A client retiring in 18 months wants to know where to park $300,000 from a recent home sale. CD? Money market fund? Short bond ladder? The right answer depends on FDIC limits, duration risk, and liquidity needs, and the Series 66 will hand you the scenario in 90 seconds with a single-best-answer format.
Cash equivalents are short-duration, high-quality instruments that convert to spendable money quickly with little price risk. The exam treats anything maturing within 12 months (and often within 90 days) as a cash equivalent.
Demand deposits sit in checking and savings accounts at banks and credit unions. The depositor can pull the funds at any time without penalty. Insurance comes through the FDIC for banks and the NCUA for credit unions, both at $250,000 per depositor, per insured institution, per ownership category. The category piece matters: a single account, a joint account, and a retirement account at the same bank each get separate $250,000 caps.
TRAP: FDIC insures the bank, not the brokerage. SIPC (the Securities Investor Protection Corporation) is insurance-of-last-resort for customer assets when a brokerage fails; $500K total with a $250K cash sublimit.
Common mistakes
- Assuming SIPC covers investment losses. SIPC protects against brokerage failure (missing securities or cash from the firm's insolvency), not market losses. A client whose stock dropped 80% gets nothing from SIPC. The cap is $500K total with a $250K cash sublimit per separate customer.
- Confusing secondary offering with secondary market trading. A secondary offering is a registered sale of existing shares by holders, with proceeds to those holders. Secondary market trading is normal exchange activity. The terms sound similar but mean different things on the exam.
- Forgetting that money market mutual funds are not FDIC-insured. A bank money market deposit account (MMDA) sits at a bank and is FDIC-insured to $250,000. A money market mutual fund sits at a brokerage or fund family and is not insured. The client may not see the distinction; the exam will.
Bottom line
- FDIC and NCUA insure deposits up to $250,000 per depositor, per institution, per ownership category; SIPC covers brokerage $500K total / $250K cash sublimit if the firm fails, never market losses
- Bond prices and yields move inversely; longer duration, lower coupon, and lower yield all raise duration, and a zero-coupon bond's duration equals its maturity
- YTM assumes hold-to-maturity, YTC assumes call at first call date; quote yield-to-worst (the lower) on premium callable bonds
- Common stock = voting plus last claim on assets; preferred stock = fixed-dividend priority over common but no vote and no growth; ADRs let U.S. investors hold foreign equity in dollars
Exam shortcut
FDIC vs. SIPC test trick. If the question describes a bank deposit, think FDIC $250K. If the question describes a brokerage customer asset, think SIPC $500K total with a $250K cash sublimit. If the question describes investment losses, neither applies. It is a market-risk question, not an custody-failure question. Bond yield ranking for premium and discount bonds. Memorize the ladder.
The full lesson (about 3,416 words, 23 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B2
- B3
- B4
- B5
- B6
- B7
- B8
- B9
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