Chapter 5 Flashcards by Bhargav Arimilli

What is the best strategy at straight cash management?

envelope system

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What are the pros of the envelope system?

always have cash for bills

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What are the cons of the envelope system?

may lose envelope with cash

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What is the best strategy at maximizing incentives?

credit cards with bonus

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What are the pros of credit cards with bonus?

earn bonus miles or credits

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What are the cons of credit cards with bonus?

may go over your budget

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What are four common mistakes in managing cash?

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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What are two paths to overspending?

liquidate savings or borrowing money

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What are the four types of financial services?

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

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Give 2 examples of savings services.

time deposits in savings; CDs

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Give 3 examples of cash availability/payment services.

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

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

$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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What is the liability for a credit card?

$0 liability for fraudulent purchases if reported within 2 days

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What are three examples of opportunity costs involving financial services?

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

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What are three ways the Fed can increase money supply?

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

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Mutual savings banks specialize in

savings accounts and mortgage loans

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Mutual savings banks are owned by

their depositors

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Mutual savings banks are common in

the Northeast

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

False, they result in higher interest rates.

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Credit unions are owned by

users.

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What is the profit status of credit unions?

non profit

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Which institution has the lowest loan rates?

credit unions

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Which institution has the highest savings rate?

credit unions

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FDIC stands for

Federal Deposit Insurance Corporation

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The FDIC provides

deposit insurance which guarantees the safety of cash at banks

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

$250,000

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

$500,000

Give six examples of high-cost financial services.

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

Give three examples of non-deposit institutions.

mortgage companies; life insurance companies; investment companies

The products of investment companies are called

mutual funds

Which financial institution does NOT have FDIC insurance?

investment companies

What are the five steps to choosing a financial institution?

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

Describe regular savings accounts (2).

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

Describe interest-earning NOW accounts. (2)

checking account paying interest; high minimum to avoid fees

What does CD stand for?

certificate of deposit

What is a CD?

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

Describe money market accounts (3).

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

Describe money market funds.

non-FDIC insured funds offered by investment companies and LICs

Describe US Savings Bonds. (3)

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

What is yield?

percentage increase in value due to interest earnings

What is compounding?

interest earned on interest

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

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

What is the purpose of the APY?

to provide consistency when comparing different savings options

What is the formula for APY?

100 x ($interest/$principal)

When is the APY formula applicable?

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

What is the secondary formula for APY?

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

What happens if APY < inflation?

means loss of purchasing power

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

(1 - MTR) * yield on savings

Liquidity

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

Describe regular checking accounts.

many have minimum balances or service charges

Describe activity accounts.

fees on each check and deposit.

What are two types of checking accounts?

individual or joint account

What are the 3 endorsement types?

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

What are the six steps for writing a check?

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

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

the amount written in words

Where on a check is the bank routing # found?

lower left

Where on a check is the account # found?

lower middle

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

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

What is a certified check?

personal check with guaranteed payment

What happens if a certified check isn't cashed?

money stays in account drawn on

What is a cashier's check?

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

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

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

When is a cashier's check required in TX?

when closing real estate sales

What is a money order?

recipient is guaranteed funds are good

Describe traveler's checks.

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

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

prepaid travel card