cash management
Decisions related to investments or one year or less in duration
objectives of cash management
1) managing transaction needs
2) preparing for cash emergencies
3) making a temporary investment
5-8 months
How much should you hold in cash?
False
True or False. Accounts that are more liquid usually pay lower rates of interest but have lower monthly service charges and fees.
14 years
You have a balance of $1000 and an APR or 16%. Your minimum payment is $15 per month. If you continue to make minimum payments, how long does it take
True
The opportunity cost of holding cash is the higher rate or return on other investments
False
Cash management is the same as checking account management
Depository institutions
Examples of these are commercial banks, savings institutions, and credit unions
Depository institutions
Financial institutions that obtain funds from customer deposits. The primary source of funds comes from consumer deposits and the primary source of income comes from interest on loans
Commercial bank
Gets its funds from checking and savings accounts deposits and uses the money to provide a wide array of financial services, including business and personal loans, mortgages and credit cards
Savings and loan associations
A depository institution that receives funds primarily from household deposits and uses most of its funds to make home mortgage loans
Mutual savings institution
A savings institution owned by its depositors
Credit union
A nonprofit depository institution owned by its depositors. Can offer lower loan rates and higher interest on deposits due to reduced coasts of operations
Nondepository institutions
Examples include mutual fund companies, life insurance companies, brokerage firms and other financial services firms.
Mutual fund
A nondepository financial institution that sells shares to investors and then invests the money in financial assets
Life insurance company
A nondepository financial institution that obtains funds from premiums paid for life insurance, invests in stocks and bonds, and makes mortgage loans.
Brokerage firm
A nondepository financial institution that helps its customers to buy and sell financial securities
products, price, people, place
4 P's for evaluating financial institutions
Demand deposits
Deposit accounts, such as checking accounts, from which money can be withdrawn with little or no notice to the financial institution
Regular checking account
Checking account that does not pay interest and requires the payment of a monthly service charge unless a minimum balance is maintained in the account
Negotiated order of withdrawal account
A type of checking account that pays interest
Time deposit account
A savings account from which the depositor may not withdraw money, without penalty, until after a certain amount of time has passed
Certificate of deposit (CD)
An account that pays a fixed rate of interest on funds left on deposit for a stated period of tim
Maturity date
For a CD, the date on which the depositor can withdraw the invested amount and receive the stated interest
Money market mutual fund
A mutual fund that holds a portfolio of short-term, low-risk securities issued by the federal government, its agencies, and large corporations and pay investors a rate of return that fluctuates with the interest earned on the portfolio
Monet market account
A savings account which pays interest that fluctuates with market rates on money market securities
U.S. savings bonds
Bonds issued by the U.S treasury that pay interest that fluctuates with current Treasury security rates and are exempt from state and local taxes
Discount bonds
Bonds that sell for less than their face value
Rule of 72
Method of calculating the time for a sum of money to double by dividing 72 by the rate of interest earned on the funds
Annual percentage yield (APY)
The amount of interest paid each year, given as a percentage of the investment. This makes it possible to compare interest rates across accounts with different compounding periods
closed-end credit
Loans for a specific purpose paid back in a specified period of time, usually with monthly payments
open-end credit
preapproved continuous loan that can cover many purchases and usually requires monthly partial payments
credit limit
preapproved maximum amount of borrowing for open-end credit account
cash advance
a cash loan from credit card account
travel and entertainment card
credit card that requires payment of the full balance each billing cycle
annual percentage rate (APR)
standardized annual cost of credit, including all mandatory fees paid by the borrower, expressed as a percentage rate
teaser rates
short-term below-market interest rate intended to encourage new customers to apply for a credit card
finance charge
the dollar amount of periodic interest charged by the lender on a credit account
periodic rate
the nominal rate divided by the number of billing periods per year
finance charge
periodic rate x account balance owed
fixed-rate loan
loan for which the rate of interest remains the same throughout the term of the loan
