Final answer:
Short-term, highly liquid investments with minimal risk of loss are known as cash equivalents. These include money market funds, Treasury bills, and short-term government bonds, and are highly liquid, making them nearly as accessible as direct cash.
Step-by-step explanation:
Short-term, highly liquid investments that can be readily converted to cash, with little risk of loss, are referred to as cash equivalents. These financial assets include money market funds, Treasury bills, and short-term government bonds. Cash equivalents are part of the M2 money supply, commonly referred to as "near money" due to their high liquidity, being nearly as liquid as M1 (cash and checking deposits) but not quite as liquid.
Investing in stocks offers a higher rate of return over time, however, they come with higher risks, particularly in the short term. Despite this, stocks provide high liquidity, as shares in publicly held companies can be sold quickly for cash. Mutual funds, similarly, can typically be sold swiftly, though some may have restrictions or fees that can impact their liquidity.
Financial intermediaries, like banks, are institutions that operate within the financial capital market to match supply and demand. Banks provide certain investment products with varying levels of return, risk, and liquidity, and they purchase insurance from the FDIC to mitigate the risk of bank failures. The balance between the expected return, risk, and liquidity is a fundamental principle in the investment decision-making process.