Chapter 4: Managing Your Cash and Savings Flashcards
study for exam #2
Routine, daily administration or cash and near-cash resources (liquid assets, such as interest checking account, savings account, money market deposit, CDs, T-bill, & U.S. Savings bond [EE]).
cash management
one should only write checks at certain times, avoid carrying checkbook and debit card, plan spending limit before shopping, and establish an ongoing savings program to manage…
cash.
Stocks are riskier than bonds.
true
the lower interest rates of 2007-2008 helped reduce the costs of financing the federal budget deficit.
true
what do higher or lower interest rates cause investors to lose money?
lower
who benefits the most from low interest rates?
borrowers
what do low interest rates mean for savers?
it seems useless to save so less people save
what industry offers all kinds of financial products and services?
financial service industry
what are the 2 types of financial institutions?
- depository
- Non depository
commercial banks, Savings and Loan associations, savings banks, and credit unions constitute what type of financial institution?
depository
what type of financial institution doesn’t accept deposits?
non-depository
depository banks are either government-insured or state-insured.
true
what is the amount of Deposit Insurance Protection provided by depository financial institutions to protect against loss?
$250,000/depositor
securities bought through the bank aren’t covered by Deposit Insurance Protection.
true
how can you increase your Deposit Insurance Protection?
open multiple accounts in different names, like joint accounts w/ partner’s name and each have separate accounts too.
what acts require all banks to clearly disclose fees, rates, and terms and to use the standard annual percentage yield (APY) formula on compounding, must notify customers of rate changes 30 days prior, and bases interest on average deposit balance?
Truth in Savings Act of 1993
Type of account where the bank must permit the withdrawal of funds.
checking account (demand account)
how do you put money in an account?
deposit
if you write a check, use a debit card, or withdraw cash from a checking account, you are…
withdrawing from the account.
type of account with no interest where service charges can be waived if minimum balance of $500-1,000 is maintained.
regular checking account
regular checking accounts are only offered by commercial…
banks.
type of account that is expected to remain on deposit longer and, therefore, has the benefit of higher interest rates.
savings account (time deposit)
1) Negotiable Order of Withdrawal (NOW) accounts
2) Money Market Deposit Account (MMDAs)
3) Money Market Mutual Funds (MMMF)
4) Asset Management Account (AMA) OR Central Asset Account
These are known as?
interest-paying checking accounts
type of interest-paying checking account where financial institutions pay interest on a $500-1,500 requirement (although, there is technically no legal minimum).
Negotiable order of withdrawal (NOW) accounts
type of interest-paying checking account that is convenient, safe (federally insured), requires a minimum balance of $1,000 or more, allows use of checks and access to ATMs, and has a limited number of free transactions with a fee on the remainder.
money market deposit accounts (MMDAs)
which interest-paying checking account has the highest interest rates?
money market deposit accounts (MMDAs)
type of interest-paying checking account that pools funds of many small investors to purchase high-return, short-term marketable securities.
money market mutual funds (MMMF)
money market mutual funds have an interest rate of what percentage range higher than savings accounts?
1-3% higher
you can access funds from money market mutual funds (MMMF) by check writing of less than $…
500.
type of interest-paying checking account that combines checking, investing, and borrowing activities.
asset management accounts (AMA) OR central asset accounts
offered by brokerage houses and mutual funds. includes MMDAs, unlimited checking, Visa and Mastercard debit, ATM use, brokerage loan accounts. supplies extra funds through loans. has no deposit insurance, but has Securities Investor Protection Corporation to protect it).
asset management accounts (AMA) OR central asset accounts
what type of interest-bearing account automatically “sweeps” excess account balances into higher-return money market mutual funds (MMMF)?
asset management accounts (AMA) OR central asset accounts
system that can complete transactions via telecommunication and computers.
electronic funds transfer system (EFTs)
type of EFT that transfers funds from your bank account to recipient’s account.
debit cards
what verifies user access to debit cards?
personal identification number (PIN)
EFT that is a remote computer terminal for transactions.
automatic teller machines (ATMs)
what type of card is more secure than the magnetic strip found in credit cards?
