Chapter 6 exam 2

money management

A series of decisions made over a short term period regarding cash inflows and outflows

How does money management differ from long term investment or long term borrowing decisions

As opposed to long-term investing and borrowing decisions, money management focuses on short-term investments to achieve liquidity and adequate return.

how does a savings account compare with a NOW account

Because checks cannot be written against a savings account, it is less liquid than a NOW account. However, savings accounts pay higher interest than NOW accounts.

compare the return and liquidity of various money market investments

Checking accounts, NOW accounts, MMDAs, savings accounts, and MMFs are all liquid but have zero or low interest rates. CDs have high returns but are not very liquid. T-bills have high returns but high minimum purchase requirements. Asset management accounts are convenient but require a high minimum balance.

the three types of risk that effects money market

Credit risk: Interest rate risk: Liquidity risk:

steps should you take to determine the best allocations of your money market investments

First, anticipate upcoming bills and make sure there is money in your checking account to cover them. Second, estimate money needs in the near future and consider putting the funds for those in accounts that offer sufficient liquidity while still paying interest. Finally, invest remaining funds according to your risk tolerance.

why maintaining more liquidity during a week economy costly

If you did not have to maintain liquid funds, you could invest them and earn a higher rate of return.

why are rates on CD's higher than those on savings

Interest rates are higher on CDs to compensate investors for tying up their funds for a specified period of time. Furthermore, because there is a penalty for early withdrawal, CDs are less liquid than savings accounts.

how does money market deposit account differ from a NOW account

MMDA has a limit on the number of checks that can be written during the month and it is more liquid

When might a depositor use an MMDA

Many depositors use regular checking or NOW accounts for everyday transactions while taking advantage of MMDA's higher interest rate and using the MMDA only for large withdrawals.

What two factors affect the return on short term investments what investments should you consider to achieve liquidity and an adequate return

Return is affected by the prevailing risk-free rate and the investor's risk tolerance. Assets that are liquid may not have a high return, and assets that offer high returns tend not to be very liquid. To deal with this, consider investing in multiple money market investments with varying returns, liquidity, and maturities.

compare the intrests rates offered by a T-Bill and CDs which type is more liquid

T-bill returns earn a slightly lower return than CDs do. However, T-bills are more liquid because a secondary market exists for T-bills but not for CDs.

are MMF a risky investment , and are they liquid

Though not insured, money market funds are considered safe because they invest in very safe investments and have a very low risk of default. Money market funds offer some liquidity as investors can write a limited number of checks against their account each month.

how do you earn return on a T-bill

You earn a return on T-bills by buying them at less than face value and holding them to maturity or by selling them for more than you paid for them in the secondary market.

What is liquidity?

Your ability to cover any cash deficiencies that you may experiences that you may experience

assume that your monthly expenses will not change, but the economy is much weaker, why may you need more liquidity even if your expenses don't change

Your income might decline, which could require you to have more liquidity in order to maintain your normal spending behavior.

how is a now account different from a regular checking account

a NOW pays interest, and is less liquid than a regular checking account

what factor would most affect your choice of maturity date on a CD

a need for liquidity

what is a NOW account

a type of deposit offered by depository institutions that provides checking services and pays interests

What is asset management?

an account that combines deposit accounts with a brokerage account and provides a single consolidated statement

How does money management relate to the cash flow statement

because it determines how to use excess funds or how and where to obtain funds when they are needed.

disadvantage of maintaining a very high level of liquidity

because liquid assets tend to offer relatively low returns. For example, you can retain all of your assets in a checking account and will have very liquid assets, but you will not earn any return on your assets.

What are some ways an individual might handle a cash flow deficiency

by keeping enough cash in liquid investments such as a checking account or savings account to cover deficiencies.

what are treasury securities

debt securities issued by the U.S. government.

How is your personal cash flow statement used to help manage liquidity

determines the amount of excess or deficient funds a person will have at the end of

why is it important to have sufficient liquidity during a weak economy

if you had sufficient liquidity you wouldn't have to sell investments when the economy went bad

over draft protection

is a loan, usually at high interest rates, that a bank gives certain customers when they don't have sufficient funds in their accounts to cover checks they have written.

What is the opportunity cost of having excessive amounts of liquid funds

is that a portion of the funds could have been invested in less liquid assets, which could have earned a higher return. The relationship between the proportion of your funds invested in liquid assets and the potential return on your invested funds is inverse.

Money Market Funds (MMFs)

pool money from individual investors and invest in short-term maturity securities.

the advantages of an asset management account as well as its requirements

provides a single consolidated statement showing the ending balances and activity of all the accounts.

how to calculate the return of a T-bill

return= face value- purchase price/ purchase price

what is commercial paper

short-term debt issued by large corporations.

Why do individuals use checking accounts

so that they may pay for goods and services and have a record of doing so

what terms does financial institution specify for certificate deposits

the minimum amount to be invested, the maturity date, and an annualized interest rate.

What is the disadvantage of having funds In a checking account

they often pay no interest.

what is a T bill

treasury securities with maturities of one year or less