Finance Chapter 5

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Chapter 5 Notes

Three general reasons for holding onto cash:
1. managing transaction needs
2. preparing for cash emergencies
3. making a temporary investment

-very conservative advice suggest you should have enough liquid assets to cover 5 to 8 months of regular expenses -others suggest 2 months is more than enough

Four rules to help better cash management outcomes:
1. keep track of your cash by balancing your checkbook every month 2. develop a system to ensure that you pay your bills on time 3. stick to your financial plan by paying yourself first
4. use sound criteria to evaluate financial institutions and select products or services

Depository institutions include commercial banks, several types of savings institutions, and credit unions. All these types of firms are similar in two major ways: * their primary source of funds comes from customer deposits * their primary source of income is interest earned on loans

S&Ls were first limited to offering savings accounts and making home and personal loans to individuals. More recently, however, savings institutions have been able to offer a more competitive selection of checking and savings accounts; they can even offer credit cards, business loans, and financial planning services.

An important distinction between credit unions and other depository institutions is that credit unions have non-profit status and often make use of a partially volunteer labor force, allowing them a low-cost advantage over other institutions

Nondepository firms include mutual fund companies, life insurance companies, brokerage firms, and other financial services firms. No accounts offered are federally insured

Since demand deposits are easily converted to cash, they are less risky to you.

Key Terms:

Annual percentage yield (APY): the amount of interest paid each year, given as a percentage of the investment; the APY makes it possible to compare interest rates across accounts with different compounding periods.

Automated teller machines (ATMs): computer terminals used to complete certain financial transactions, including obtaining account balances, making deposits and withdrawals.

Brokerage firm: a nondepository financial institution that helps its customers to buy and sell financial securities.

Cash management: management of cash payments and liquid investments

Cash reserve: liquid assets held to meet emergency cash needs

Certificate of deposit (CD): an account that pays a fixed rate of interest on funds left on deposit for a stated period of time

Commercial bank: a depository institution offering a wide variety of cash management services to business and individual customers.

Credit union: a nonprofit depository institution owned by its depositors

Debit card: a plastic card that effects immediate electronic withdrawal of funds from a bank account

Demand deposits: deposit accounts, such as checking accounts, from which money can be withdrawn with little or no notice to the financial institution

Depository institutions: financial institutions that obtain funds from customer deposits

Discount bonds: bonds that sell for less than their face value

Federal Deposit Insurance Corporation (FDIC): a government-sponsored agency that insures customer accounts in banks and savings institutions

Life insurance company: a nondepository financial institution that obtains funds from premiums paid for life insurance, invests in stock and bonds, and makes mortgage loans

Maturity date: for a CD, the date on which the depositor can withdraw the invested amount and receive the stated interest

Money market account: a savings account which pays interest that fluctuates with market rates on money market securities

Money market mutual fund: a mutual fund that holds a portfolio of short-term, low risk, securities issued by the federal government, its agencies and large corporations and pays investors a...
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