Chapter 4
What is a bank statement
A bank statement is an itemized listing of all transactions in your checking account that your bank provides once a month, which includes checks written, ATM transactions, debit purchases, automatic payments, deposits made, bank service charges, and interest earned.
What does a bank statement show
A bank statement shows all the transactions that occurred in a checking account during a specific period, the account balance, interest earned, and bank service charges.
What are the two forms of service charges when it comes to checking accounts?
A base service charge and additional charges for each check you write and each ATM or bank-by-phone transaction.
What is a cashier's check
A cashier's check is a check that guarantees payment and can be purchased from a bank. The bank issues a check payable to a third party and drawn on itself, not the purchaser.
What is a certificate of deposit (CD)?
A certificate of deposit (CD) is a savings instrument that typically pays a fixed rate of interest for a fixed period of time.
What is a certified check
A certified check is a check for which the bank verifies that there are sufficient funds in the account to cover the check before certifying it and guaranteeing its payment.
How is a checking account different from a savings account?
A checking account is a demand deposit account, meaning that the bank must permit these funds to be withdrawn whenever the account holder demands, while a savings account is a time deposit, expected to remain on deposit for longer periods of time than demand deposits.
What is a checking account
A checking account is a safe and convenient way to hold money and streamline point-of-sale purchases, debt payments, and other basic transactions.
What is a credit union
A credit union is a nonprofit, member-owned financial cooperative that provides a full range of financial products and services to its members. Credit unions are generally smaller than commercial banks and savings and loan associations and offer interest-paying checking accounts and a variety of savings and lending programs.
What is a money market deposit account?
A money market deposit account (MMDA) is an interest-bearing account offered at banks and other financial institutions that compete with money market mutual funds for deposits.
What is a money market mutual fund?
A money market mutual fund (MMMF) pools the funds of many small investors to purchase high-return, short-term marketable securities offered by the U.S. Treasury, major corporations, large commercial banks, and various government organizations.
What is the importance of reviewing a bank statement
It is important to review your monthly bank statement to verify the accuracy of your account records and to reconcile any differences between the statement balance and the balance shown in your checkbook ledger. The monthly statement is also a valuable source of information for your tax records.
Why is it important to understand the effects of compounding?
It is important to understand the effects of compounding because it can significantly impact the amount of interest earned on an investment over time.
What are liquid assets?
Liquid assets are assets that can be readily converted into cash with little or no loss in value. They include cash, checking accounts, savings accounts, money market deposit accounts, money market mutual funds, and other short-term investments.
Why are liquid assets considered liquid?
Liquid assets are considered liquid because they're either held in cash or can be readily converted into cash with little or no loss in value.
What are some of the convenience factors that influence people's choice of where to maintain a checking account?
Location, business hours, number of drive-thru windows, and number and location of branch offices and ATMs.
What is the minimum MMDA balance required by most banks?
Most banks require a minimum MMDA balance of $1,000 or more.
How much should most families have in liquid reserves according to post-crisis consensus?
Most families should have an amount equal to at least six months of after-tax income in liquid reserves.
Why are EMV chips becoming more common in credit and debit cards
Security concerns are increasing pressure for financial institutions to replace the common magnetic strip on credit cards with EMV chips as they offer better security to customers and issuers.
How do Series EE bonds differ from T-bills?
Series EE bonds are accrual-type securities, which means that interest is paid when they're cashed in or before maturity, rather than periodically during their lives. T-bills pay interest on a discount basis and thus are different from other savings or short-term investment vehicles.
How long do Series EE bonds earn interest at a fixed rate?
Series EE savings bonds earn interest at a fixed rate for 30 years.
How do smart savers view saving?
Smart savers recognize the importance of saving and know that savings must be managed as astutely as any security.
Why did some argue that the Fed kept interest rates too low for too long?
Some argue that the Fed kept interest rates too low for too long, which slowed the economy's long-term recovery from the financial crisis of 2007-2008.
What are some important considerations when choosing a savings vehicle?
Some important considerations include your risk tolerance, the length of time you can leave your money on deposit, and the level of current and anticipated interest rates.
What are some popular types of liquid assets?
Some popular types of liquid assets include cash, interest checking accounts, savings accounts, money market deposit accounts, certificates of deposit (CDs), U.S. Treasury bills (T-bills), and U.S. savings bonds (EE).
What are some of the types of accounts that banks may offer when it comes to checking accounts?
Special accounts that combine such features as credit cards, free checks, and reduced fees.
