Prentice-Hall, Inc.1 Chapter 5 Cash or Liquid Asset Management.
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Transcript of Prentice-Hall, Inc.1 Chapter 5 Cash or Liquid Asset Management.
Prentice-Hall, Inc. 2
The Need for Liquidity
Liquidity offers protection– enables you to have immediate access to funds– keeps you from tapping into investments
The reservoir effect Risks associated with liquid assets
– risk-return trade-off -- higher liquidity means lower returns
– spending risk -- cash on hand is easier to spend
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Automate Savings: Pay Yourself First, Just Do It!
Payroll deductions Account alternatives Time value of
money Automatic deposit
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Financial Institutions
“Banks” or deposit-type financial institutions
Non-deposit-type financial institutions
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“Banks” or Deposit-type Financial Institutions
Commercial banksSavings and loan associationsSavings banksCredit unions
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On-Line Banking and “Net” Banks
On-line banking offers account access via personal computer; convenience at a fee.
“Net” banks are electronic banks that pay more for deposits, but have no local branch.
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What to Look for in a Financial Institution
Kind of services provided.Safety of your money.Cost of achieving your financial goals.Type of personal relationship provided.Note: You should probably use more
than one financial institution to take advantage of each one’s strengths.
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Cash Management Alternatives
Checking accountsSavings accountsMoney market deposit accounts Certificates of depositMoney market mutual funds
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Cash Management Alternatives (cont’d)
Asset management accounts
U.S. Treasury bills U.S. Series EE
bonds
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Checking Accounts
Demand deposits -- non-interest bearing accounts
Negotiable order of withdrawal (NOW) accounts -- interest bearing accounts
Forced balances and opportunity costsFees associated with checking
accounts
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Savings Accounts
Passbook accountsStatement accounts“Passbook” versus statementLow return, reduced further by forced
balances or service charges
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Money Market Deposit Accounts (MMDA)
Alternative to a commercial bank’s savings account
Advantages– higher rates of interest– limited check writing
Disadvantages– higher minimum balance requirements– variable rate of interest
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Certificates of Deposits (CDs) Pay a fixed rate of
interest for a fixed period of time
Offer higher rates, but sacrifice liquidity
Have early withdrawal penalties
Very competitive marketing tool
Shop nationally
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Money Market Mutual Funds (MMMFs)
Pool funds from many investors to buy higher priced securities
Offer return rates from 2% to 17%Charge an administration feeAre bought by the shareMost require a $500 to $2,000 minimum
investmentHave limited check writing privileges
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Asset Management AccountsOffer comprehensive financial services
– checking accounts and credit cards– money market mutual funds– loans– brokerage services– overdraft protection
Automatically control cash flowsHave higher annual fees ($50 to $125)
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U.S. Treasury Bills
Are short-term, less-than 12 months, notes of debt
Are purchased at a discountDon’t accrue periodic interest paymentsAre extremely liquidAre state and local income tax exempt
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U.S. Series EE Bonds
Denominations from $25 to $10,000Are purchased at half their face valueLiquid, but early withdrawal reduces the
returnRate of interest varies with the market
rateOffer several tax advantages
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Comparing Cash Management Alternatives
Use comparable interest ratesConsider tax advantages and after-tax
returnConsider safety
– Federal Deposit Insurance Corporation (FDIC)
– National Credit Union Association (NCUA)– Money market mutual funds and safety
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Choosing a Financial Institution
The Three Cs of Banking– The cost factor– The convenience
factor– The consideration
factor
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The Cost Factor
Monthly feesMinimum balanceCharge per checkBalance-dependent scaled fees
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The Convenience Factor
Location (branches, ATMs)Safety deposit boxesOverdraft protectionStop-payment ability
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Other Types of Checks
– Cashier’s check– Certified check– Money order– Traveler’s check
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Electronic Fund Transfers (EFTs)
Automated bill paymentAutomated teller machinesDebit cardsSmart cards
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Automated Teller Machines
Be careful with your PINFees -- $1.00 to $5.00 per transactionSecurityLiability -- limited to $50 if you notify the
holding institution within 24 hours
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Debit Cards
The plastic check Avoid carrying cash Avoid carrying a big
credit card balance
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Smart Cards
Money is stored electronically on the card
Have similar usage as debit cardsLimit owner liability if stolen because
the card doesn’t access an accountExamples -- Kinkos, some universities,
some grocery stores
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Fixing ErrorsBe alert to human and computer errors.Never deposit cash in an ATM.Call the institution that made the error.Write the institution within 60 days of
receiving your statement.Write the Federal Reserve Board’s
Division of Consumer and Community Affairs.
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Summary
Cash management balances the need for liquid assets and emergency funds with the potential for greater return from other investments.
Automate savings to meet your goals.
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Summary (cont’d)
Types of financial institutions– “banks” or deposit-type financial institutions– non-deposit-type financial institutions
Compare liquid investment alternatives using– return– safety– compounding methods– tax advantages
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Summary (cont’d)
Cash management accounts– checking accounts– savings accounts– money market deposit accounts – certificates of deposit– money market mutual funds– asset management accounts– U.S. Treasury bills– U.S. Series EE bonds