Short-Term Investments and Excel Formulas

Short-term investments are financial investments that can easily be converted to cash, typically within five years. They are high-quality and highly liquid assets or investment vehicles that offer lower risk and lower return than long-term investments. Short-term investments are suitable for investors who need to access their money in the near future, or who want to preserve their capital and avoid market volatility.

Some common examples of short-term investments are:

• CDs (certificates of deposit): These are bank deposits that pay a fixed interest rate for a specified period of time, usually from a few months to a few years. CDs are insured by the FDIC up to $250,000 and have low risk, but also low liquidity and low returns.
• Money market accounts: These are savings accounts that pay a variable interest rate based on the prevailing market rates. Money market accounts are also insured by the FDIC up to $250,000 and have low risk, but higher liquidity and slightly higher returns than CDs.
• High-yield savings accounts: These are online savings accounts that pay higher interest rates than traditional savings accounts, but may have higher minimum balance requirements or fees. High-yield savings accounts are also insured by the FDIC up to $250,000 and have low risk, high liquidity and moderate returns.
• Government bonds: These are debt securities issued by the federal, state or local governments that pay a fixed interest rate and principal at maturity. Government bonds are backed by the full faith and credit of the issuer and have low risk, but also low liquidity and low returns. The most common types of government bonds are Treasury bills, notes and bonds, which have maturities ranging from a few weeks to 30 years.
• Corporate bonds: These are debt securities issued by corporations that pay a fixed or variable interest rate and principal at maturity. Corporate bonds are rated by credit rating agencies based on the issuer’s financial strength and default risk. Corporate bonds have higher risk, higher liquidity and higher returns than government bonds, but lower risk, lower liquidity and lower returns than stocks.
• Municipal bonds: These are debt securities issued by state or local governments or their agencies that pay a fixed or variable interest rate and principal at maturity. Municipal bonds are exempt from federal income tax and sometimes from state and local taxes as well, making them attractive for investors in high tax brackets. Municipal bonds have similar risk, liquidity and return characteristics as corporate bonds, but may also be affected by the fiscal health of the issuer and the local economy.

Short-term investments can be a good way to diversify your portfolio, earn some income and prepare for your financial goals. However, you should also be aware of the potential drawbacks of short-term investments, such as:

• Inflation risk: This is the risk that the purchasing power of your money will decrease over time due to the rising cost of goods and services. Short-term investments may not keep up with inflation, especially in periods of high inflation, and may result in a negative real return (the return after adjusting for inflation).
• Interest rate risk: This is the risk that the value of your investments will fluctuate due to changes in the market interest rates. Short-term investments are sensitive to interest rate movements, especially those with longer maturities or lower coupon rates. When interest rates rise, the prices of existing bonds fall, and vice versa.
• Opportunity cost: This is the cost of choosing one alternative over another. Short-term investments may have lower opportunity cost than long-term investments in periods of low or falling interest rates, but higher opportunity cost in periods of high or rising interest rates. By investing in short-term investments, you may miss out on the potential higher returns and growth of long-term investments, such as stocks or stock funds.

To summarize, short-term investments are financial investments that can easily be converted to cash, typically within five years. They are suitable for investors who need to access their money in the near future, or who want to preserve their capital and avoid market volatility. Short-term investments offer lower risk and lower return than long-term investments, and have different advantages and disadvantages depending on the type, maturity, interest rate and tax status of the investment.

Basic Theory:

Short-term investments typically refer to financial instruments with maturities of one year or less, offering a higher degree of liquidity compared to long-term investments. Examples include Treasury bills, certificates of deposit, and money market funds. The primary goal is to preserve capital while generating modest returns within a short time frame.

Procedures in Excel:

1. Data Input: Begin by organizing your data in an Excel table. Include columns such as “Investment Type,” “Principal Amount,” “Interest Rate,” “Term,” and “Maturity Value.”
2. Interest Calculation: Utilize the formula for simple interest to calculate the returns on each investment:

   Interest = Principal Amount * Interest Rate * Term

3. Maturity Value: Calculate the maturity value using the formula:

   Maturity Value = Principal Amount + Interest

4. Portfolio Analysis: If you have multiple investments, use Excel functions like SUM to calculate the total principal, total interest, and total maturity value.

Scenario with Real Numbers:

Consider a scenario with three short-term investments:

Now, apply the formulas:

• For Treasury Bills:
  • Interest: =B2*C2*D2/12
  • Maturity Value: =B2+E2
• Repeat the process for Certificate of Deposit and Money Market Fund.
• Portfolio Analysis:
  • Total Principal: =SUM(B2:B4)
  • Total Interest: =SUM(E2:E4)
  • Total Maturity Value: =SUM(F2:F4)

Calculation Results:

Other Approaches:

1. Compound Interest: Instead of simple interest, you can use compound interest formulas for a more accurate representation of returns.
2. Risk-Return Analysis: Implement Excel functions such as AVERAGE and STDEV to analyze the risk and return of your short-term investment portfolio.