What are stop-payment orders, and how much do they typically cost?
Stop-payment orders are check-related charges that typically cost $20 to $35.
How has technology impacted the financial services industry
Technology has allowed consumers to do all their banking online or through mobile applications, making it easier for people to access their accounts and complete transactions from anywhere. This has also enabled financial institutions to offer more services and bundle products at competitive prices.
What types of savings bonds are issued by the U.S. Treasury?
The U.S. Treasury issues Series EE bonds and Series I savings bonds.
What is the U.S. personal saving rate average after the financial crisis of 2007-2008?
The U.S. personal saving rate increased to an average of about 5 percent of after-tax income.
What is the average interest rate on five-year Treasury bonds from 2008 to the spring of 2018?
The average interest rate on five-year Treasury bonds from 2008 to the spring of 2018 fell to only 1.71 percent.
What are the benefits of lower interest rates?
The benefits of lower interest rates include reduced costs of financing the federal budget deficit and support for the "too big to fail" banks.
What is the biggest drawback to using debit cards
The convenience of debit cards may be their biggest drawback because they make it easier to overspend. If there's a problem with a purchase, you cannot stop payment like you can with a check or a credit card.
What are the costs of lower interest rates?
The costs of lower interest rates include reduced interest income for savers and investors and the risk of deflation.
What is the effect of the drop in interest rates on personal finances?
The drop in interest rates has significant implications for personal finances. It affects the return on savings and investments, and borrowers may benefit from lower interest rates, while lenders may suffer from reduced interest income.
What happens to the effective rate of interest when interest is compounded more frequently?
The effective rate of interest increases when interest is compounded more frequently.
What are the factors that determine the amount of interest you'll earn on your savings or interest-bearing checking account?
The factors that determine the amount of interest you'll earn on your savings or interest-bearing checking account are the frequency of compounding, the balance on which interest is paid, and the interest rate paid.
What is the federal Truth in Savings Act of 1993?
The federal Truth in Savings Act of 1993 requires all depository financial institutions to clearly disclose fees, interest rates, and terms on both checking and savings accounts.
What is the financial services industry
The financial services industry comprises all institutions that offer financial products and services such as checking and savings accounts, credit cards, loans and mortgages, insurance, mutual funds, financial planning, securities brokerage, tax filing and planning, estate planning, real estate, trusts, and retirement.
What are the four factors that may cause discrepancies between the checkbook ledger balance and the bank statement balance
The four factors that may cause discrepancies between the checkbook ledger balance and the bank statement balance are outstanding checks, deposits not yet credited to the account, service charges not yet deducted from the account, and interest earned not yet added to the account.
What is the future value factor in Appendix A?
The future value factor in Appendix A is used to calculate the future value of a lump sum investment.
What is the future value formula?
The future value formula is: FV = PV x (1 + i)^n.
What is the future value interest factor for an annuity in Appendix B?
The future value interest factor for an annuity in Appendix B is used to calculate the future value of ongoing savings.
How is the interest on T-bills calculated?
The interest on T-bills is equal to the difference between the purchase price paid and their stated value at maturity.
How often is the interest rate for Series EE bonds set?
The interest rate for Series EE bonds is set every six months in May and November and changes with prevailing Treasury security market yields.
What is the key to success when it comes to saving?
The key to success is to establish a regular pattern of saving.
What does the law require banks to do regarding interest paid on deposit accounts?
The law requires banks to pay interest on a customer's full daily or monthly average deposit balance and prohibits them from paying interest on only the lowest daily balance or paying no interest if the account balance falls below the minimum balance for just one day.
What is the difference between the nominal rate of interest and the effective rate of interest?
The nominal rate of interest is the stated rate of interest, while the effective rate of interest is the annual rate of return that's actually earned during the period the funds are held.
What is the purpose of a PIN in debit card transactions
The personal identification number (PIN) issued with a debit card verifies that the user is authorized to access the account.
What is the purchase price of Series EE bonds?
The purchase price of Series EE bonds is a uniform 50 percent of the face amount (thus a $100 bond will cost $50 and be worth $100 at maturity).
What is the purpose of a checking account comparison chart?
The purpose of a checking account comparison chart is to compare information on daily balance requirements, service fees, interest rates, and the services offered by different banks.
What is the purpose of efficient cash management?
The purpose of efficient cash management is to ensure adequate funds for both household use and an effective savings program.
What is the standard annual percentage yield (APY) formula?
The standard annual percentage yield (APY) formula is used by banks to state the interest paid on accounts, taking compounding into account.
