SHORT-TERM SECURITIES

Short-term Securities are debt or equity investment that can be sold or converted into cash
within a period of 1 year or in the operating cycle of a company.
From definition, a short-term security must comply following two conditions:
1. It should be liquid i.e, easily convertible into cash.
2. The company must have sold the security or convert it into cash within a period of 1
year.

TYPES OF SHORT-TERM SECURITIES

Following are some of the common short-term securities:
1. T-Bills
2. Commercial Paper
3. Certificates of Deposit (CDs)
4. Municipal Bonds
5. Peer to Peer Lending

1) T-BILLS
Treasury Bills are financial instruments that are issued by Government having maturity
periods ranging from few days to 1 year. These are safest securities and are risk free as
these are issued by the Government.
 T-Bills are sold at a discounted price to its face value. For instance, a T-bill of Rs.
10,000 can be sold at the rate of Rs. 9,500. At time of maturity, Government has
to return the face value i.e, Rs. 10,000 to the investor.
HOW T-BILLS WORK
When an investor decides to buy a treasury bill, he or she is lending money to the
Government. The Government uses that loan to meet expenses like giving salaries and
military equipment. At the date of maturity, the Government has to return the face value
along with interest to the investor.
FACTORS THAT INFLUENCE T-BILLS PRICES
1. Maturity Date---- T-Bills having longer maturity dates have higher returns while
the bills with short maturity dates have low returns.
2. Risk Tolerance---- When an economy is in expansion phase, T-Bills are less
attractive as other securities are offering high return. In contrast, if the economy
is in recession, T-Bills become more attractive (high prices) as other securities are
riskier.
3. Inflation---- If the inflation rate is higher as compared to the return on T-Bill,
fewer investors are attracted.
2) COMMERCIAL PAPER
Commercial Paper is a short-term, unsecured financial instrument issued by large
corporations having maturity period ranging from 1 to 270 days. It also referred to as an
unsecured promissory note because the issuer promises to repay the face value at
maturity date and it is not backed by any other asset but issuer promise.
 It is issued by large corporations having high reputation and high credit ratings.
 Due to its unsecured nature, it is sold at discount to its face value.
 It is not backed by any collateral due to which it is risky.
 Minimum credit rating shall be P2 of CRISIL.
COMMERCIAL PAPER AND CREDIT RATING
One common risk associated with commercial paper is credit rating. Investors are
motivated to buy only that commercial paper issued by a corporation having high credit
rating. If the same commercial paper is issued by a corporation with low credit rating,
investors will not agree to buy it due to fear of return of their loan.

3) CERTIFICATES OF DEPOSIT (CDs)

A certificate of Deposit is a financial document issued by a bank to an investor who
agrees to deposit a sum of money for a pre-determined period of time with a condition
that he or she will not withdraw the amount before its maturity, otherwise he or she has
to bear penalty.
 Due to restrictions on early withdrawal, a CD offers high interest rate to investors
as compared to a bank’s savings account.
 It is also referred to as a promissory note issued by a bank.
ADVANTAGE OF CDs
 CDs offer higher rates as compared to savings account.
 It is relatively a safe investment. If market changes, CD will offer same value
expected at purchase.
DISADVANTAGES OF CDs
 It can charge fee or penalty to investor if he or she wants to withdraw investment
before pre-determined time.
 Due to fixed interest rate, CDs cannot bear the burden of inflation which can
affect the standard of living of an investor.

4) MUNICIPAL BONDS
A municipal bond is a debt security issued by a Government to finance its public projects
like schools, hospitals and highways. These are also referred to as “muni bonds” or
“muni”.
 One of the main advantage of municipal bond is that they are exempted from tax
i.e, return from these bonds is not subjected to any form of tax.
 TYPES OF MUNICIPAL BONDS
a) GENERAL OBLIGATION BOND
These are issued by Government and are unsecured by revenues from govt.
projects. That’s why they provide more return due to high risk.
b) REVENUE BONDS
Revenue Bonds are issued by Government and are secured by revenues from
govt. projects.

5) PEER TO PEER LENDING

Peer-to Peer lending is direct lending of money to individuals or businesses without the
involvement of financial intermediaries.
 P2P can be done through online platform that match lenders with borrowers.
 P2P offers both secured and unsecured loans. Secuerd loans rae specific to
industry that are backed by luxury goods.
ADVANTAGE OF CDs
 P2P generally yields higher returns to the investors.
 P2P involves lower interest rates due to high competitions among lenders.

DISADVANTAGE OF CDs
 Due to low credit ratings of some borrowers, P2P involves high credit risk.
 Govt. does not provide any protection to investor in case of borrower’s default.