Series 65 Quiz: Differentiate Cash Instruments
20 questions · exam conditions
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Differentiate Cash InstrumentsQuestion 1 of 20

Which statement about FDIC insurance coverage is accurate for an investor holding Commercial Paper at a bank?

Commercial Paper becomes FDIC insured when held in a bank custody account.
FDIC insurance covers deposits, not Commercial Paper, regardless of where it is held.
FDIC insurance covers any instrument with a maturity under 1 year.
FDIC insurance covers Commercial Paper only if issued by a bank holding company.
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Series 65 Quiz

Series 65 Quiz: Differentiate Cash Instruments

Practice Differentiate Cash Instruments in Series 65 with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Differentiate Cash Instruments, giving you a quick way to practice the rules, question types, and explanations that matter most for Series 65.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Which statement about FDIC insurance coverage is accurate for an investor holding Commercial Paper at a bank?

  1. Commercial Paper becomes FDIC insured when held in a bank custody account.
  2. FDIC insurance covers deposits, not Commercial Paper, regardless of where it is held. (correct answer)
  3. FDIC insurance covers any instrument with a maturity under 1 year.
  4. FDIC insurance covers Commercial Paper only if issued by a bank holding company.
Explanation: This question tests the ability to differentiate between insured deposits and money market instruments, focusing on characteristics like risk and liquidity (Series 65 standard). Insured deposits, such as CDs and savings accounts, offer FDIC insurance against bank failures, providing a safety net for investors. Money market instruments, like T-bills and commercial paper, are generally liquid but carry different levels of risk depending on the issuer's creditworthiness. The correct answer states FDIC covers deposits, not commercial paper. A common distractor might assume custody implies insurance. Teaching strategies include holding structure reviews. Encourage custodian agreement examinations.

Question 2

In liquidity management, which statement accurately compares FDIC-insured deposits with short-term T-bills?

  1. Both are FDIC insured up to $250,000 per issuer and provide daily liquidity.
  2. FDIC-insured deposits protect principal up to limits, while T-bills rely on U.S. government credit. (correct answer)
  3. T-bills have early-withdrawal penalties, while insured deposits are sold at a discount to par.
  4. Insured deposits carry market price risk, while T-bills have no interest rate sensitivity.
Explanation: This question tests the ability to differentiate between insured deposits and money market instruments, focusing on characteristics like risk and liquidity (Series 65 standard). Insured deposits, such as CDs and savings accounts, offer FDIC insurance against bank failures, providing a safety net for investors. Money market instruments, like T-bills and commercial paper, are generally liquid but carry different levels of risk depending on the issuer's creditworthiness. The correct answer highlights the principal protection of insured deposits up to limits and the reliance of T-bills on U.S. government credit, which is essential for understanding safety in liquidity management. A common distractor might incorrectly claim both are FDIC insured, which overlooks the distinct backing of T-bills. Teaching strategies include comparing real-world scenarios, such as a bank failure versus government default risk, to clarify these differences. Additionally, encourage learners to review FDIC limits and Treasury security features for comprehensive knowledge.

Question 3

What is a primary risk associated with a money market instrument such as Commercial Paper compared to an insured CD?

  1. An insured CD has market price risk, while Commercial Paper has none due to daily trading.
  2. Commercial Paper is FDIC insured, while an insured CD is not covered if held to maturity.
  3. Commercial Paper has issuer credit risk; an insured CD has FDIC protection within limits. (correct answer)
  4. An insured CD has default risk equal to the issuing corporation's credit rating.
Explanation: This question tests the ability to differentiate between insured deposits and money market instruments, focusing on characteristics like risk and liquidity (Series 65 standard). Insured deposits, such as CDs and savings accounts, offer FDIC insurance against bank failures, providing a safety net for investors. Money market instruments, like T-bills and commercial paper, are generally liquid but carry different levels of risk depending on the issuer's creditworthiness. The correct answer contrasts credit risk in commercial paper with FDIC protection for CDs. A common distractor might reverse insurance applicability. Teaching strategies include risk profiling activities. Encourage credit analysis practice on issuers.

Question 4

Which statement about FDIC insurance coverage is accurate for a Certificate of Deposit compared with a Treasury bill?

  1. Both are FDIC-insured if held in a brokerage account
  2. A T-bill is FDIC-insured when purchased at auction; a CD is not insured
  3. A CD may be FDIC-insured up to limits; a T-bill is not FDIC-insured but is a Treasury obligation (correct answer)
  4. Neither is protected because both are considered money market instruments
Explanation: This question tests the ability to differentiate between insured deposits and money market instruments, focusing on characteristics like risk and liquidity (Series 65 standard). Insured deposits, such as Certificates of Deposit (CDs) issued by FDIC-member banks, are protected by FDIC insurance up to $250,000 per depositor, per insured bank, safeguarding against bank failure. In contrast, Treasury bills (T-bills) are short-term debt obligations issued by the U.S. Treasury and backed by the full faith and credit of the federal government, but they are not covered by FDIC insurance since they are not bank deposits. The correct answer emphasizes that a CD can be FDIC-insured within limits, while a T-bill relies on the government's backing rather than FDIC protection, highlighting the distinct risk profiles. A common distractor might incorrectly assume T-bills receive FDIC coverage due to their low-risk nature, but this overlooks the specific role of FDIC in insuring bank deposits only. Teaching strategies include comparing real-world examples, such as how a bank failure affects CDs versus T-bills, to reinforce understanding of insurance and government backing. Additionally, encourage students to review FDIC guidelines and TreasuryDirect resources to clarify these differences in investment safety nets.