What are the three ways that a couple or partners can open a checking account?
They can each open individual checking accounts, open a joint account that requires both signatures on all checks, or open a joint account that allows either one to write checks.
What are some of the ways that banks may charge fees for ATM or bank-by-phone transactions?
They may charge fees for transactions that exceed a specified number or for using the ATM of another bank that is not a member of the same network.
How can you avoid frivolous, impulsive expenditures?
To avoid frivolous, impulsive expenditures, you can write checks only at certain times of the week or month and avoid carrying your checkbook or debit card when you might be tempted to spend money for unplanned purchases. Additionally, you can set a maximum spending limit beforehand when you're going shopping.
How can you keep your online banking secure
To keep online banking secure, customers should use strong passwords, avoid public Wi-Fi, keep their computer software up to date, and be wary of phishing emails and scams.
What is a common requirement to avoid service charges for maintaining a checking account?
To maintain a minimum balance of $500 to $1,000 or more.
What are traveler's checks
Traveler's checks are checks that can be purchased at commercial banks and most other financial institutions. They typically come in denominations ranging from $20 to $100 and can be used to make purchases or withdraw cash in the local currency.
What is the difference between Series EE bonds and Series I savings bonds?
Unlike Series EE bonds, Series I savings bonds earn interest at a rate that is adjusted for inflation.
What are some benefits of using an ATM
Using an ATM provides customers with the ability to conduct banking transactions at any time and from any location, as well as access to cash and the ability to transfer funds between accounts.
Are T-bills free from state and local income taxes?
Yes, T-bills are free from state and local income taxes.
Can T-bills be sold at any time?
Yes, T-bills can be sold at any time (in a very active secondary market) with no interest penalty.
Can banks and other depository institutions offer any rate and maturity CD they wish?
Yes, banks, S&Ls, and other depository institutions can offer any rate and maturity CD they wish.
Can bonds be redeemed any time after the first 12 months?
Yes, bonds can be redeemed any time after the first 12 months.
Is there a penalty for redeeming EE bonds in less than five years?
Yes, redeeming EE bonds in less than five years results in a penalty of the last three months of interest earned.
How can you calculate the effective rate of interest?
You can calculate the effective rate of interest using the formula: Effective Rate = Interest Earned During the Year / Amount Invested.
Where can you open a checking account
You can have regular or interest-paying checking accounts at commercial banks, S&Ls, savings banks, credit unions, and even brokerage houses through asset management accounts.
How can you use the future value concept to calculate how much an investment or deposit will grow over time at a compounded rate of interest?
You can use the procedures described in Chapter 2 of the text to find out how much an investment or deposit will grow over time at a compounded rate of interest.
How can you calculate the future value of an annuity?
You can use the same basic procedure as the future value concept to find the future value of an annuity.
How much should you set aside each month for savings?
You should set aside an amount you can comfortably afford each month, even if it's only $50 to $100.
What is the difference between a savings bank and a savings and loan association
A savings bank is similar to a savings and loan association but is located primarily in the New England states. Most savings banks are mutual associations, meaning their depositors are their owners and receive a portion of the profits in the form of interest on their savings. Savings and loan associations, on the other hand, primarily channel the savings of depositors into mortgage loans for purchasing and improving homes, but also offer many of the same checking
Why might a seller require a certified check instead of a personal check
A seller might require a certified check instead of a personal check because they can't be absolutely sure that a personal check is good, especially for large purchases or when the buyer's bank is not located in the same area where the purchase is being made.
What is a time deposit?
A time deposit is a savings deposit that is expected to remain on deposit for longer periods of time than demand deposits.
What can account reconciliation help you avoid
Account reconciliation can help you avoid overdrafts by forcing you to verify your account balance monthly.
What is account reconciliation
Account reconciliation is the process of comparing and matching the transactions on a bank statement to the transactions recorded in your checkbook ledger to ensure the accuracy of the account balance.
What is the effect of investing $25,000 for five years at the rate of only 2.70 percent in April 2018 versus investing at the 2007 average rate of 4.43 percent?
After five years, you would have about $31,050 at the average rate and only about $28,562 at the lower rate.
What is an ATM
An ATM is a remote computer terminal that customers of a bank or other depository institution can use to make deposits, withdrawals, and other transactions such as loan payments or transfers between accounts—24 hours a day, 7 days a week.
What is an EFTS
An EFTS is an electronic funds transfer system that uses telecommunications and computer technology to electronically transfer funds into and out of bank accounts.
