Deck 5: Liquidity Management: Managing Current Assets and Current Liabilities

Question 1

Monica Bates received a check and endorsed it by simply signing her name on the reverse side of the check.This is called

A)a special endorsement.
B)a deposit endorsement.
C)a restrictive endorsement.
D)a blank endorsement.

Answer 1

a blank endorsement.

Question 2

From a safety perspective,which alternative below offers the best advice?

A)Make sure an account is federally insured.
B)Make sure an account is state insured.
C)Avoid any institution that is not a commercial bank.
D)Avoid using out-of-state institutions.

Answer 2

Make sure an account is federally insured.

Question 3

Money market mutual funds are best described as institutions that

A)invest only in MMDAs.
B)pool resources of many investors to purchase liquid and high-yielding securities.
C)issued by the Treasury,commercial banks,and other corporations.
D)combine short-term securities with long-term securities.
E)are established by banks and other financial institutions to help depositors manage their liquid assets.

Answer 3

pool resources of many investors to purchase liquid and high-yielding securities.

Question 4

A money market deposit account (MMDA)is

A)a limited-access savings account with a minimum balance requirement offering money market rates.
B)the statement a money market mutual fund sends you showing activity in your account.
C)any savings account at a federally-insured financial institution that offers higher rates but is not insured.
D)similar to a CD since you pay a penalty for early withdrawals.

Question 5

Which of the following statements is true concerning overdrafts?

A)An effective way to prevent them is to "overload" the account.
B)They can be avoided by arranging an automatic transfer from a savings account.
C)They are inexpensive nuisances because banks usually do not charge for overdrafts.
D)They differ from "bounced checks" in that "bouncing" a check is a mistake while an overdraft is deliberate.

Question 6

Which of the following is not a characteristic of certificate of deposit (CDs)?

A)You pay a penalty for early redemption.
B)You "lock in" (are guaranteed)the stated interest if you hold the CD until maturity.
C)They are preferred over money market deposits if you expect interest rates to fall.
D)They have a minimum maturity of three years.

Question 7

Many financial planners recommend that you hold emergency reserve assets equal to ________ months of after-tax income.

A)3-6
B)5-7
C)7-12
D)12-15

Question 8

John issued a check to Mary who signed it as a blank endorsement.Mary lost the check.If someone finds it,he/she could

A)sign his/her name under Monica's and cash the check.
B)write "for deposit only" under Monica's signature and deposit it to his/her account.
C)do nothing;the check must be made payable to him/her before it can be cashed.
D)do nothing;since he or she is neither a payer or payee.

Question 9

If spouses open a bank account with right of survivorship and one spouse dies,the funds in the account:

A)are immediately frozen until the will is probated.
B)pass in total and immediately to the remaining spouse.
C)pass immediately in a proportionate share to the surviving spouse.
D)automatically assume the status "tenants in common."

Question 10

Which of the following assets is most liquid?

A)A checking account
B)A savings account
C)A certificate of deposit (CD)
D)The above three are equally liquid.

Question 11

Which of the following is not a primary reason why many people hold cash?

A)To undertake transactions
B)To avoid credit
C)To have an emergency reserve
D)To have a store of value

Question 12

Which of the following is not true of U.S.Series EE bonds?

A)The rate on new issues is set relative to the rates on other Treasury loans.
B)Taxes on on interest can be deferred until the bond is redeemed.
C)The interest income is taxed by states and local governments.
D)Some interest is forfeited if the bonds are redeemed before five years.

Question 13

A NOW account is

A)a CD that pays interest immediately ("now").
B)a limited checking account usually only three checks a month can be written.
C)any checking account not held at a commercial bank.
D)a checking account that pays interest.

Question 14

The least effective method of protecting against overdrafts generally is to

A)maintain a larger-than-normal account balance.
B)arrange for automatic transfers from a savings account.
C)arrange for a credit-card loan to cover the overdraft.
D)ignore them since banks do not charge for overdrafts.

Question 15

Federal deposit insurance

A)protects each deposit account up to $100,000.
B)protects each depositor up to $100,000.
C)protects both the deposit and depositor up to $1,000,000.
D)is available only by depositor choice and then a small fee must be paid.

Question 16

Which of the following is not a characteristic of most passbook savings accounts?

A)An unlimited number of deposits or withdrawals each month
B)No minimum balance requirement
C)Interest rates are higher than money market rates.
D)Transactions are often recorded in a passbook.

Question 17

Holding cash in a temporary "parking place" is associated with which cash motive?

