1. Prentice-Hall, Inc.1 Chapter 5 Cash or Liquid Asset Management

2. Prentice-Hall, Inc.2 The Need for Liquidity  Liquidity offers protection – enables you to have 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

3. Prentice-Hall, Inc.3 Automate Savings: Pay Yourself First, Just Do It!  Payroll deductions  Account alternatives  Time value of money  Automatic deposit

4. Prentice-Hall, Inc.4 Financial Institutions  “Banks” or deposit-type financial institutions  Non-deposit-type financial institutions

5. Prentice-Hall, Inc.5 “Banks” or Deposit-type Financial Institutions  Commercial banks  Savings and loan associations  Savings banks  Credit unions

6. Prentice-Hall, Inc.6 On-Line Banking and “Net” Banks  On-line banking offers account access via personal computer; convenience at a fee.  “Net” banks are electronic banks that pay more for deposits, but have no local branch.

7. Prentice-Hall, Inc.7 Non-deposit-type Financial Institutions  Mutual funds  Stockbrokerage firms

8. Prentice-Hall, Inc.8 What to Look for in a Financial Institution  Kind of services provided.  Safety of your money.  Cost of achieving your financial goals.  Type of personal relationship provided.  Note: You should probably use more than one financial institution to take advantage of each one’s strengths.

9. Prentice-Hall, Inc.9 Cash Management Alternatives  Checking accounts  Savings accounts  Money market deposit accounts  Certificates of deposit  Money market mutual funds

10. Prentice-Hall, Inc.10 Cash Management Alternatives (cont’d)  Asset management accounts  U.S. Treasury bills  U.S. Series EE bonds

11. Prentice-Hall, Inc.11 Checking Accounts  Demand deposits -- non-interest bearing accounts  Negotiable order of withdrawal (NOW) accounts -- interest bearing accounts  Forced balances and opportunity costs  Fees associated with checking accounts

12. Prentice-Hall, Inc.12 Savings Accounts  Passbook accounts  Statement accounts  “Passbook” versus statement  Low return, reduced further by forced balances or service charges

13. Prentice-Hall, Inc.13 Money Market Deposit Accounts (MMDA)  Alternative to a commercial bank’s savings account  Advantages – higher rates of interest – limited check writing  Disadvantages – higher minimum balance requirements – variable rate of interest

14. Prentice-Hall, Inc.14 Certificates of Deposits (CDs)  Pay a fixed rate of interest for a fixed period of time  Offer higher rates, but sacrifice liquidity  Have early withdrawal penalties  Very competitive marketing tool  Shop nationally

15. Prentice-Hall, Inc.15 Money Market Mutual Funds (MMMFs)  Pool funds from many investors to buy higher priced securities  Offer return rates from 2% to 17%  Charge an administration fee  Are bought by the share  Most require a $500 to $2,000 minimum investment  Have limited check writing privileges

16. Prentice-Hall, Inc.16 Asset Management Accounts  Offer comprehensive financial services – checking accounts and credit cards – money market mutual funds – loans – brokerage services – overdraft protection  Automatically control cash flows  Have higher annual fees ($50 to $125)

17. Prentice-Hall, Inc.17 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

18. Prentice-Hall, Inc.18 U.S. Series EE Bonds  Denominations from $25 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

19. Prentice-Hall, Inc.19 Comparing Cash Management Alternatives  Use comparable interest rates  Consider tax advantages and after-tax return  Consider safety – Federal Deposit Insurance Corporation (FDIC) – National Credit Union Association (NCUA) – Money market mutual funds and safety

20. Prentice-Hall, Inc.20 Choosing a Financial Institution  The Three Cs of Banking –The cost factor –The convenience factor –The consideration factor

21. Prentice-Hall, Inc.21 The Cost Factor  Monthly fees  Minimum balance  Charge per check  Balance-dependent scaled fees

22. Prentice-Hall, Inc.22 The Convenience Factor  Location (branches, ATMs)  Safety deposit boxes  Overdraft protection  Stop-payment ability

23. Prentice-Hall, Inc.23 The Consideration Factor  Personal attention  Financial advice

24. Prentice-Hall, Inc.24 Balancing Your Checking Account  Just Do It!  Follow Worksheet 12

25. Prentice-Hall, Inc.25 Other Types of Checks – Cashier’s check – Certified check – Money order – Traveler’s check

26. Prentice-Hall, Inc.26 Electronic Fund Transfers (EFTs)  Automated bill payment  Automated teller machines  Debit cards  Smart cards

27. Prentice-Hall, Inc.27 Automated Teller Machines  Be careful with your PIN  Fees -- $1.00 to $5.00 per transaction  Security  Liability -- limited to $50 if you notify the holding institution within 24 hours

28. Prentice-Hall, Inc.28 Debit Cards  The plastic check  Avoid carrying cash  Avoid carrying a big credit card balance

29. Prentice-Hall, Inc.29 Smart Cards  Money is stored electronically on the card  Have similar usage as debit cards  Limit owner liability if stolen because the card doesn’t access an account  Examples -- Kinkos, some universities, some grocery stores

30. Prentice-Hall, Inc.30 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.

31. Prentice-Hall, Inc.31 Summary  Cash management balances the need for liquid assets and emergency funds with the potential for greater return from other investments.  Automate savings to meet your goals.

32. Prentice-Hall, Inc.32 Summary (cont’d)  Types of financial institutions – “banks” or deposit-type financial institutions – non-deposit-type financial institutions  Compare liquid investment alternatives using – return – safety – compounding methods – tax advantages

33. Prentice-Hall, Inc.33 Summary (cont’d)  Cash management accounts – checking accounts – savings accounts – money market deposit accounts – certificates of deposit – money market mutual funds – asset management accounts – U.S. Treasury bills – U.S. Series EE bonds

34. Prentice-Hall, Inc.34 Summary (cont’d)  The three C’s of banking – cost – convenience – consideration  Electronic fund transfers – automated teller machines – debit cards – smart cards – automated bill payment