BSAD 009 Chapter 4

Mistakes when managing cash needs

1. overspending as a result of impulse buying and overusing credit 2. having insufficient liquid assets to pay current bills 3. using savings or borrowing to pay for current expenses 4. failing to put unneeded funds in an interest-earning savings account or investment plan

What to do when interest rates are rising

1. use long-term loans to take advantage of current low rates 2. select short-term savings instruments to take advantage of higher rates when they mature

What to do when interest rates are falling

1. use short-term loans to take advantage of lower rates when you refinance the loans 2. select long-term savings instruments to "lock in" earnings at current high rates

Automatic teller machine (ATM)

a computer terminal used to conduct banking transactions

What does "banking" refer to?

a credit union, an ATM, or a phone app to transfer funds

Trust

a legal agreement that provides for the management and control of assets by one party for the benefit of another

Certified check

a personal check with guaranteed payment amount of check is deducted from your balance when the financial institution certifies the check

Debit card

a plastic access card used in computerized banking transactions

Compounding

a process that calculates interest based on previously earned interest

Money market account

a savings account offered by banks, savings and loan associations, and credit unions that require a minimum balance and has earnings based on market interest rates covered by federal insurance, but funds are NOT

certificate of deposit (CD)

a savings plan requiring that a certain amount be left on deposit for a stated time period to earn a specific rate of return there is a penalty for early withdrawal

Liquidity

allows you to withdraw your money on short notice without a loss of value or fees

Asset management account

an all-in-one account that includes savings, checking, borrowing, investing, and other financial services for a single fee (aka cash management account)

Overdraft protection

an automatic loan made to checking account customers to cover the amount of checks written in excess of the available balance in the checking account convenient but costly

Relationship of interest rates and inflation rates

as inflation rates increase, interest rates increase too

What are common payment choices?

cash, credit card, debit card, online/mobile transfer

Activity accounts

checking accounts that charge a fee for each check written and sometimes a fee for each deposit in addition to a monthly service charge but you do not have to maintain a minimum balance

Federal Deposit Insurance Corporation (FDIC)

coverage prevents a loss of money due to a failure of the insured institution up to $250,000 per depositor per insured financial institution

Prepaid debt cards

debit cards that you can "load" funds onto and use it in-stores, online, and for person-to-person payments

Indexed CD

earnings based on the stock market

brokerage firms

employ investment advisors and financial planners to serve as an agent between the buyer and seller for stocks, bonds, and other investment securities obtain earnings from commissions and fees

Who charges the highest loan rate?

finance companies - provide loans to consumers and small businesses

"Vishing"

fraud by live or automated calls

"Smishing"

fraud by texting

Rising-rate or bump-up CDs

higher rates at various intervals

What do you compare the rate of return to?

inflation rate

Deposit institutions

intermediaries between suppliers (savers) and users (borrowers) of funds commercial banks, savings & loans associations, mutual savings banks, credit unions

Regular savings account

involve a low or no minimum balance and allow you to withdraw money as needed

What are your options when you need more cash than you have available?

liquidate savings or borrow

What has the benefit of prepaid debt cards been?

lower consumer debt

Commercial banks

offer a full range of financial services; investors contribute the needed capital to operate

investment companies (mutual funds)

offer a money market fund - a combination of savings-investment plan company uses a investors' money to purchase a variety of short-term financial instruments NOT covered by federal deposit insurance

Liquid CDs

offer an opportunity to withdraw money without a penalty, usually you are required to maintain a minimum balance in the account

Non-deposit institutions

offer various financial services life insurance, investment companies (mutual funds), brokerage firms, credit card companies, finance companies, mortgage companies

What has become the fastest-grousing payment method?

prepaid debt cards

Zero-coupon CD

purchased at a deep discount with no interest payment initial deposit grows to the maturity value of the CD

How are earnings of savings measured

rate of return

What do taxes do to interest rates

reduce it

What is the most common limitation on a checking account?

required amount that must be kept on deposit to earn interest or avoid a service charge

Financial institution services

savings, payment services (demand deposits - checking), borrowing, insurance, investments

"Phishing"

scam that uses email spam or pop-up messages to deceive you into revealing your credit card number, bank account info, SSN, passwords, or other private information

Mutual savings banks

specialize in savings accounts and mortgages and are owned by depositors profits go to the depositors through higher rates on savings

Callable CD

start with higher rates and usually have long maturities if interest rates drop, the bank may "call" (close) the account after a set period and give the original deposit with an interest earnings to the saver

Rent-to-own centers

stores that lease products to consumers who can own the item if they complete a certain number of monthly or weekly payments

Rate of return (yield)

the percentage of increase in the value of savings as a result of interest earned

Annual percentage yield

the percentage rate expressing the total amount of interest that would be received on a $100 deposit based on the annual rate and frequency of compounding for a 365-day period

What is a major concern with prepaid debit cards?

there are an extensive number of fees that a user can encounter due to a few current regulations

Savings & loan associations

traditionally specialized in savings accounts and mortgages, now offer more full range services

Credit unions

user-owned, nonprofit, cooperative organizations report lower fees and lower loan rates with higher satisfaction than traditional institutions

What are the two ways debit cards can be used

with a signature like a credit card or with a PIN

How are credit cards different than debit cards?

with credit cards you are borrowing additional money rather than spending your own funds