A)Undertaking transactions
B)Holding an emergency reserve
C)Holding a short-term store of value
D)Paying off credit

Question 18

From a federal income tax perspective,interest on U.S.Series EE bonds

A)is subject to state and local taxes.
B)may be deferred until redemption and may be avoided if it is used for a child's college or vocational expenses.
C)is taxable when earned.
D)is exempt from federal taxes.

Question 19

Depositors often cite ________ as the most important consideration in selecting a particular bank.

A)safety
B)low charges
C)size
D)geographical convenience

Question 20

The difference between a NOW account and a Money Market Deposit Account,it that the latter

A)pays a higher rate of interest and requires a larger minimum balance.
B)has no limit on the number of checks you can write.
C)is not covered by federal deposit insurance.
D)cannot accept electronic transfers.

Question 21

Lenny,who lives in New York City,deposited in his checking account a check from his mother,who also lives in New York City.The bank must make the funds available

A)immediately.
B)on the next business day.
C)two days after the deposit day.
D)after the check clears the Federal Reserve System.

Question 22

Lou Hinton's savings account (offering 12% simple interest)showed the following activity for the month of June:
Opening balance $2,000
6/10 Deposit 1,000
6/20 Withdrawal ( 800)6/30 Ending Balance 2,200
Interest earned in June with the FIFO method would be

A)$24.00.
B)$12.00.
C)$18.67.
D)$21.33.

Question 23

Lou Hinton's savings account (offering 12% simple interest)showed the following activity for the month of June:
Opening balance $2,000
6/10 Deposit 1,000
6/20 Withdrawal ( 800)6/30 Ending Balance 2,200
Interest earned in June with the LIFO method would be

A)$24.00.
B)$22.00.
C)$18.67.
D)$21.33.

Question 24

The more frequently interest is compounded,

A)the higher your effective yield.
B)the lower your effective yield.
C)your effective yield stays the same.
D)there is no relationship between effective yield and compounding.

Question 25

Some financial institutions offer continuous compounding.This means that

A)your effective yield will be about 20% higher than daily compounding.
B)your effective yield will be only slightly higher than daily compounding.
C)in reality they are offering only simple interest.
D)you must deposit at least $10,000 to open an account offering this feature.

Question 26

Agnes has a checking account and she has just received her March bank statement that shows an ending balance of $250.Agnes' records indicate an ending balance of $220.In looking over the data you notice that two checks Agnes wrote totaling $75 had not yet cleared the bank,while a deposit for $40 that she mailed had not been received by the bank.There also was a $5 bank service charge.To adjust her records,Agnes should

A)reduce her book balance by $5.
B)increase the bank balance by $40.
C)call the bank and tell them that their balance is incorrect.
D)do nothing,everything seems in good order.

Question 27

Lou Hinton's savings account (offering 12% simple interest)showed the following activity for the month of June:
Opening balance $2,000
6/10 Deposit 1,000
6/20 Withdrawal ( 800)6/30 Ending Balance 2,200
Interest earned in June with the day-of-deposit-day-of-withdrawal method would be

A)$24.00.
B)$28.67.
C)$18.67.
D)$21.33.

Question 28

You read that a savings account offers a 10% yield,compounded semi-annually.Your effective annual yield then is

A)10.25%.
B)11.00%.
C)9.75%.
D)5.05%.

Question 29

Lou Hinton's savings account (offering 12% simple interest)showed the following activity for the month of June:
Opening balance $2,000
6/10 Deposit 1,000
6/20 Withdrawal ( 800)6/30 Ending Balance 2,200
Interest earned in June with the minimum balance method would be

A)$20.00.
B)$22.00.
C)$30.00.
D)unknown.

Question 30

Lenny,who lives in New York City,deposited in his checking account a certified check from his mother,who also lives in New York City.The bank must make the funds available

A)immediately.
B)on the next business day.
C)two days after the deposit day.
D)after the check clears the Federal Reserve System.

Question 31

Which method of determining interest provides the largest interest amount?

A)LIFO
B)FIFO
C)Day-of-deposit-day-of-withdrawal
D)Minimum balance

Question 32

Ian's records show a cash balance of $2,000 while the bank statement shows a balance of $1,800.The difference is most likely explained by

A)unrecorded interest earned on the account.
B)deposits made after the statement period.
C)checks not cleared during the statement period.
D)a statement period less than one month.

Question 33

A "substitute check" is

A)a digital picture of your original check formated for bank processing.
B)any photocopy of an original check.
C)meant to replace an original check that has been lost or stolen.
D)issued by a credit card company to cover previous purchases.

Question 34

You deposit $1,000 in an account offering an 8% yield,compounded semi-annually.At the end of one year,your total earned interest is

A)$40.00.
B)$40.80.
C)$80.00.
D)$81.60.

