HACE 3200 1nd Edition Lecture 9 Outline of Last Lecture I Study Guide for Exam 1 Outline of Current Lecture I Cash or Liquid Asset Management 2 5 14 Chapter 5 Liquidity The Need for Liquidity o Liquidity offers Protection Enables you to have immediate access to funds Keeps you from tapping into investments Risks associated with liquid assets o Risk return trade off higher liquidity means lower returns o Spending risk cash on hand is easier to spend Banks or Deposit type Financial Institutions o Commercial banks Personal and business loans First National Bank o Savings and Loan associations Generally for home mortgages o Savings banks Generally in Northeastern United States o Credit Unions Similar services as banks UGA Community Credit Union You are a member of the credit union which means you have to have some sort of affiliation Often offers a lower interest rate on loans Non Deposit types of Financial Institutions o Mutual Funds Stocks or Bonds Short term money market mutual funds provide better with minimal risk o Stockbrokerage firms These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Now offer credit cards money market mutual funds On line Banking and Net Banks o On line banking offers account access via personal computer convenience at a fee o Net banks are electronic banks that pay more for deposits but have no local branch Cash Management Alternatives o Listed Most to Least liquid Checking accounts Savings Accounts Money Market deposit accounts Certificates of deposit Money Market mutual funds Cash Management Alternatives cont d o Asset Management accounts o U S Treasury Bills a bond T bills o U S Series EE Bonds 1 Checking Accounts o Demand deposit non interest bearing accounts o Negotiable order of withdrawal NOW accounts interest bearing accounts o Disadvantages Forced balances and opportunity costs Fees associated with checking accounts 2 Savings Account o Passbook accounts you kept a passbook of your accounts o Statement accounts receive monthly statements o Disadvantages Low rate of return reduced further by forced balances or service charges 3 Money Market Deposit Accounts MMDA o Alternatives to a commercial bank s savings account o Advantages Higher rates of interest Check writing o Disadvantages Higher minimum balance requirements Variable rate of interest 4 Certificates of Deposits CDs o Fixed rate if interest for a fixed period of time 30 days to years o Higher interest rates less liquidity o Have early withdrawal penalties CD insured by the FDIC up to 250 000 5 Money Market Mutual Funds MMMFs o Pool funds from many investors o Money Market instruments are Forms of Debt that mature in less than one year and are very liquid o Treasury bills make up the bulk of the money market instruments Securities in the money market are relatively risk free o Offer return rates from 2 to 17 o Charge an administration fee o Most require a 500 to 2 000 minimum investment o Have limited check writing privileges 6 Asset Management Accounts offered by Brokerage Firms o Brokerage firm a stock broker s business charges a fee to act as intermediary between buyer and seller o Stock Broker is a qualified and regulated professional who buys and sells shares and other securities through market on behalf of investors o Financial services offered Checking accounts Credit cards Loans o Automatically control cash flows o Have higher annual fees 50 to 125 o High minimum balances 5 000 7 U S Treasury Bills T Bills o Are short term 12 months o Are purchased at a discount o Don t accrue periodic interest payments you receive appreciated value end o Are state and local income tax exempt 8 U S Series EE Bonds o Denominations from 25 to 10 000 o Are purchased at half their face value receive full value at maturity o Rate of interest varies with the market o Not taxed at state or local level Comparing Cash Management Alternatives o Comparable interest rates Annual Percentage Yield APY expresses an annual rate if interest taking into account the effect of compounding usually for deposit or investment products such as a certificate of deposit It is analogous to the Annual Percentage rate APR which is used for loans The annual percentage yield is generally used to refer to the rate paid to a depositor or lender by a financial institution whereas annual percentage rate refers to the rate paid to a financial institution by a borrower o Tax Considerations Is your investment tax exempt or not o Safety FDIC Federal Deposit Insurance Corporation Up to 250 000 per depositor Automated Teller Machines o Fees 1 00 to 5 00 per transaction typically at non affiliated ATMs o Security location of ATM o Liability limited to 50 dollars if you notify the holding institution within 24 hours of theft or loss Debit Cards o AKA The plastic check o Advantages Smart Cards o Money is stored electronically on the card o Have similar usage as debit cards o Limit Owner liability if stolen because the card doesn t access an account o Examples Kinkos UGA card some grocery stores