Question 5

A demand deposit account, such as a checking account, offers the highest degree of:

  1. return potential
  2. tax benefits
  3. liquidity (correct answer)
  4. protection from inflation
Explanation: Demand deposit accounts are designed for transactions and immediate access to funds. Their defining feature is maximum liquidity, allowing depositors to withdraw money at any time without penalty. They offer very low returns, no special tax benefits, and are highly susceptible to losing purchasing power during inflationary periods.

Question 6

Which of the following cash instruments are both issued at a discount and mature at face value?

  1. Certificates of Deposit and Demand Deposits
  2. U.S. Treasury bills and Commercial Paper (correct answer)
  3. Money Market Deposit Accounts and U.S. Treasury notes
  4. Negotiable CDs and Bankers' Acceptances
Explanation: Both U.S. Treasury bills and commercial paper are commonly issued as zero-coupon instruments. They are sold at a price below their face value (at a discount) and the investor receives the full face value at maturity. The difference represents the investor's interest or return. Other instruments listed typically pay a stated rate of interest.

Question 7

A corporate treasurer needs to invest excess cash for 45 days. The primary goal is preservation of capital, with a secondary goal of earning a modest return. Which of the following is generally considered the LEAST suitable option?

  1. A U.S. Treasury bill
  2. A repurchase agreement
  3. An insured money market deposit account
  4. A 5-year non-callable certificate of deposit (correct answer)
Explanation: A 5-year CD is the least suitable option due to the short time horizon of 45 days. Investing in a long-term CD would subject the corporation to a significant interest penalty for early withdrawal, potentially leading to a loss of principal. The other options are highly liquid, short-term instruments appropriate for this purpose.

Question 8

An adviser is constructing the cash and cash equivalents portion of a portfolio for a client who prioritizes safety and tax efficiency at the state level. The client lives in a state with a high income tax.

Given the client's priorities, which of the following would be the most suitable instrument?

  1. A bank-issued certificate of deposit
  2. A U.S. Treasury bill (correct answer)
  3. Commercial paper from a highly-rated U.S. corporation
  4. A money market deposit account
Explanation: U.S. Treasury bills are direct obligations of the U.S. government, making them one of the safest investments available. Critically, the interest earned on Treasury securities is taxable at the federal level but exempt from state and local income taxes, which directly addresses the client's tax concerns. The other options generate interest that is fully taxable at the state level.

Question 9

An investor owns a variety of cash and cash-equivalent instruments. Which one is subject to the full faith and credit of the issuing bank, but not directly insured by a government agency?

  1. A Treasury bill
  2. An FDIC-insured checking account with a balance of $200,000
  3. A negotiable CD with a face value of $500,000 (correct answer)
  4. A money market fund that invests in T-bills
Explanation: FDIC insurance covers deposits up to $250,000 per depositor, per insured bank, for each account ownership category. A negotiable CD with a face value of $500,000 would have $250,000 insured by the FDIC, but the remaining $250,000 would be subject to the credit risk of the issuing bank itself, backed only by the bank's own full faith and credit.

Question 10

A client is considering placing a significant portion of their emergency fund into a 5-year certificate of deposit (CD) due to its attractive interest rate compared to a savings account. A key disadvantage of this strategy that an IAR must disclose is the CD's:

  1. credit risk
  2. market risk
  3. lack of liquidity (correct answer)
  4. unfavorable tax treatment
Explanation: The primary disadvantage of a traditional CD for an emergency fund is its lack of liquidity. Funds are committed for a specified term, and early withdrawal typically incurs a substantial penalty, which is counterproductive for funds needed for unforeseen emergencies. FDIC-insured CDs have virtually no credit risk. Market risk is minimal as the principal is fixed. The tax treatment is similar to other interest-bearing instruments.

Question 11

From the perspective of an investor, a primary difference between a money market deposit account (MMDA) and a demand deposit account (checking account) at the same bank is that the MMDA:

  1. is not insured by the FDIC
  2. typically offers a higher interest rate but may have transaction limits (correct answer)
  3. is invested in a portfolio of common stocks
  4. can only be opened by institutional investors
Explanation: Both MMDAs and checking accounts are FDIC-insured bank deposits. However, MMDAs generally pay a higher interest rate than standard checking accounts. In exchange for this higher rate, banks may impose limits on the number of certain types of withdrawals or transfers per month.

Question 12

Compared to a U.S. Treasury bill, commercial paper of the same maturity will typically offer:

  1. a lower yield due to its higher credit quality
  2. a higher yield to compensate for greater credit risk (correct answer)
  3. an identical yield as they are both money market instruments
  4. better liquidity in the secondary market
Explanation: Because commercial paper carries corporate credit risk and is not backed by the U.S. government, investors demand a higher yield (return) to compensate for this additional risk compared to a risk-free Treasury bill of the same maturity. This additional yield is known as a credit spread.

