Chapter 5 Cash and Liquid Assets

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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

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Institutions

• Distinctions now blurry depositories (banks,
  SL'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

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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

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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 ATMs but higher fees
  and new account numbers

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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

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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?

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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

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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?

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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

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Payment Developments

• Bank fees
• Rubber checks
• EFTs
• Online bills

• Mailed bills
• Plastic pay
• Check 21 law
• International

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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

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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

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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

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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
• Cant redeem for one year
• Within 5, forfeit 3 months interest