Deck 5: Cash or Liquid Asset Management

Question 1

Cash and investments that can be easily converted into cash are termed

A) capital assets.
B) liquid assets.
C) illiquid assets.
D) depositable assets.
E) None of the above are correct.

Answer 1

liquid assets.

Question 2

When you are considering different investment options and want to maximize your returns, be sure to compare the investments'

A) quoted rates.
B) APRs.
C) APYs.
D) None of the above.

Answer 2

APYs.

Question 3

What is the name of an investment company that raises funds from investors, pools the money, and invests in stocks or bonds?

A) stockbrokerage firm
B) bond brokerage firm
C) mutual fund firm
D) securities fund firm
E) None of the above are correct.

Answer 3

mutual fund firm

Question 4

It is always a wise financial decision to wait until you are earning a substantial amount of money before you start establishing a disciplined financial plan for your future.

Question 5

Keeping your funds in liquid assets is riskier than keeping them in illiquid assets and therefore investors require a higher expected rate of return on liquid assets.

Question 6

When you automate your savings you are less likely to spend those dollars because they never become part of the funds in your checking account.

Question 7

Online banking makes cash management and budgeting more complicated.

Question 8

How do you compare cash management alternatives to determine which is best for you?

A) Compare returns using comparable interest rates.
B) Take into account their tax status.
C) Consider their safety or risk.
D) All of the above are correct.

Question 9

Because liquid assets can be turned into cash quickly and with little loss, they have little risk associated with them and therefore provide a low rate of return for the consumer.

Question 10

Which of the following characteristics apply to liquid assets?

A) They are characterized by low returns.
B) They involve low risk.
C) The temptation to spend is greater.
D) All of the above are correct.

Question 11

The deregulation of the 1980s has allowed brokerage firms to offer traditional banking services, and has also let banks offer services traditionally found only at investment companies.

Question 12

What is involved with proper cash management?

Question 13

Liquid assets allow you to cover unplanned expenses without having to interrupt your long-term investments or liquidate any tangible assets.

Question 14

With online banking you have access to your accounts, and are able to conduct business transactions through the internet, your mobile phone or some other online device.

Question 15

Why are liquid assets important in cash management?

Question 16

Liquid assets or funds are important to

A) cover unplanned expenses.
B) prevent interrupting your long-term investments.
C) prevent overdrafts in checking accounts.
D) cover some planned expenses.
E) All of the above are correct.

Question 17

Deposit-type financial institutions are commonly referred to as mutual funds and brokerage firms.

Question 18

The Truth in Savings Act of 1993

A) helps investors compare interest rates on investment options.
B) requires that all institutions publish only annually compounded APRs.
C) ensures that all investments are federally insured.
D) All of the above are correct.

Question 19

The ________ converts interest rates compounded for different periods into comparable annual rates, allowing you to compare interest rates easily.

A) APR
B) APY
C) YTD
D) YAY

Question 20

Credit unions and Internet-only banks typically offer more attractive interest rates to both borrowers and savers.

Question 21

Money market mutual funds provide attractive competition for bank deposits because

A) their low fees are affordable for almost anyone.
B) they are convenient to purchase and use.
C) their short term, higher returns are generally regarded as practically risk-free.
D) they are fully insured.
E) None of the above are correct.

Question 22

NOW accounts offer an option to traditional demand deposits. All of the following are characteristics of NOW accounts except one. Which is it?

A) You must generally maintain high minimum balances.
B) There is a monthly fee associated with them.
C) The interest rate is generally higher than other savings accounts.
D) The interest rate is generally lower than other cash management alternatives.

Question 23

Explain the advantages of credit unions. Are there any disadvantages to them?

Question 24

Savings accounts are insured at the ________ level.

A) local
B) state
C) federal
D) All of the above are correct.
E) None of the above are correct

Question 25

Of the following, which one is not an advantage of a CD as a cash management alternative?

A) fixed interest rate, beneficial if interest rates drop
B) wide selection of maturities
C) is insured
D) liquidity
E) convenient to purchase

Question 26

Which of the following financial institutions were originally established to provide mortgage loans to depositors?

A) commercial banks
B) savings and loan associations
C) internet banks
D) credit unions
E) None of the above are correct.

