Emergencies, job layoffs, and unforeseen expenses happen, and good investment opportunities emerge. It is important to have a cash reserve to help meet these occasions. In addition to providing a safety cushion, a cash reserve reduces the likelihood of being forced to sell investments at inopportune times to cover unexpected expenses. Most experts recommend a cash reserve equal to about six months’ living expenses. Calling it a “cash” reserve does not mean the funds should be in cash; rather, the funds should be in investments you can easily con- vert to cash with little chance of a loss in value. Money market mutual funds and bank accounts are appropriate vehicles for the cash reserve.
Similar to the financial plan, an investor’s insurance and cash reserve needs will change over his or her life. We’ve already mentioned how a retired person may “cash out” a life insurance policy to supplement income. The need for disability insurance declines when a person retires. In contrast, other insurance, such as supplemental Medicare coverage or long-term care insurance, may become more important.
Posts Tagged ‘debt’
Cash Reserve
November 14th, 2010Exotic Interest Rate Instruments
November 21st, 2009This is a relatively simple introduction to the sort of interest rate-based instruments available to both banks and corporates to enable them to manage interest rate risk. Other more exotic instruments include the following:
Swaptions. Swaptions give the holder the right but not the obligation to enter into a future defined swap agreement.
Interest rate swap futures. These are futures contracts in which the underlying instrument is the value of a specified interest rate swap contract.
Basis spread contracts. It is possible to trade futures contracts based on basis spreads,
for example on the spread between two benchmark rates such as those from an interbank market and those from government bonds.
Bond indices futures contracts. A relatively few standardized bond indices exist on which it is possible to trade futures contracts.
Caps and collars. It is possible to create a number of different positions based on combinations of call and put options.
Strips and synthetic zeroes. Investment banks can create a variety of synthetic products based on actual or notional coupon bonds. A government coupon bond can be used to create two securities. The first security entitles the holder to the coupon payments only, these securities are referred to as strips. The second makes no coupon payments but has the structure of a zero coupon bond.