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Chapter 5 Cash or Liquid Asset Management The Need for Liquidity Liquidity offers protection Provides immediate access to funds Keeps you from tapping into investments The reservoir effect Risks associated with liquid assets Risk-return trade-off Higher liquidity means lower returns

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chapter 5

Chapter 5

Cash or Liquid Asset Management

the need for liquidity
The Need for Liquidity
  • Liquidity offers protection
    • Provides immediate access to funds
    • Keeps you from tapping into investments
  • The reservoir effect
  • Risks associated with liquid assets
    • Risk-return trade-off
      • Higher liquidity means lower returns
    • Spending risk
      • Cash on hand is easier to spend
financial institutions
Financial Institutions
  • “Banks” or deposit-type financial institutions
  • Non-deposit-type financial institutions
banks or deposit type financial institutions
“Banks” or Deposit-Type Financial Institutions
  • Commercial banks
  • Savings and loan associations
  • Mutual savings banks
  • Credit unions
non deposit type financial institutions
Non-Deposit-Type Financial Institutions
  • Mutual funds
  • Stockbrokerage firms
  • Pawnshops
  • Check-cashing outlets
what to look for in a financial institution
What to Look for in a Financial Institution
  • Services offered
  • Convenience/location
  • Safety/deposit insurance
  • Interest rates
  • Fees and charges
cash management alternatives
Cash Management Alternatives
  • Checking accounts
  • Savings accounts
  • Money market deposit accounts
  • Certificates of deposit
  • Money market mutual funds
cash management alternatives cont d
Cash Management Alternatives (cont’d)
  • Asset management accounts
  • U.S. Treasury bills
  • U.S. Series EE bonds
checking accounts
Checking Accounts
  • Regular checking accounts
  • Activity accounts
  • Interest-earning checking accounts (aka NOW accounts)
  • Review checking account comparison handout
savings accounts
Savings Accounts
  • Two primary types
    • Passbook accounts
    • Statement accounts
  • High accessibility but low return
  • Low return, reduced further by forced balances or service charges
money market deposit accounts mmda
Money Market Deposit Accounts (MMDA)
  • Offered by commercial banks as an alternative to a “regular” savings account.
  • Advantages
    • Higher rates of interest
    • Limited check writing
  • Disadvantages
    • Higher minimum balance requirements
    • Variable rate of interest
certificates of deposit cds
Certificates of Deposit (CDs)
  • Pay a fixed rate of interest for a fixed period of time
  • Offer higher rates, but sacrifice liquidity
  • Most have early withdrawal penalties
  • Very competitive marketing tool
  • Shop nationally for the best rate
money market mutual funds mmmfs
Money Market Mutual Funds (MMMFs)
  • Pool funds from many investors to buy higher priced securities
  • Historical return rates range from 2% to 17%
  • Charge an administration fee
  • Are bought by the share

(1 share = 1 dollar)

  • Most require a $500 to $2,000 minimum investment
  • Have limited check writing privileges
u s treasury bills
U.S. Treasury Bills
  • Are short-term, less than 12 months, notes of debt
  • Are purchased at a discount
  • Don’t accrue periodic interest payments
  • Are extremely liquid
  • Are state and local income tax exempt
u s series ee bonds
U.S. Series EE Bonds
  • Denominations from $50 to $10,000
  • Are purchased at half their face value
  • Liquid, but early withdrawal reduces the return
  • Rate of interest varies with the market rate
  • Offer several tax advantages
comparing cash management alternatives
Comparing Cash Management Alternatives
  • Use comparable interest rates
  • Consider tax advantages and after-tax return
    • After-tax return = taxable return (1 – tax rate)
  • Consider safety
    • Federal Deposit Insurance Corporation (FDIC)
    • National Credit Union Association (NCUA)
    • Money market mutual funds and safety
choosing a financial institution
Choosing a Financial Institution
  • The Three Cs of Banking
    • Cost
    • Convenience
    • Consideration
the cost factor
The Cost Factor
  • Monthly fees
  • Minimum balance
  • Charge per check
  • Balance-dependent scaled fees
the convenience factor
The Convenience Factor
  • Location (branches, ATMs)
  • Safety deposit boxes
  • Overdraft protection
  • Stop-payment ability
the consideration factor
The Consideration Factor
  • Personal attention
  • Financial advice
  • Staffing
balancing your checking account
Balancing Your Checking Account
  • Keep accurate records
  • Just Do It!
  • Follow Worksheet 12
debit cards
Debit Cards
  • The plastic check
  • Avoid carrying cash
  • Avoid carrying a big credit card balance
fixing errors
Fixing Errors
  • Be alert to human and computer errors
  • Never deposit cash in an ATM
  • Call the institution that made the error
  • Write the institution within 60 days of receiving your statement
  • Write the Federal Reserve Board’s Division of Consumer and Community Affairs