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Personal financial planning > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

Define the term Money management

A
  • describes the decisions you make over a short period regarding your income and expenses
  • focuses on maintaining short term investment to achieve both liquidity and an adequate return on investment
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2
Q

What is Liquidity

A

your access to ready cash (savings and credit) to cover short term and unexpected expenses

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3
Q

What is the most expensive way to borrow and the cheapest way?

A

Credit cards are the most expensive way to borrow, and line of credit is the cheapest way

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4
Q

T OR F? interest rate on a line of credit is higher than credit cards

A

False, interest rate on a line of credit is usually much lower.

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5
Q

what are emergency funds

A

Savings in short term, conservative investments that allows you to avoid interest charges altogether when liquidity issues arise

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6
Q

T OR F? You should have between three and six months worth of expenses in an emergency fund

A

True

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7
Q

What are the different types of financial institiutions?

A
  • depository institution

- Non - depository institutions

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8
Q

What is a depository institution?

A

Financial institutions that accept deposits from and provide loands to individuals and businesses

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9
Q

Examples of depository individuals

A

chartered banks, trust and loan companies, credit unions and caisses populaires

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10
Q

define the term non depository institution?

A

financial institutions that do not offer federally insured deposit accounts but provide various other financial services

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11
Q

examples of non depository institutions

A

finance and lease companies, mortgage companies, investment dealers, insurance companies, mutual fund companies etc.

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12
Q

what is a diversified portfolio

A

make sure that all the money is not put into 1 or 2 share but spread out to reduce risk. Done by mutual fund companies

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13
Q

What are schedule 1 banks?

A

Domestic banks

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14
Q

What are schedule 2 banks?

A

Foreign banks incorporated in Canada e.g ING bank of canada

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15
Q

What are schedule 3 banks?

A

subsidiaries of foreign banks that are restricted in their authority to accept deposits (e.g. citibank)

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16
Q

Explain financial conglomerates

A

Financial institutions that offer a diverse set of financial services to individual firms

17
Q

T OR F? financial institutions aims to serve as a one stop where individuals can conduct all of their financial services

A

TRUEEE

18
Q

Financial conglomerates are often referred to as?

A

Financial supermarkets

19
Q

What are trust and loan companies

A

Financial institutions that, in addition to providing services similar to a bank, can provide financial planning services, such as administering estates and acting as trustee in the administration of trust accounts (e.g. RBC Estate and Trust services)
Credit Unions and Caisses Populaires

20
Q

What are Credit Unions and Caisses populaires

A

provincially incorporated co-operative financial institutions that are owned owned and controlled by their members

  • accounts are eligible for deposit insurance protection
  • does not operate outside provincial boundaries
21
Q

What are finance and lease companies

A

specialize in providing personal loans or leases to individuals.

22
Q

Why would you go to a finance and lease company and not a bank

A

only you reason you may go is if you were declined by a bank. Finance and lease companies charge higher interest rates

23
Q

Explain the role of mutual fund companies

A

non depository institution that sell units to individuals and use the proceeds to invest in a security to create mutual funds.
- minimum investment security usually about 500 - 5000

24
Q

List other banking services offered by financial institutions

A
  • no interest bearing chequing accounts
  • online banking
  • interact transfer
  • credit card financing (high interest rate w membership fee)
  • safety deposity box
    ABM
  • Certified cheque
  • money order and draft
  • travelers cheque
25
Q

Define the term money order and draft

A

direct your bank to pay a specific amount to the person named on them

26
Q

When selecting a financial institution, what are the major factors to consider?

A
  • convenience (proximity)
  • deposit rate and insurance
  • fees
27
Q

What are some savings alternatives offered by financial institutions?

A
  • Tax free savings
  • savings deposits
  • Term deposits
28
Q

What is tax free savings account?

A

A registered investment account that allows you to purchase investments with after-tax dollars, without attracting any tax payable on your investment growth

29
Q

What are savings deposits

A
  • Pay interests on deposists

- (savings account - interest earned = principal x rate (expressed as a decimal) x time in years

30
Q

what is term deposits

A

offered as short term or long term investments

- offer slightly higher returns than savings deposits, but lower than GICs because they are cashable

31
Q

What are characteristics of GIC

A
  • return (interest earned is based on the annualized interest rate and amount of time until maturity)
  • Liquidity (cashable GICs do not offer same interest rate as regular)
  • choice among GIC maturities
32
Q

What are canada savings bond

A

short term to medium term, high quality securities issued by the government of canada.
- cashable any time, virtually risk free and high liquid.

33
Q

What are Money Market Funds (MMFS)

A
  • Accounts that pool money from individuals and invest in securities that have short term maturities such as one year or less
34
Q

What are steps to determine the optimal allocation of short-term investment

A
  1. anticipate upcoming bills and have sufficient funds in your chequing account
  2. Estimate additional funds needed in the future and invest in a liquid investment
  3. Use remaining funds in a way that will earn you a higher return, within your risk tolerance
35
Q

Guaranted Investment Certificates (GIC)

A
  • savings alternatives that is an instrument issued by a depository institution that specifies a minimum investment, interest rate and maturity date. There is a penalty for early withdrawal

Personal financial planning (9 decks)

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