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Finance 3300 > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

What is the best strategy at straight cash management?

A

envelope system

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2
Q

What are the pros of the envelope system?

A

always have cash for bills

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3
Q

What are the cons of the envelope system?

A

may lose envelope with cash

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4
Q

What is the best strategy at maximizing incentives?

A

credit cards with bonus

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5
Q

What are the pros of credit cards with bonus?

A

earn bonus miles or credits

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6
Q

What are the cons of credit cards with bonus?

A

may go over your budget

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7
Q

What are four common mistakes in managing cash?

A

overspending from impulse buying; not having enough liquid assets to pay current bills; using savings/borrowing money to pay current bills; failing to put unneeded money in interest-earning savings

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8
Q

What are two paths to overspending?

A

liquidate savings or borrowing money

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9
Q

What are the four types of financial services?

A

savings; cash availability/payment services; borrowing; investment + other financial services

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10
Q

Give 2 examples of savings services.

A

time deposits in savings; CDs

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11
Q

Give 3 examples of cash availability/payment services.

A

checking accounts/demand deposits; automatic payments (direct withdrawal); prepaid cards

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12
Q

What are the liabilities for lost debit cards? (3)

A

$50 liability if reported within 2 days; $500 liability if reported in 3-60 days; unlimited liability if reported after 60 days

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13
Q

What is the liability for a credit card?

A

$0 liability for fraudulent purchases if reported within 2 days

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14
Q

What are three examples of opportunity costs involving financial services?

A

ATM fees; “free” checking accounts with high minimum balances; high return only with low liquidity

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15
Q

What are three ways the Fed can increase money supply?

A

lowering reserve requirement; lowering the discount rate; buying securities via Open Market Operations

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16
Q

Mutual savings banks specialize in

A

savings accounts and mortgage loans

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17
Q

Mutual savings banks are owned by

A

their depositors

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18
Q

Mutual savings banks are common in

A

the Northeast

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19
Q

(T/F) Mutual savings banks result in lower interest rates.

A

False, they result in higher interest rates.

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20
Q

Credit unions are owned by

A

users.

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21
Q

What is the profit status of credit unions?

A

non profit

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22
Q

Which institution has the lowest loan rates?

A

credit unions

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23
Q

Which institution has the highest savings rate?

A

credit unions

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24
Q

FDIC stands for

A

Federal Deposit Insurance Corporation

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25
Q

The FDIC provides

A

deposit insurance which guarantees the safety of cash at banks

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26
Q

What is the FDIC limit per depositor, per financial institution?

A

$250,000

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27
Q

A joint account held by two people has an FDIC limit of

A

$500,000

28
Q

Give six examples of high-cost financial services.

A

pawnshops; check-cashing outlets/car title loans; finance companies; payday loans; rent-to-own centers; tax refund anticipation loans

29
Q

Give three examples of non-deposit institutions.

A

mortgage companies; life insurance companies; investment companies

30
Q

The products of investment companies are called

A

mutual funds

31
Q

Which financial institution does NOT have FDIC insurance?

A

investment companies

32
Q

What are the five steps to choosing a financial institution?

A

prepare a list of important features; rank your personal top 3-4 features; prepare list of institutions; conduct research for decision; make a decision

33
Q

Describe regular savings accounts (2).

A

usually involve low or no minimum balance; credit unions call them “share accounts”

34
Q

Describe interest-earning NOW accounts. (2)

A

checking account paying interest; high minimum to avoid fees

35
Q

What does CD stand for?

A

certificate of deposit

36
Q

What is a CD?

A

requires you to leave your money on deposit for a set time period; otherwise, you incur penalties

37
Q

Describe money market accounts (3).

A

requires minimum balances and earnings based on market interest rates; FDIC-insured funds; write a few checks per year

38
Q

Describe money market funds.

A

non-FDIC insured funds offered by investment companies and LICs

39
Q

Describe US Savings Bonds. (3)

A

offered by Treasury with long maturities (30 years); floating rates until 2005 but now fixed rates; redeemed series EE bonds are federal tax-free if used for college tuition and fees and held for more than 5 years

40
Q

What is yield?

A

percentage increase in value due to interest earnings

41
Q

What is compounding?

A

interest earned on interest

42
Q

The Truth in Savings Law of 1993 requires the disclosure of (4)

A

fees on deposit account; interest rate; annual percentage yield (APY); other terms + conditions

43
Q

What is the purpose of the APY?

A

to provide consistency when comparing different savings options

44
Q

What is the formula for APY?

A

100 x ($interest/$principal)

45
Q

When is the APY formula applicable?

A

when number of days in the term is 365 or when the account does not have a stated maturity

46
Q

What is the secondary formula for APY?

A

total interest earned/$deposited; APY = 100 x [ ((1+i)/m)^m - 1]

47
Q

What happens if APY < inflation?

A

means loss of purchasing power

48
Q

What is the formula for after-tax rate of return?

A

(1 - MTR) * yield on savings

49
Q

Liquidity

A

Allows you to withdraw money on short notice without penalty or fees

50
Q

Describe regular checking accounts.

A

many have minimum balances or service charges

51
Q

Describe activity accounts.

A

fees on each check and deposit.

52
Q

What are two types of checking accounts?

A

individual or joint account

53
Q

What are the 3 endorsement types?

A

blank (signature only); restrictive (“for deposit only”); special (“pay to the order of”)

54
Q

What are the six steps for writing a check?

A

record the date; write the name of the payee; record dollar amount in numbers; record dollar amount in words; sign check; fill out reason for payment

55
Q

Which trumps which on a check - the amount written in words or the amount written in numbers?

A

the amount written in words

56
Q

Where on a check is the bank routing # found?

A

lower left

57
Q

Where on a check is the account # found?

A

lower middle

58
Q

Give 4 examples for reasons why your checkbook balance and bank balance may not match up.

A

interest earned or bank fees; checks that haven’t yet cleared; deposits not yet received by bank; math errors or omitted entries

59
Q

What is a certified check?

A

personal check with guaranteed payment

60
Q

What happens if a certified check isn’t cashed?

A

money stays in account drawn on

61
Q

What is a cashier’s check?

A

Check of a financial institution you get by paying the face amount plus a fee

62
Q

What happens if a cashier’s check isn’t cashed?

A

money is deducted from account (at the time of issue)

63
Q

When is a cashier’s check required in TX?

A

when closing real estate sales

64
Q

What is a money order?

A

recipient is guaranteed funds are good

65
Q

Describe traveler’s checks.

A

sign each check twice - once when issued and once when cashed; allows you to make payments when away from home

66
Q

What is the equivalent of an electronic traveler’s check?

A

prepaid travel card

Finance 3300 (15 decks)

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