, there is certainly no expectation that rates will remain constant going forward. I suggest that speaking in terms of "expected return" for a MM fund is inappropriate. There really is no such thing. MM funds are very good for a lot of reasons and situations. However, wanting some expected return is not one of them. If an investor wants some expected return, then bonds, bond funds, or CDs would be vehicles to consider. If the question concerns money market accounts, then there is even less definition of an expected return. The yield is whatever the bank wishes to pay and it can change at any time.

Best wishes,
Jeff
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Sheepdog
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Post by Sheepdog »

Mel,
Jeff is correct that MM rates will vary during the year. In addition, even if the MM rate was constant the yield you calculated would not be correct since you did not put into the equation compounding of the interest.
Jim
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nisiprius
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Post by nisiprius »

I've been bothered by this, too--and by the fact that none of the investing-for-dummies materials I've read ever give you a simple list of what things should fall in what categories.

However, in terms of growth and volatility of an entire portfolio, predictions, backtesting, withdrawal strategies, etc. it seems as if the percentage of stocks is very important, and the relative percentages of everything else are much, much less important, so it's not too much of a worry.

Another puzzler is I bonds. Although they're called bonds, I have always classified them as cash, because they have no fixed maturity date, no market fluctuation, and can be redeemed at (almost) any time.

By the way, another things I obsessed about for years and finally gave up on... I believe that it's true, or may once have been true, that if you read the fine print you do not have a right to cash a CD before maturity. This is actually done at the bank's discretion, and they apparently have the right to refuse.

As I said I tried to pin this down once, and it ended up getting very freaky. Banks absolutely hate to talk about this, and I've gotten flatly contradictory verbal statements about it from different people at the same bank, one saying "Of course you can, it's your money" and another chewing me out, "Can't you read the language here where it says you can't?"

At the time, I contacted the state banking division, and someone there basically refused to answer the question. They said "Do you have a CD that a bank has refused to cash before maturity?" I said "No, I want to find out what the rules are before I buy the CD." They said "We will not discuss the matter unless a bank has refused to cash a CD for you." "So you're saying early withdrawal is the bank's discretion, not the customer's right?" "No, we did not say that and we will not discuss the matter unless a bank has refused to cash a CD for you."

I have the impression I had touched some kind of nerve and that there were important things that I was not being told, but I never figured out what they were.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Post by Valuethinker »

nisiprius wrote:
I have the impression I had touched some kind of nerve and that there were important things that I was not being told, but I never figured out what they were.
Here's my guess. If it's Northern Rock (British building society in the middle of a bank run) then you walk in, and say I want to cash the CD, and they invoke 'force majeure'-- in corporate finance law this is known as a 'Material Adverse Change (MAC)' clause or the 'market conditions' stipulation.

If you really need your money, and the sky is falling, it's at their discretion.

You could actually be better off (assuming within FDIC limits) if the bank goes into administration at that moment. FDIC, AFAIK, will pay out smoothly and quickly.

'cashable', I infer is at their discretion, not yours. The reason no one will tell you that is 1). they don't know 2). they don't want to put themselves in the legal position of having you testify you told them one thing, when in fact the reality was the opposite.

Worth reading an account of the run on the Bank of the United States, a Bronx-based bank, lending primarily to the Jewish rag trade (hence the patriotic link in the name, which would appeal to immigrants). This, in the end, led to Roosevelt closing the banks, the creation of the FDIC etc.

http://en.wikipedia.org/wiki/New_York_B ... ted_States
The bank had 400,000 depositors — more than any other in the country — and immediately hurt were garment businesses that needed money for their payrolls. Claims began to be processed in an orderly manner, but on December 21 [1930] a crowd of 3,000 shouting "We want our money!" tried to storm the padlocked Bronx branch. Six people were arrested, all Bronx residents. Charges were dropped the next day.

A Monetary History of the United States by Milton Friedman and Anna Jacobson Schwartz, calls its failure the largest ever in American banking up to that time. The bank ultimately paid out over 80 percent on its deposits. But the obvious public panic set the stage for a series of bank failures that continued until 1933.
Friedman and Schwartz (and other historians) aren't wrong to note the slightly anti-semitic sentiments that arose over this bank. The playwright Arthur Miller's father's business was wiped out in this event (or the aftermath), and he alludes to it in his plays 'Death of a Salesman', 'The Price' and 'Broken Glass' (mostly the middle one).

http://www.doollee.com/PlaywrightsM/miller-arthur.html
Synopsis:
In the attic of a soon-to-be-demolished house, two brothers meet after a 16 year estrangement to dispose of their dead parents' property. The first is a policeman who sacrificed his education and probably a career as a scientist to care for his ruined, invalid father. The other, who arrives late, is an eminent surgeon who walked out on the demands of family to concentrate on medicine and personal success. Their confrontation leads them to examine the events and qualities of their very different lives and the price that each of them has had to pay.
"Maybe all one can do is hope to end up with the right regrets."
- Arthur Miller
This is what bank runs are like. Here in the UK, a couple sold their lifetime business, and deposited £1m with the Northern Rock. When they were told they could not withdraw it, they refused to let the manager leave his office, until the police had to be called. (the UK insurance limit at the time was 100% of £3k and 90% of the next £30k).
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