Question 13

Which of the following instruments would be most exposed to purchasing power risk if held for a one-year term during a period of unexpectedly high inflation?

  1. Common stock of a technology company
  2. A one-year FDIC-insured certificate of deposit (correct answer)
  3. A real estate limited partnership
  4. Gold bullion
Explanation: Purchasing power risk, or inflation risk, is the risk that the return on an investment will not keep up with inflation. Fixed-income instruments with low, fixed returns, such as a CD, are most vulnerable. The fixed interest rate may be lower than the rate of inflation, resulting in a negative real return. Assets like stocks, real estate, and commodities have the potential to appreciate in value and provide a better hedge against inflation.

Question 14

A key feature of commercial paper is that it is:

  1. an unsecured promissory note (correct answer)
  2. a long-term secured corporate bond
  3. exempt from credit risk
  4. guaranteed by the issuing company's bank
Explanation: Commercial paper is a type of unsecured, short-term debt instrument issued by corporations. It is essentially a short-term IOU. Because it is unsecured, its value depends entirely on the creditworthiness and good faith of the issuing company.

Question 15

A retired client seeks to place $100,000 in an instrument that offers the highest possible level of safety from default. Which of the following would be the most appropriate recommendation?

  1. Commercial paper from an A-1 rated corporation
  2. A negotiable CD from a large money-center bank
  3. A U.S. Treasury bill (correct answer)
  4. A money market mutual fund investing only in government securities
Explanation: For the highest level of safety from default, a U.S. Treasury bill is the best choice. It is a direct obligation of the U.S. government and is considered to have no credit risk. While the other options are also relatively safe, commercial paper and bank CDs have a degree of corporate credit risk, and a money market fund, while safe, is not a direct government obligation and is not insured.

Question 16

The maximum maturity for securities to be considered commercial paper under the Securities Act of 1933 exemption is:

  1. 30 days
  2. 90 days
  3. 270 days (correct answer)
  4. 365 days
Explanation: To qualify for exemption from registration requirements under the Securities Act of 1933, commercial paper must have a maximum maturity of 270 days (or nine months). This is a defining regulatory feature of this money market instrument.

Question 17

Which characteristic distinguishes a negotiable jumbo certificate of deposit from a traditional CD?

  1. Negotiable CDs are the only type insured by the FDIC.
  2. Negotiable CDs can be sold in the secondary market before maturity. (correct answer)
  3. Negotiable CDs always have a maturity of less than 270 days.
  4. Negotiable CDs pay interest that is exempt from federal taxes.
Explanation: The key feature of a negotiable CD is its negotiability—the ability for the owner to sell it to another investor in the secondary market before its maturity date. This provides liquidity that traditional CDs lack. Both types of CDs from member banks are FDIC insured. Maturity dates for negotiable CDs vary and are not limited to 270 days. Interest from both is federally taxable.

Question 18

An IAR is reviewing a client's holdings. The client holds a money market mutual fund. The IAR should explain to the client that this investment is:

  1. a bank deposit insured by the FDIC
  2. a portfolio of short-term debt instruments that is not FDIC insured (correct answer)
  3. a direct obligation of the U.S. Treasury
  4. a type of certificate of deposit with a variable interest rate
Explanation: A money market mutual fund is an investment company product that invests in a pool of money market instruments like T-bills, commercial paper, and negotiable CDs. It is not a bank deposit and is not insured by the FDIC. While the fund aims to maintain a stable $1.00 net asset value, it is possible to lose money.

Question 19

Which of the following best describes the primary risk associated with investing in high-quality commercial paper?

  1. Interest rate risk
  2. Purchasing power risk
  3. Liquidity risk
  4. Credit or default risk (correct answer)
Explanation: Commercial paper is unsecured, short-term debt issued by a corporation. Therefore, its primary risk is credit risk, which is the risk that the issuing corporation will default on its obligation to pay back the principal at maturity. While interest rate and purchasing power risks exist, they are secondary to the issuer-specific credit risk.

Question 20

What is a primary risk associated with insured deposits such as bank savings accounts and CDs?

  1. They may have interest rate or opportunity risk if rates rise after locking a CD. (correct answer)
  2. They are subject to issuer default with no federal protection.
  3. They are exposed to large market price swings due to daily trading.
  4. They are backed by corporate collateral that can become impaired.
Explanation: This question tests the ability to differentiate between insured deposits and money market instruments, focusing on characteristics like risk and liquidity (Series 65 standard). Insured deposits, such as CDs and savings accounts, offer FDIC insurance against bank failures, providing a safety net for investors. Money market instruments, like T-bills and commercial paper, are generally liquid but carry different levels of risk depending on the issuer's creditworthiness. The correct answer identifies opportunity risk in fixed-rate deposits. A common distractor might suggest default exposure. Teaching strategies include interest rate trend analyses. Encourage monitoring economic indicators.