variable-rate loan
loan for which the rate of interest varies periodically with a changing market rate, such as the prime rate
single-payment loan
a loan that requires the repayment of interest and principal in a single payment at a specified date in the future
principal
the original amount borrowed or invested in loans
installment loans
a loan that requires repayment in equal periodic installments which include both interest and principal
default
failure to meet the terms of a loan agreement, as when payments are not made in a timely fashion
acceleration clause
a loan term that requires immediate repayment of the total amount due on an installment loan that is in default
prepayment penalty
a fee charged to the borrower when a loan balance is repaid before the end of the loan term
secured loan
a loan that includes a pledge of collarteral
lien
public notice of a right to real property
home equtiy
the market value of a home minus the remaining mortgage balance
consumer finance company
a non depository institution that makes loans to riskier consumers
sales finance company
a non depository institution that makes consumer loans to buyers of products offered through its parent company
promissory note
legal contract that specifies the terms and conditions of the borrower's agreement to repay a sum of money
rule of 78
a mathematical formula used to calculate the amount of interest remaining to be paid on an add-on installment loan
balloon loan
a loan for which regular installment payments are calculated using a amortization period, but a single large payment is required after a shorter period of time to repay the balance in full
depreciation
the decline in value of an asset over time due to wear and tear, obsolescence, and competitive factors
sticker price
the manufacturer's suggested retail price for a new vehicle, including manufacturers installed accessories and options
dealers invoice price
the price that a dealer pays to purchase a new vehicle from the manufacturer
closed-end lease
lease in which the lessor bears the risk that the value of the car at the end of the term is less than originally estimated
open-end lease
Lease in which the lessee is responsible for the additional depreciation at the end of the lease term if the value of the car is less than originally estimated
lemon laws
state laws that protect consumers against chronically defective vehicles
property tax rate
local tax on real estate proportional to value
assessment ratio
proportion of market value used to calculate assessed value of real estate on which the property tax rate will be assessed
mortgage insurance premium
insurance charged to a mortgage borrower to protect the lender against the risk of borrower default
closing costs
transaction costs paid at the closing of a home purchase
conventional mortgage
a fixed-rate, fixed term, fixed payment mortgage loan
adjustable-rate mortgage
mortgage loan with an interest rate that, by contract, varies over time with market conditions
interest rate caps
caps on annual and lifetime increases in an ARM interest rate
negative amortization
addition to loan balance that occurs when the monthly payment is insufficient to cover the monthly interest costs
graduated payment mortgage
mortgage that allows for gradually increasing payments over the life of the loan, resulting in negative amortization during the early years
lender buy-down mortgage
mortgage that imposes a schedule of increasing interest rates over the life of the loan, resulting in gradually increasing payments
growing equity mortgage
a mortgage whose payments increase over time, with the increase applied to reduce the balance owed on the loan
shared appreciated mortgage
mortgage that gives a lender the right to a proportion of the increase in the value of the home in return for a lower rate or interest
reverse annuity mortgage
an arrangement in which the homeowner sells equity in a home in return for a stream of income but retains the use of the home
refinancing
obtaining a new mortgage to pay off a previous, usually higher-rate mortgage
escrow account
a reverse account held by the mortgage lender in which it collects a monthly repayment of property taxes and insurance and then pays these bills as they come due
liability risk
the risk that you will be held financially responsible for losses to another person or that person's property
law of large numbers
a principle holding that, for large pools of identical risks, the risk that actual losses per person will be greater than predicted decreases as the size of the pool increases
premium
the price an insurer charges a policyholder for insurance protection
rider
addendum to an insurance policy that requires payment of additional premium in return for additional specified insurance coverage
principle of indemnity
the principle that insurance will only reimburse the policyholder for actual losees
deductible
the amount of a loss that must be paid by an insured before the insurance company will pay any insurance benefit
umbrella policy
a supplemental personal liability insurance policy