A client’s “cash” may be in demand deposits and immediately spendable, held in a CD until maturity, or invested in money market instruments whose sale price can change. Your recommendation depends on which meaning applies.
When a client needs money soon, compare demand deposits and money market instruments by how reliably each can provide spendable cash. Cash equivalents are highly liquid, short-term investments used to meet near-term cash needs with limited price uncertainty. The label does not promise insurance or immediate access.
You use demand deposits for ready spending and money market instruments to invest money temporarily. Before recommending either, identify who owes the money, when repayment occurs, and what happens if the client needs cash earlier. A higher interest rate helps only if the product fits those needs.
A bank’s failure could prevent customers from recovering their deposits. The Federal Deposit Insurance Corporation (FDIC) protects eligible bank deposits within coverage limits. FDIC insurance covers up to $250,000 per depositor, per insured bank, per ownership category, including principal and accrued interest.
Common mistakes
- Counting branches as banks. Two branches do not turn one single-ownership limit into $500,000 of FDIC protection.
- Ignoring earned interest. $249,000 principal plus $3,000 accrued interest exceeds the insurance limit by $2,000.
- Counting every trust beneficiary. Six eligible beneficiaries still produce a $1,250,000 maximum per grantor per bank, not $1,500,000.
Bottom line
- FDIC coverage generally reaches $250,000 per depositor, per insured bank, per ownership category, including accrued interest.
- Same-category deposits across branches and brokers aggregate at the issuing bank; money market mutual funds receive no FDIC coverage.
- Covered revocable and irrevocable trust deposits combine, with $250,000 per eligible beneficiary and a five-beneficiary cap per grantor per bank.
- Demand deposits have no stated maturity; CDs have stated maturities and specified interest terms, with possible early-exit costs.
Exam shortcut
Identify the obligation before calculating: bank deposit, corporate promise, fund shares, or direct government debt. The words “cash” and “money market” cannot settle the classification. For insurance questions, group balances by actual issuing bank and ownership category. Add accrued interest before applying the limit, then subtract coverage to find the uninsured excess. For trust questions, count distinct eligible beneficiaries before multiplying. Repeated names across trust documents do not multiply protection.
The full lesson (about 3,030 words, 20 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B2
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