knowledge topics
Cash
KNOWLEDGE EXPECTED OF: Both CFP® Professionals and QAFPTM Professionals
- Identify the primary investment objectives typically associated with the asset class of cash.
- Preservation of nominal capital
- Liquidity of capital
- Explain purposes for holding the asset class of cash, such as:
- Maintain liquidity for emergencies
- Maintain liquidity to fund expenses or purchases
- Maintain/reduce volatility
- Generate income
- Define cash and cash equivalent investment vehicles that are a part of the asset class of cash, such as:
- Domestic currency
- Chequing / savings accounts
- Canada bonds
- Canada Savings Bonds
- Canada Premium Bonds
- Treasury bills (T-bills)
- Bankers' acceptance
- Commercial paper
- Short-Term Guaranteed Investment Certificates (GICs) and Term Deposits†
- Money Market (Mutual) Funds††
- Explain characteristics of each cash or cash equivalent investment, such as:
- Relative potential for loss of capital†††
- Level of liquidity
- Relative level of volatility
- Expected rate of return
- Explain how each of the factors may impact the suitability of a cash or cash equivalent investment, such as:
- Time horizon
- Volatility
- Risk tolerance
- Investment objective
- Financial situation
- Personal situation
- Income
- Liquidity
- Control
- Tax impact
- Investment management process
- Economic cycle
- Cost
- Historical performance
- Performance expectations
- Evaluate how each of the factors may impact the suitability of a cash or cash equivalent investment.
- Explain for whom each cash or cash equivalent investment may be suitable.
- Explain how a return is generated for each cash and cash equivalent investment.
- Interpret the return for a cash and cash equivalent investment.
- Explain risks associated with each cash and cash equivalent investment.
- Explain opportunities for diversification within the asset class of cash, such as:
- By credit quality of issuer
- By term to maturity of investment
- By government coverage of asset (CDIC or similar provincial agency)
- Identify that cash and cash equivalent investments typically generate interest income.
- Explain the tax treatment (based on the asset location) of each type of cash and cash equivalent investment.
- When held to maturity††††
- When disposed of prior to maturity
- Estimate the tax impact (based on the asset location) of holding each type of cash and cash equivalent investment.
- If held to maturity††††
- If disposed of prior to maturity
- Explain the types of bonds offered by the Canadian Government that act as a cash and cash equivalent investment.
- Canada Savings Bonds
- Canada Premium Bonds
- Identify that Treasury Bills are also available from some foreign governments.
- Identify that foreign Treasury Bills may be used as a hedge against the depreciation of the Canadian dollar versus the foreign currency.
- Explain that a Guaranteed Investment Certificate and/or term deposits may have restrictions on redemption prior to maturity.
- Define opportunity cost.
- Explain the opportunity cost of holding a cash or cash equivalent investment.
† Short term generally applies to any Guaranteed Investment Certificate or term deposit with a remaining maturity of one year or less, or any similar investment that can be redeemed prior to maturity with no loss of capital.
†† While there is a theoretical risk of loss of capital for a money market mutual fund, the historical probability has been close to zero and as such, they are regularly included in practice as a cash equivalent investment.
††† Consumer protection organizations such as CDIC should be evaluated within the potential for loss of capital.
†††† Domestic currency, chequing / savings accounts and money market instruments do not have a maturity. Explain the tax treatment for each of these investments when income is received from them.
Glossary of Verbs (mouse over to see definition)
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Define
To state exactly the meaning of
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Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
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Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
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Compare
To note the similarities and differences between two or more things
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Estimate
To determine an approximate value for
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Calculate
To find the value using mathematics
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Convert
To change from one form or purpose to another
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Evaluate
To reach a conclusion or make a judgement through careful study
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Interpret
To give the meaning of / to construe or understand / to translate orally
Read more about the Taxonomy used in the FP-BoK
