Chapter 5 Flashcards
Define the term Money management
- 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
What is Liquidity
your access to ready cash (savings and credit) to cover short term and unexpected expenses
What is the most expensive way to borrow and the cheapest way?
Credit cards are the most expensive way to borrow, and line of credit is the cheapest way
T OR F? interest rate on a line of credit is higher than credit cards
False, interest rate on a line of credit is usually much lower.
what are emergency funds
Savings in short term, conservative investments that allows you to avoid interest charges altogether when liquidity issues arise
T OR F? You should have between three and six months worth of expenses in an emergency fund
True
What are the different types of financial institiutions?
- depository institution
- Non - depository institutions
What is a depository institution?
Financial institutions that accept deposits from and provide loands to individuals and businesses
Examples of depository individuals
chartered banks, trust and loan companies, credit unions and caisses populaires
define the term non depository institution?
financial institutions that do not offer federally insured deposit accounts but provide various other financial services
examples of non depository institutions
finance and lease companies, mortgage companies, investment dealers, insurance companies, mutual fund companies etc.
what is a diversified portfolio
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
What are schedule 1 banks?
Domestic banks
What are schedule 2 banks?
Foreign banks incorporated in Canada e.g ING bank of canada
What are schedule 3 banks?
subsidiaries of foreign banks that are restricted in their authority to accept deposits (e.g. citibank)
Explain financial conglomerates
Financial institutions that offer a diverse set of financial services to individual firms
T OR F? financial institutions aims to serve as a one stop where individuals can conduct all of their financial services
TRUEEE
Financial conglomerates are often referred to as?
Financial supermarkets
What are trust and loan companies
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
What are Credit Unions and Caisses populaires
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
What are finance and lease companies
specialize in providing personal loans or leases to individuals.
Why would you go to a finance and lease company and not a bank
only you reason you may go is if you were declined by a bank. Finance and lease companies charge higher interest rates
Explain the role of mutual fund companies
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
List other banking services offered by financial institutions
- 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
Define the term money order and draft
direct your bank to pay a specific amount to the person named on them
When selecting a financial institution, what are the major factors to consider?
- convenience (proximity)
- deposit rate and insurance
- fees
What are some savings alternatives offered by financial institutions?
- Tax free savings
- savings deposits
- Term deposits
What is tax free savings account?
A registered investment account that allows you to purchase investments with after-tax dollars, without attracting any tax payable on your investment growth
What are savings deposits
- Pay interests on deposists
- (savings account - interest earned = principal x rate (expressed as a decimal) x time in years
what is term deposits
offered as short term or long term investments
- offer slightly higher returns than savings deposits, but lower than GICs because they are cashable
What are characteristics of GIC
- 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
What are canada savings bond
short term to medium term, high quality securities issued by the government of canada.
- cashable any time, virtually risk free and high liquid.
What are Money Market Funds (MMFS)
- Accounts that pool money from individuals and invest in securities that have short term maturities such as one year or less
What are steps to determine the optimal allocation of short-term investment
- anticipate upcoming bills and have sufficient funds in your chequing account
- Estimate additional funds needed in the future and invest in a liquid investment
- Use remaining funds in a way that will earn you a higher return, within your risk tolerance
Guaranted Investment Certificates (GIC)
- 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
