Presentation on theme: "Prentice-Hall, Inc.1 Chapter 5 Cash or Liquid Asset Management."— Presentation transcript:
Prentice-Hall, Inc.1 Chapter 5 Cash or Liquid Asset Management
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
Prentice-Hall, Inc.3 Automate Savings: Pay Yourself First, Just Do It! Payroll deductions Account alternatives Time value of money Automatic deposit
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.
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.
Prentice-Hall, Inc.10 Cash Management Alternatives (cont’d) Asset management accounts U.S. Treasury bills U.S. Series EE bonds
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
Prentice-Hall, Inc.12 Savings Accounts Passbook accounts Statement accounts “Passbook” versus statement Low return, reduced further by forced balances or service charges
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
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
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
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
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
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
Prentice-Hall, Inc.20 Choosing a Financial Institution The Three Cs of Banking –The cost factor –The convenience factor –The consideration factor
Prentice-Hall, Inc.21 The Cost Factor Monthly fees Minimum balance Charge per check Balance-dependent scaled fees
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
Prentice-Hall, Inc.28 Debit Cards The plastic check Avoid carrying cash Avoid carrying a big credit card balance
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
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.
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.