Post on 20-Dec-2015
transcript
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Chapter 5Cash and Liquid Assets
• Liquid assets – cash or investments readily convertible to cash without loss– Checking, savings and money market
accounts– Pay bills without selling long-term assets
• Little risk but low returns– Need to balance risk of cash shortage against
low returns
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InstitutionsDistinctions now blurry – depositories
(banks, S&L's, credit unions) and nondepositories (mutual funds)– Depository accounts insured by Federal
Gov't– Credit Unions – nonprofits – have highest
rates on deposits and lowest rates on loans; insured
– Savings certificates – not redeemable before maturity; rates fixed until maturity
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Banks Ranked by Assets
( billions)
Citigroup $1,187
J. P. Morgan/Chase/Bank One 1,102
Bank of America 966
Wells Fargo 370
Wachovia 364
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Mergers Consumer Perspective
• Major bank mergers over last 15 years– Concentration increased, reducing choices– Cost savings = reduced employment
• Credit card effect– Four largest control 56% of the market– One brand, new rules, new fees
• Checking accounts – more ATM’s but higher fees and new account numbers
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Cash Management AlternativesUnderstand advantages/disadvantages in T 5.1
Checking MMMF's
Savings accounts Asset Management
Accounts
Savings Certificates T-bills
Bank MMF's Savings bonds
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Comparing Alternatives
Need to (1) Compare returns on same basis (2) Consider tax status (3) Safety versus riskAnnual Percentage Yield (APY) – makes non-
annual compounded rates comparableAlso need to know method used to compute
balance for interest – daily average or minimum?
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Taxes and Other Issues
• Safety – deposit accounts insured up to $100,000– MMMF not insured but buy low risk assets
• Interest on most “muni funds” not subject to Fed and some state taxes– Need to compare with taxable investments
on a before-tax or after-tax basis
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Checking Accounts
• To open, need SSN and photo ID
• Consider costs:– Monthly fees, balance-dependent fees, check
charges, penalties (OD's and bounces)– OD protection, direct deposit, EFT, location– Are you a face-to-facer or ATM'er?
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Electronic Funds Transfers
Receive or payout electronicallyReceive pay electronically or make tax payments
ATM's (debit cards and cash advances)
Smart cards
Preauthorized debits (health club fees)
Wire transfers and ACH Payments
Fixing mistakes – 60 days
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Payment Developments
• Bank fees
• Rubber checks
• EFT’s
• Online bills
• Mailed bills
• Plastic pay
• Check 21 law
• International
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Stored Value Cards
• Replenishable cash is embedded
• “Store Specific”– Titan card, copy. Prepaid phone, transit, gift
cards
• “General Purpose” or “Octopus Card”– Widely accepted – newspapers, fast food,
parking meters
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Checkbook Balancing
• Ending bank statement balance
• Add: deposits not on statement
• Deduct: outstanding checks and uncleared ATM/debt card transactions
• Subtotal
• Deduct charges/add interest on statement
• Should equal your adjusted balance
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Savings Certificates
• Fixed maturity date– Early withdrawal penalty– Usually have minimum amounts
• FDIC insured• Variations
Interest – fixed usually fixed, also floating, zero coupon, rate step-ups; may be callable; “death put”
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Savings Bonds
• EE or Patriot Bonds– Sold at one-half face value– Rate adjusted every six months
• I- Bonds– Fixed base rate plus inflation adjustment
• Not subject to state tax; federal deferred• Can’t redeem for one year
– Within 5, forfeit 3 months interest