Question 35

If you discover that someone has stolen your checks,you should

A)issue an immediate stop payment for each check.
B)purchase account insurance to avoid potential losses.
C)inform the bank and open a new account.
D)do nothing.

Question 36

In devising a cash management strategy,you should assume that future interest rates

A)will likely be volatile,but accurately forecasted.
B)are not likely to change from the levels of present rates.
C)will likely be volatile,and difficult to forecast.
D)will occur in some random fashion.

Question 37

Which alternative below generally offers the highest potential yield and highest risk?

A)NOW accounts
B)CDs
C)MMDAs
D)U.S.Series EE bonds

Question 38

Which method of determining interest provides the least interest amount?

A)LIFO
B)FIFO
C)Day-of-deposit-day-of-withdrawal
D)You can't tell without more information.

Question 39

Which of the following checks does not guarantee payment?

A)A personal check with a restrictive endorsement
B)A certified check
C)A cashier's check
D)A traveler's check

Question 40

A cash management strategy does not involve which of the following activities?

A)Deciding to your satisfaction what future interest rates will be
B)Balancing your desires for safety,liquidity,and yield
C)Obtaining information about alternative deposit accounts
D)Keeping as little cash as possible

Question 41

Cash serves as a relative liquid short-term store of value.

Question 42

One motive for holding cash is to undertake transactions.

Question 43

A money market deposit account does not have a fixed rate of interest.

Question 44

Many financial planners believe you should hold emergency reserves of no more than one month of after-tax income.

Question 45

Both money market deposit accounts and money market mutual funds may have federal insurance protection.

Question 46

In most cases,you have unlimited access to a passbook savings account.

Question 47

The best choice for someone who makes occasional spur-of-the-moment purchases is

A)a money market mutual fund.
B)a passbook savings account.
C)a certificate of deposit.
D)a U.S.Series HH bond.

Question 48

Money market deposit accounts are not as safe as money market mutual funds.

Question 49

A NOW account is defined simply as a checking account that pays interest.

Question 50

Federal deposit insurance insures each deposit you have with a bank up to $100,000.

Question 51

A temporary parking place for cash means holding liquid assets until the investment environment for long-term assets improves.

Question 52

An emergency reserve is held for transactions purposes.

Question 53

Pocket money refers to "pocket lines of credit" offered by major credit cards.

Question 54

Because it pays higher interest,a CD is considered more liquid than a passbook savings account.

Question 55

A money market mutual fund is a good short-term investment if you want a rather high liquid balance to make an occasional major purchase,such as an item at a flea market.

Question 56

Rates of interest on passbook savings are usually lower than rates available on other savings accounts.

Question 57

Money market deposit accounts and money market mutual funds are identical financial products.

Question 58

A money market deposit account limits both deposits and withdrawals during a month.

Question 59

During inflationary periods,cash assets serve poorly as a store of value.

Question 60

Money market mutual funds are special accounts offered by commercial banks and S&Ls.

Question 61

The following is a correct order of decreasing liquidity: pocket money,checking account,passbook savings account,money market deposit account,CD.

Question 62

You are typically responsible for the payment on stolen checks that are forged with your name.

Question 63

To minimize legal problems in the event a spousal death,many people open their checking accounts as tenants in common.

Question 64

Federal regulations prohibit banks from charging a prepayment penalty for redeeming a CD before its maturity date.

Question 65

The safest endorsement of a check is a blank endorsement.

Question 66

A traveler's check is likely to be more liquid than your personal check.

Question 67

With a right of survivorship the proceeds in a joint bank account pass to the surviving account owner.

Question 68

Banks must return your original checks on demand for a small fee.

Question 69

The IRS accepts substitute checks as proof of purchase for tax purposes.

Question 70

An overdraft and "bounced check" mean the same thing.

Question 71

A cashier's check is one of your personal checks the bank has guaranteed for payment.

Question 72

A bank reconciliation means that the end-of-month balance as show on the bank statement is the same as the end-of-month balance in the check record.

Question 73

An interest penalty is associated with a CD,but not with a money market deposit account.

Question 74

A cashier's check is written by a bank and drawn against the bank when paid.

Question 75

Many people cite convenience as the most important factor in choosing one bank over another.

Question 76

A U.S.Series EE savings bond offers reasonably high rates and good liquidity.

Question 77

The rate on new issues of U.S.Series EE savings bond five years is set at 90% of rate on 5-year Treasury securities.

Question 78

When you reconcile your monthly bank statement,any checks outstanding should be deducted from your book balance.

Question 79

A "special endorsement" transfers payment on an existing check to someone else.

Question 80

A CD enables you to "lock in" a current interest rate.