Chapter 6 (Managing your money)

Question 1

a series of decisions made over a short term period regarding cash inflows and outflows

Answer 1

money management

Question 2

your ability to cover any cash deficiencies that you may experience

Answer 2

liquidity

Question 3

• interest rate usually high

- maintaining adequate liquid assets allows you to avoid using credit cards and paying hight finance charges

Answer 3

using credit cards for liquidity

Question 4

• very liquid investment

- overdraft protection

Answer 4

checking account

Question 5

an arrangement that protects a customer who writes a check for an amount that exceeds the checking account balance; it is a short term loan from the depository institution where the checking account is maintained

Answer 5

overdraft protection

Question 6

a financial institution’s notice that it will not honor a check if someone tries to cash it; usually occurs in response to a request by the writer or the check

Answer 6

stop payment

Question 7

paychecks go directly to your financial institution

Answer 7

direct deposit

Question 8

a type of deposit offered by depository institutions that provides checking services and pays interest

Answer 8

NOW (negotiable order of withdrawal) account

• requires a minimum balance, lowering liquidity

Question 9

• retail CDs
• return: pay higher interest rates than savings deposits
• liquidity: penalties are imposed for early withdrawal
• choice among CD maturities

Answer 9

CD (certificate of deposit)

Question 10

certificates of deposits that have small denominations

Answer 10

retailed CDs

Question 11

a deposit offered by a depository institution that requires a minimum balance, has no maturity date, pays interest, and allows a limited number of checks to be written each month

Answer 11

Money market deposit account (MMDA)

Question 12

• less liquid than checking, but pays a higher interest rate

- many people keep a checking or NOW account for day-to-day and a money market for other funds

Answer 12

money market deposit account (MMDA)

Question 13

debt securities issued by the U.S. treasury

Answer 13

treasury securities

Question 14

treasury securities with maturities of one year or less

Answer 14

Treasury bills (T-Bills)

Question 15

• return: purchased at a discount; result in capital gains
• secondary market
• quotations: prices online and in financial news publications

Answer 15

treasury bills

Question 16

a market where existing securities such as treasury bills can be purchased or sold

Answer 16

secondary market

Question 17

accounts that pool money from individuals and invest in securities that have a short term maturity

Answer 17

money market funds (MMFs)

Question 18

• typically less than 90 days
• commercial paper
• quotations: found in financial newspapers and online

Answer 18

Money market funds

Question 19

short term debt securities issued by large corporations that typically offer a slightly higher return than treasury bills

Answer 19

commercial paper

Question 20

an account that combines deposit accounts with a brokerage account and provides a single consolidated statement

Answer 20

asset management account

Question 21

an asset management account that sweeps any unused balance in the brokerage account into a money market investment at the end of each business day

Answer 21

sweep account

Question 22

the risk that a borrower may not repay on a timely basis

Answer 22

credit risk (default risk)

Question 23

the risk that the value of an investment could decline as a result of a change in interest rates

Answer 23

interest rate risk

Question 24

the potential loss that could occur as a result of converting an investment into cash

Answer 24

liquidity risk

Question 25

list in order of higher return to less liquidity

Answer 25

• one year CD
• three month CD
• three month t-bill
• savings account
• MMDA
• Now account
• checking account