Chapter 5 Cash and Liquid Assets

1. Chapter 5Cash and Liquid Assets • Liquid assets – cash or investments readily convertible to cash without loss • Checking, savings and money market accounts • Pay bills without selling long-term assets • Little risk but low returns • Need to balance risk of cash shortage against low returns

2. Institutions Distinctions now blurry – depositories (banks, S&L's, credit unions) and nondepositories (mutual funds) • Depository accounts insured by Federal Gov't • Credit Unions – nonprofits – have highest rates on deposits and lowest rates on loans; insured • Savings certificates – not redeemable before maturity; rates fixed until maturity

3. Banks Ranked by Assets ( billions) Citigroup $1,187 J. P. Morgan/Chase/Bank One 1,102 Bank of America 966 Wells Fargo 370 Wachovia 364

4. Mergers Consumer Perspective • Major bank mergers over last 15 years • Concentration increased, reducing choices • Cost savings = reduced employment • Credit card effect • Four largest control 56% of the market • One brand, new rules, new fees • Checking accounts – more ATM’s but higher fees and new account numbers

6. Cash Management AlternativesUnderstand advantages/disadvantages in T 5.1 Checking MMMF's Savings accounts Asset Management Accounts Savings Certificates T-bills Bank MMF's Savings bonds

7. Comparing Alternatives Need to (1) Compare returns on same basis (2) Consider tax status (3) Safety versus risk Annual Percentage Yield (APY) – makes non-annual compounded rates comparable Also need to know method used to compute balance for interest – daily average or minimum?

8. Taxes and Other Issues • Safety – deposit accounts insured up to $100,000 • MMMF not insured but buy low risk assets • Interest on most “muni funds” not subject to Fed and some state taxes • Need to compare with taxable investments on a before-tax or after-tax basis

9. Checking Accounts • To open, need SSN and photo ID • Consider costs: • Monthly fees, balance-dependent fees, check charges, penalties (OD's and bounces) • OD protection, direct deposit, EFT, location • Are you a face-to-facer or ATM'er?

10. Electronic Funds Transfers Receive or payout electronically Receive pay electronically or make tax payments ATM's (debit cards and cash advances) Smart cards Preauthorized debits (health club fees) Wire transfers and ACH Payments Fixing mistakes – 60 days

11. Bank fees Rubber checks EFT’s Online bills Mailed bills Plastic pay Check 21 law International Payment Developments

13. Stored Value Cards • Replenishable cash is embedded • “Store Specific” • Titan card, copy. Prepaid phone, transit, gift cards • “General Purpose” or “Octopus Card” • Widely accepted – newspapers, fast food, parking meters

14. Checkbook Balancing • Ending bank statement balance • Add: deposits not on statement • Deduct: outstanding checks and uncleared ATM/debt card transactions • Subtotal • Deduct charges/add interest on statement • Should equal your adjusted balance

15. Savings Certificates • Fixed maturity date • Early withdrawal penalty • Usually have minimum amounts • FDIC insured • Variations Interest – fixed usually fixed, also floating, zero coupon, rate step-ups; may be callable; “death put”

16. Savings Bonds • EE or Patriot Bonds • Sold at one-half face value • Rate adjusted every six months • I- Bonds • Fixed base rate plus inflation adjustment • Not subject to state tax; federal deferred • Can’t redeem for one year • Within 5, forfeit 3 months interest