What is an EFTS network
An EFTS network, such as Cirrus, Star, or Interlink, allows customers to get cash from the ATM of any bank in the United States or overseas that is a member of that network.
What is an MMDA?
An MMDA is a money market deposit account that typically pays a variable rate of interest and allows you to make withdrawals at any time.
What is an MMMF?
An MMMF is a money market mutual fund that typically pays a variable rate of interest and allows you to make withdrawals at any time.
What is an asset management account
An asset management account is a type of account offered by brokerage firms that combines the features of a checking account, savings account, and investment account into one. It allows investors to easily manage their cash, securities, and other investments in a single account.
What is the importance of an ongoing savings program?
An ongoing savings program is important in personal financial planning because it is a way to accumulate funds to meet future financial goals and a cushion against financial emergencies.
What are bank-by-phone accounts
Bank-by-phone accounts allow bank customers to make various types of transactions by telephone, either by calling a customer service operator who handles the transaction or by using the keypad on a touch-tone telephone to provide instructions to the bank.
How can Bankrate.com help you find the best CD rates?
Bankrate.com can help you find the best CD rates by providing a list of the highest rates on CDs nationwide.
How can Bankrate.com help you find the best checking and savings account fees?
Bankrate.com can help you find the best checking and savings account fees by listing the fees at banks in your city.
What is Bankrate.com?
Bankrate.com is a website that lists the highest rates on CDs nationwide and also the checking and savings account fees at banks in your city.
How can using an ATM from another bank affect fees
Banks charge an average per-transaction fee of over $4.50 for using the ATM of another bank, and some also charge when you use your ATM card to pay certain merchants.
What is the average charge on a returned check?
Between $25 and $30.
How can you avoid an overdraft?
By linking your checking and savings accounts or having overdraft protection on your account.
How do CDs differ from the savings instruments discussed earlier in the chapter?
CDs differ from the savings instruments discussed earlier in the chapter in that CD funds (except for CDs purchased through brokerage firms) must remain on deposit for a specified period and an interest penalty usually makes withdrawal somewhat costly.
What is cash management?
Cash management involves the routine, day-to-day administration of cash and near-cash resources, also known as liquid assets.
Who typically buys cashier's checks
Cashier's checks are often used by people who don't have checking accounts or in situations where sellers of goods or services do not accept personal checks.
What are some large financial organizations that issue traveler's checks
Citibank, American Express, MasterCard, Visa, and Bank of America are some large financial organizations that issue traveler's checks.
What are some common savings vehicles that people use?
Common savings vehicles include regular savings or money market deposit accounts at financial institutions, commercial banks, savings and loans, savings banks, credit unions, and mutual funds.
How can consumers save more money by default
Consumers can save more money by setting up automatic transfers from their checking to their savings account. This simplifies the decision-making process and combats procrastination.
What are the factors that typically influence the choice of where to maintain a checking account?
Convenience, services, and cost.
What are some benefits of credit unions
Credit unions are run to benefit their members and therefore often pay higher interest rates on savings and charge lower rates on loans than other depository financial institutions.
How can debit cards make it easier to overspend
Debit cards make it easier to overspend because they are convenient for retailers, who don't have to worry about bounced checks, and for consumers, who don't have to write checks.
How do debit cards work
Debit cards use specially coded plastic cards to transfer funds from the customer's bank account to the recipient's account. The card can be used to make purchases at any place of business with the required point-of-sale terminals.
How many free monthly checks and transfers do depositors receive with an MMDA account?
Depositors receive a limited number (usually six) of free monthly checks and transfers with an MMDA account.
How do depository financial institutions differ from nondepository financial institutions
Depository financial institutions accept deposits from customers and offer traditional banking services such as checking and savings accounts, while nondepository financial institutions do not accept deposits and offer other financial services such as insurance and investment products.
What is the difference between depository and nondepository financial institutions
Depository financial institutions accept deposits from customers, while nondepository financial institutions do not. Depository financial institutions include commercial banks, savings and loan associations, savings banks, and credit unions, while nondepository financial institutions include brokerages, insurance companies, and mutual funds.
What is an EMV chip
EMV chips, named for its developers-Europay, MasterCard, Visa, is a chip embedded in a credit or debit card that holds encrypted cardholder information to increase security in transactions.
What is a vital element of personal financial planning?
Establishing and maintaining an ongoing savings program is a vital element of personal financial planning.
