Deposits & Money-Market Instruments: CMFAS CM-EIP Notes

Loading…

Deposits & Money-Market Instruments

Deposits and money-market instruments are short-term, low-risk ways to hold cash: bank deposits (savings and fixed/time deposits) pay interest and are protected by a deposit insurance scheme, while money-market instruments such as Treasury bills, commercial paper and certificates of deposit are highly liquid, short-maturity debt that trades close to par.

9 min read8 sections

Must-know for the exam

A deposit makes the depositor an unsecured creditor of the bank; principal is fixed in money terms and earns interest, and does not fluctuate in market value.
Savings accounts offer high, on-demand liquidity but the lowest interest rate; rates are usually variable.
Fixed (time) deposits lock money in for a set term at a rate fixed in advance, paying more than savings — generally the longer the tenor, the higher the rate.
Early withdrawal of a fixed deposit usually forfeits accrued interest (and may incur a penalty), though the principal is returned.
A deposit insurance scheme compensates eligible depositors up to a legislated cap PER DEPOSITOR PER MEMBER BANK; it is funded by member institutions and membership is compulsory.
Deposit insurance covers eligible deposits only — investment products such as shares, unit trusts and structured products are generally NOT covered, even if bought through a bank.
In Singapore a statutory deposit insurance body administers the scheme for member banks and finance companies up to a per-depositor cap (exact figures set by law).
Money-market instruments are short-term debt (usually maturing within one year) that act as close substitutes for cash.
Treasury bills are government-issued, sold at a discount to par with no coupon; the discount is the return, and they carry very low credit risk.
Commercial paper is short-term, usually unsecured corporate debt; it carries more credit risk than a T-bill and therefore pays a higher yield.
A negotiable certificate of deposit (CD) is a bank-issued deposit instrument that CAN be sold in the secondary market before maturity, unlike an ordinary fixed deposit.
Discount (zero-coupon) instruments are bought below face value and redeem at par; their price drifts up towards par as maturity nears. A higher price or a longer time to maturity LOWERS the yield (R = D × 365 / M, MAS T-bills FAQs).
Core trade-off: greater liquidity and lower risk come with lower return; yields move with short-term interest rates.
Main risks are credit, interest-rate, liquidity, inflation (purchasing-power) and — for foreign holdings — currency risk; their low risk and simplicity make them Excluded Investment Products (EIPs).

Traps that cost marks

Assuming deposit protection or the bank's obligation makes a depositor a secured creditor or part-owner.
Confusing the on-demand savings account with the locked-in, higher-rate fixed deposit.
Overlooking that the higher rate is compensation for reduced liquidity, not for extra risk.
Believing that premature withdrawal risks the principal rather than mainly the interest.
Reversing the usual tenor-to-rate relationship or assuming rates are only known at maturity.
Assuming each account is separately capped, or that the whole balance is covered.
Assuming anything held at a bank is automatically insured, including investment products.
Believing depositors or taxpayers fund the scheme, or that banks opt in voluntarily.

What deposits and money-market instruments are

A DEPOSIT is money placed with a bank; the bank owes it back to the depositor (the depositor is an unsecured creditor of the bank) and pays interest in return. The principal amount is fixed in money terms — a deposit does not fluctuate in market value the way a share or bond does.

MONEY-MARKET INSTRUMENTS are short-term debt securities — typically maturing within one year — issued by governments, banks and companies to borrow cash for short periods. They are close substitutes for holding cash because they are low-risk and easily converted back into money.

Both sit at the LOW-RISK, LOW-RETURN end of the investment spectrum. Investors use them for capital preservation, liquidity and a modest yield, rather than for capital growth.

Because they are simple, familiar and comparatively low-risk, deposits and plain money-market instruments are treated as Excluded Investment Products (EIPs) rather than the more complex Specified Investment Products (SIPs).

Savings accounts

A SAVINGS ACCOUNT holds money that can be withdrawn on demand (or at very short notice) while earning interest. It combines everyday accessibility with a small return.

Key features:

•High liquidity — funds are available on demand, so the account is suited to an emergency buffer or day-to-day cash.
•A relatively LOW interest rate, reflecting the convenience and instant access; rates are usually variable and can change at the bank's discretion.
•Interest is often calculated on the daily or monthly balance and credited periodically.

The trade-off is explicit: the more liquid and accessible the account, the lower the return it typically offers.

Premium

Every note. Every question. One pass.

6 more sections of this note are part of Premium.

Every section of every study note
12,500+ questions across every CMFAS module
Full timed mock exams
A worked explanation on every question
Your full mistake bank and weak-area review

Unlock with Premium

Passes from S$39.90, pay once, no auto-renew

Deposits & Money-Market Instruments

Must-know for the exam

Traps that cost marks

What deposits and money-market instruments are

Savings accounts

Exam-style questions