1

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

2

InstitutionsDistinctions now blurry – depositories

(banks, S&L'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

3

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

4

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 ATM’s but higher fees and new account numbers

5

6

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

7

Comparing Alternatives

Need to (1) Compare returns on same basis (2) Consider tax status (3) Safety versus riskAnnual Percentage Yield (APY) – makes non-

annual compounded rates comparableAlso need to know method used to compute

balance for interest – daily average or minimum?

8

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

9

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?

10

Electronic Funds Transfers

Receive or payout electronicallyReceive 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

11

Payment Developments

• Bank fees

• Rubber checks

• EFT’s

• Online bills

• Mailed bills

• Plastic pay

• Check 21 law

• International

12

13

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

14

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

15

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”

16

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• Can’t redeem for one year

– Within 5, forfeit 3 months interest