What are some examples of depository financial institutions
Examples of depository financial institutions include commercial banks, savings and loan associations, savings banks, and credit unions.
What are some examples of financial services
Examples of financial services include financial planning, securities brokerage, tax filing and planning, estate planning, real estate, trusts, and retirement.
What are some examples of nondepository financial institutions
Examples of nondepository financial institutions include brokerages, insurance companies, and mutual funds.
What is Exhibit 4.1?
Exhibit 4.1 provides representative rates of return for popular types of liquid assets and cites their descriptions.
What is Exhibit 4.6 in the text?
Exhibit 4.6 shows the relationships between interest rates and compounding periods.
What are some important things to look for in a savings account?
Federal Deposit Insurance Corporation coverage, liquidity, and no fees.
How do financial institutions compete for business
Financial institutions compete for business by offering a range of products and services at competitive prices, often bundling accounts and offering reduced fees or commissions for customers who meet certain criteria.
How much of your investment portfolio should be in savings-type instruments, according to financial planning experts?
Financial planning experts recommend keeping a minimum of 10 percent of your investment portfolio in savings-type instruments, in addition to the six months of liquid reserves noted earlier.
What is the historical interest rate range for MMMFs?
Historically, MMMFs have paid interest at rates of 1 percent to 3 percent above those paid on regular savings accounts.
How does the amount invested in short-term vehicles depend on expected interest rate movements?
If interest rates are relatively high and you expect them to fall, you would invest in long-term vehicles in order to lock in the attractive interest rates. On the other hand, if rates are relatively low and you expect them to rise, you might invest in short-term vehicles so that you can more quickly reinvest when rates do rise.
What does it mean when banks use the daily balance procedure to determine whether to levy a service charge?
If your account falls just $1 below the minimum balance just once during the month, you'll be hit with the full service charge, even if your average balance is three times the minimum requirement.
How can interest be earned on short-term investments?
Interest can be earned on short-term investments in one of two ways: through a discount basis, where the security is sold for a price lower than its redemption value, or through direct payment, where interest is applied to a regular savings account.
What is interest earned and why is it important?
Interest earned is the reward for putting your money in a savings account or short-term investment vehicle, and it's important to understand how that interest is earned.
Why should you consider the interest rates the bank offers when choosing where to maintain a checking account?
Interest rates affect how much money you can earn on the balance you have in your account.
How did interest rates change after the financial crisis of 2007-2008?
Interest rates fell dramatically in the wake of the financial crisis of 2007-2008 due to the hurting economy and the Fed's policy efforts to stimulate it with lower interest rates.
What is a NOW account?
A NOW (negotiable order of withdrawal) account is a checking account on which the financial institution pays interest.
How much will $100 monthly deposits earning 4 percent interest grow to in 20 years?
$100 monthly deposits earning 4 percent interest will grow to more than $36,500 in 20 years.
What is the average overdraft fee?
$30.
What are some important things to look for in a checking account?
No monthly fees, no limitations on the number or type of transactions, no ATM access fees, mobile and online access, and overdraft protection.
What are the advantages of online banking
Online banking allows customers to access their accounts from anywhere at any time, check balances, pay bills, and transfer funds. It also often offers more competitive interest rates and lower fees.
What is the advantage of using online banks
Online banks often offer lower fees and higher interest rates than traditional brick-and-mortar banks.
How have financial institutions changed over the past 30 years
Over the past 30 years, financial institutions have evolved from several distinct industries to one industry in which firms are differentiated more by organizational structure than by name or product offerings.
Why do people hold cash and other forms of liquid assets?
People hold cash and other forms of liquid assets for the convenience that they offer in making purchase transactions, meeting normal living expenses, and providing a safety net to meet unexpected expenses.
What are preauthorized deposits and payments
Preauthorized deposits and payments are two related EFTS services that allow you to receive automatic deposits or make payments that occur regularly.
What is regular checking?
Regular checking is the most common type of checking account, which traditionally pays no interest but service charges can be waived if you maintain a minimum balance.
What can be preauthorized for automatic payments
Regular, fixed-amount payments, such as mortgage and consumer loan payments or monthly retirement fund contributions, can be preauthorized to be made automatically from your account.
Why is saving important?
Saving is intended to preserve the value of money, ensure liquidity, and earn a competitive rate of return.
Why are savings deposits typically preferable to checking accounts?
Savings deposits earn higher rates of interest, making them typically preferable to checking accounts when the depositor's goal is to accumulate money for a future expenditure or to maintain balances for meeting unexpected expenses.