EMV cards
what EFT:
1. makes it easy to overspend
2. are convenient for retailers and consumers
3. includes all payments ,in that, they can’t be stopped
4. is it wise to record all payments
debit cards
EFT that allows automatic deposits and payments that occur regularly and at fixed amounts.
preauthorized deposits and payments
EFT that allows you to either call your bank or use touch-screen phones to access your account information.
bank-by-phone accounts
EFT that:
1. saves time and postage
2. is convenient
3. has higher interest rates
4. has lower fees
5. but you can’t make cash deposits
online/mobile banking and bill payment services
the Electronic Fund Transfer Act of 1978 doesn’t allow a stop to defective and/or questionable purchases unless you notify the bank within 60 days by call and, then, a letter.
true
a rented drawer in bank’s vault that has two keys (1 for renter and 1 for bank) for $30/year to protect extremely valuable items.
safe-deposit boxes
investment and estate planning advice and management services provided by banks.
trust services
these 3 factors affect choice of what?:
1. convenience
2. services
3. cost
checking account
the minimum balance for a checking account is $500-1,000 or more.
true
banks use average daily, monthly, semiannual, or annual balance procedures to determine whether to levy service charges (CHOOSE 2)?
daily or monthly
the returned check fee is $25-30.
true
stop-payment orders cost $20-35.
true
lower service charges and rights of survivorship (if specified) are the main benefits of j…
oint accounts.
2 types of what?:
1) account where both people’s signatures are required
2) account where only 1 person’s signature is required
joint accounts
- write checks in ink
- include name of recipient, date, & amount
- sign using same signature as on signature card @ bank
- note check’s purpose on check itself
Do these when you open a checking…
account.
ledger that contains all checking account transactions.
checkbook ledger
what should you prepare to accompany each deposit you make?
a deposit slip
you should list checks by what in your checkbook ledger?
transit ID number
properly endorse check by using what 2 different types of endorsements?
- special endorsements
- restrictive endorsements
it takes 1-5 business days to process deposited funds .
true
when a check is written for more than the account balance.
overdraft
when a bank states, “insufficient funds,” and sends the check to the recipient, this is called a…
bounced check
what is the overdraft fee?
$30
when the bank pays the check that overdraws your account for a fee so there is no bounced check or damaged creditworthiness, this called what?
overdraft protection
overdraft protection can be in the form of a line of credit ($50-100 loan w/ interest) or an automatic transfer program (savings to checking account).
true
what 2 things are the best actions to take to avoid even needing overdraft protection?
- good cash management
- regularly balancing checking accounts
to stop payments, notify the bank and fill out a form (online or by phone call) and pay $25-35 per check.
true
if you lose your checks or checkbook, you have no personal liability, but you will still incur an expense.
true
an itemized listing of all transactions in checking account, including bank service charges, interest earned, and canceled checks, all of which is useful for tax records.
bank statement
process of uncovering errors in balance differences on bank statement and checkbook ledger.
account reconciliation process (balancing the checkbook)
- checks that haven’t been received result in an outstanding balance
- deposits made haven’t been credited to your account
- levied service charges haven’t been deducted
- interest earned hasn’t been added to your account balance
This list represents reasons for an…
unbalanced checkbook.
- cashier’s checks
- traveler’s checks
- certified checks
These are what?
special checks
type of special check that is used by those without a checking account, is purchased for face amount plus a $9 fee, and issues a check payable to a 3rd party.
cashier’s checks
type of special checks that are $20-100 each, purchased from a bank, and incur a 1-2% fee.
traveler’s checks
type of special check that is a personal check that the bank certifies with a stamp to guarantee availability, which immediately deducts funds from your account, and incurs a low fee.
certified check
emergency savings should have 6 months of after-…
tax income.
what should be a priority item in a budget?
savings
what is the minimum percentage of your investment portfolio that should be in savings-type investments?
10% or more
what are the 2 types of interests?
- discount basis
- direct payment
security is sold for a price lower than redemption value.
discount basis
amount of interest earned is added to amount invested, which is applied to savings account.
direct payment
annual rate of return that’s actually earned during the period that funds are held.
effective rate of interest
what formula is this:?
amount of interest earned / amount of money invested or deposited =
effective rate of interest
Certificates of deposit (CDs):
1. must remain of deposit for specified period
2. interest penalty for early withdrawal
3. federal deposit insurance protection
true
what type of security is sold on a discount basis of a minimum $100 w/ 1, 3, 6, 12 month maturities; have no state or local income tax; and are highly liquid w/ no interest penalty?
U.S. Treasury Bills (t-bills)
what bonds are on a discount basis, have no state or local tax, are accrual-type securities, can be purchased through payroll deductions, cost $25-10,000, have a fixed interest rate for 30 years, can be redeemed after 12 months w/ a penalty of 3 months interest for being before 5 years, and don’t report on taxes until redemption?
Series EE bonds
I Savings bonds are accrual-type securities, have interest compounded semiannually over 30 years, have exceptions for state, local, and federal income tax, are $25-10,000, are sold @ face value, and are adjusted for inflation.
true
