HACE 3200 1nd EditionExam #2 Study Guide Lectures: 9 - 17Lecture 9 (February 5th)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 assetso Risk-return trade-off: higher liquidity means lower returnso Spending risk: cash on hand is easier to spend- “Banks” or Deposit- type Financial Institutionso Commercial banks: Personal and business loans (First National Bank)o Savings and Loan associations Generally for home mortgageso Savings banks: Generally in Northeastern United Stateso 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 Institutionso Mutual Funds: Stocks or Bonds Short term money market mutual funds provide better % with minimal risko Stockbrokerage firms Now offer credit cards, money market mutual funds- On-line Banking and “Net” Bankso On-line banking offers account access via personal computer; convenience at a feeo “Net” banks are electronic banks that pay more for deposits, but have no local branch- Cash Management Alternativeso 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 accountso U.S. Treasury Bills- a bond, “T- bills”o U.S. Series EE Bonds- 1) Checking Accountso Demand deposit—non-interest bearing accountso Negotiable order of withdrawal (NOW) accounts—interest bearing accounts o Disadvantages: Forced balances and opportunity costs Fees associated with checking accounts- 2) Savings Accounto 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 writingo 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 investorso Money Market instruments are Forms of Debt that mature in less than one year and are very liquido Treasury bills make up the bulk of the money market instruments. Securities in the money market are relatively risk-freeo Offer return rates from 2% to 17%o Charge an administration feeo Most require a $500 to %2,000 minimum investmento Have limited check writing privileges - 6) Asset Management Accounts offered by Brokerage Firmso Brokerage firm- a stock broker’s business; charges a fee to act as intermediary between buyer and sellero 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 Loanso Automatically control cash flowso 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 monthso Are purchased at a discounto Don’t accrue periodic interest payments( you receive appreciated value @ end)o Are state and local income tax exempt- 8) U.S. Series EE Bondso Denominations from $25 to $10,000o Are purchased at half their face value: receive full value at maturity o Rate of interest varies with the marketo Not taxed at state or local level - Comparing Cash Management Alternativeso Comparable interest rates: Annual Percentage Yield (APY) expresses an annual rate if interest taking into account the effect of compounding, usually for deposit or investmentproducts (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 adepositor or lender by a financial institution, whereas annual percentage rate refers to the rate paid to a financial institution by a borrowero Tax Considerations Is your investment tax exempt or not?o Safety FDIC: Federal Deposit Insurance Corporation- Up to $250,000 per depositor- Automated Teller Machineso Fees- $1.00 to $5.00 per transaction (typically at non-affiliated ATMs)o Security: location of ATMo Liability: limited to 50 dollars if you notify the holding institution within 24 hours of theft or loss- Debit Cardso AKA: The plastic checko Advantages:- Smart Cardso Money is stored electronically on the cardo Have similar usage as debit cardso Limit Owner liability if stolen because the card doesn’t access an accounto Examples—Kinkos, UGA card, some grocery storesLecture 10 (February 7th)Chapter 4: Tax Planning and Strategies- Importance of Tax Planningo In 1913, the 16th Amendment gave Congress the right to impose the first income taxo The average American Works more than 4 months just to pay his/her taxes- Income Tax Structureo Income Tax—progressive tax meaning that the more you earn the more you payo Tax brackets -- income ranges for which the same marginal tax rate applies 10%- 39.5%- Income Tax Structure (cont’d)o Average Tax rate—average amount of every dollar you earned that was paid for federal income taxeso Effective Marginal tax rate—average amount of every dollar you earned that paid for all local, state, federal income taxes( largest, has more in it)- Paying Your Income Taxeso Withholdings --tax payment from each paycheck, determined on the basis of income and W-4 formo Quarterly estimated paymentso Payments with the tax return( the dreaded April 15th)o Withholdings from stock, retirement funds, and prize or gambling winnings- Social Security (OASDI) & Federal Insurance Contributions Act (FICA)o Old Age, Survivors and Disability Insurance (OASID) tax( aka Social Security)o Social Security- a mandatory insurance program administered by the federalgovernment that provides support in the event of death, disability, health problems, or retiremento Tax