Personal Finance - Chapter 4
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. They are issued in various denominations by the U.S. Treasury. Series EE bonds earn interest at a fixed rate for 30 years. They are backed by the full faith and credit of the U.S. government and can be replaced without charge in case of loss, theft, or destruction. Bonds can be redeemed any time after the first 12 months, although redeeming EE bonds in less than 5 years results in a penalty of the last 3 months of interest earned.
Cashier's Check
is a check that is drawn on the account of a financial institution and backed by the creditworthiness of the institution. Due to the reduced risk of nonpayment, it is often required by sellers in lieu of a personal check. To obtain such a check, visit the financial institution and pay a fee of $5 to $15 per cashier's check.
Deposit Insurance
is an insurance program, usually offered at the federal level, that protects the funds of depositors against the failure of an insured depository institution. Deposits held in insured commercial banks, savings and loan associations, and saving banks are protected by the Federal Deposit Insurance Corporation (FDIC), while those held in insured credit unions are covered by the National Credit Union Administration (NCUA). As an account holder, you know whether your deposits are insured, the limits of the coverage for your account, and possible correcting strategies should your balance exceed the insured balance.
Simple Interest
is interest that is paid only on an account holder's deposited funds and not on any previously earned interest. A simple interest savings account will pay interest only on funds deposited into the account and not on any interest earned in prior periods. In contrast, account holders owning accounts that earn compound interest will be paid interest on both their deposited funds and interest earned in previous periods.
Demand Deposit
is the general name given to a checking account deposit for which withdrawn balances must be honored, or paid, by the depository institution immediately upon demand by the account holder. Account holders may give this notice of their desire to withdraw funds by writing a check, making a withdrawal from an ATM, or using a debit card. This notification period can contrast greatly when holding funds in time deposits. Although this provision is rarely enforced, depending upon the terms of the account, some time deposits may require 3 to 60 days' notice to the depository institution of the account holder's desire to withdraw funds. This difference in the availability of a depositor's funds helps to explain why interest rates paid on interest-earning demand deposits are substantially lower than those paid on savings (time) deposits. Financial institutions pay lower interest rates when the account holder's funds can be withdrawn immediately, and pay higher rates on accounts for which account holders agree to commit their funds for longer periods of time and cannot withdraw as quickly.
Time Deposit
is the general name given to deposits held by investors who are willing to invest their funds for longer periods of time and interested in earning higher interest rates than are available on demand deposits. In general, depositors receive higher rates of interest on their time deposits than on their demand deposits because time deposits are less liquid than demand deposits. Demand deposits are so-called because funds withdrawn from an account holder's demand deposit account must be paid on demand, or honored, immediately.
Compound Interest
is the interest earned on interest from prior periods.
Account Reconciliation
is the process of comparing the balances in the bank's records with those in the account holder's ledger for the purpose of identifying possible errors in recording checks or deposits.
Cash Management
is the term applied to the practice of routinely managing an individual's or family's cash and near-cash assets, including the selection and use of checking and savings accounts, certificates of deposit (CDs), money market demand and mutual fund accounts (MMDAs and MMMFs), and asset management accounts (AMAs). Because these accounts tend to be changed only rarely, mistakes made in selecting, using, and managing (or neglecting) these accounts can have significantly negative effects on your current income and wealth position.
Overdraft
occur when an account holder withdraws more than the account's current balance. This can occur when the account holder bounces a check, attempts to use an ATM to withdraw an amount greater than the account balance, or makes an excessively large payment using a debit card. Depending upon the terms of the account, the circumstances of the transaction, and the account holder's relationship with the financial institution, the penalty for an overdraft can range from an insufficient funds (NSF) penalty fee to criminal prosecution.