Question 27

Pick the advantage of a certificates of deposit from this list of possibilities.

A) The interest paid is compounded daily.
B) Early withdrawals after 30 days do not incur a penalty.
C) Interest rates are generally higher than typical savings accounts.
D) They earn the APY and not the APR.

Question 28

One of the advantages of T-Bills is that they are exempt from federal taxes but subject to state income taxes.

Question 29

What are short-term notes of debt issued by the federal government commonly called?

A) T-Bills
B) T-Notes
C) T-Bonds
D) T-Accounts
E) None of the above are correct.

Question 30

Money market mutual funds provide an alternative to traditional liquid investments offered by financial institutions. Advantages of MMMFs include which of the following?

A) high interest rates
B) check-writing privileges
C) minimal risk
D) convenience--deposits made through payroll deductions
E) All of the above are correct.

Question 31

The interest rate earned on a money market deposit account is generally higher than the interest earned on a Bank savings account.

Question 32

Which of the following financial institutions is a not-for-profit organization that is open only to members of that institution and tends to offer more favorable interest rates to borrowers and savers?

A) savings bank
B) commercial bank
C) savings and loan association
D) credit union
E) None of the above are correct.

Question 33

Money Market Deposit Accounts enjoy one advantage over savings accounts found in commercial banks. This advantage is

A) a variable rate that is generally higher.
B) lower fees and smaller minimum balances.
C) greater liquidity.
D) unlimited check-writing privileges.

Question 34

What is another name for an interest-bearing checking account?

A) demand deposit
B) IBC
C) NOW
D) CWI
E) none of the above

Question 35

What are the four questions you should answer when looking for a financial institution?

Question 36

What is the name for comprehensive financial services packages offered by brokerage firms?

A) asset management accounts
B) comprehensive management accounts
C) platinum management accounts
D) consolidated management accounts
E) None of the above are correct.

Question 37

Once you have examined a financial institution's service and convenience you will want to ask three questions about their cash management alternatives. What are they?

Question 38

Negotiable Order Of Withdrawal (NOW) accounts require consumers to keep a minimum balance in the account. This balance represents the ________ cost of those funds; in that, they cannot be used elsewhere.

A) optional
B) opportunity
C) liquidity
D) extraneous
E) None of the above.

Question 39

A savings alternative that pays a fixed rate of interest while keeping your funds on deposit for a contracted period of time that can range from 30 days to several years is called a

A) demand deposit.
B) negotiable order of withdrawal deposit.
C) term deposit.
D) certificate of deposit.
E) None of the above are correct.

Question 40

Financial institutions that provide traditional checking and savings accounts are commonly referred to as

A) deposit-type financial institutions.
B) non-deposit type financial institutions.
C) personal depository institutions.
D) financial brokerage companies.
E) None of the above are correct.

Question 41

What is the importance of the APY?

Question 42

You are examining two different MMMFs. Fund A is tax-exempt and pays 5%. Fund B is taxable and pays 6%. You live in a state that imposes no income taxes and are in a 28% federal tax bracket. At what tax rate would the two funds have identical yields?

A) 16.67%
B) 17.76%
C) 20.23%
D) 28.00%
E) cannot determine from the information provided

Question 43

You have $5,000 in a 36 month Certificate of Deposit that has an APR of 3.75%. If inflation averages 4.25% during these 36 months, what is the real return on your CD?

A) 3.75%
B) 8.0%
C) negative .50%
D) negative 8.0%

Question 44

Please choose the method to use when calculating the after-tax return.

A) taxable return (1 + marginal tax rate) ‑nontaxable return
B) taxable return (marginal tax rate ‑1) ‑nontaxable return
C) nontaxable return (1 ‑marginal tax rate) + taxable return
D) taxable return (1 ‑marginal tax rate) + nontaxable return
E) nontaxable return (1 + marginal tax rate) ‑taxable return

Question 45

The APY can never be the same as the APR.

Question 46

When comparing returns on cash management investment alternatives, it is important to make sure that the rates you compare are all on the same tax basis.

Question 47

Briefly describe each of the cash management alternatives discussed in this chapter.

Question 48

The National Credit Union Association is a federal agency that insures deposits at credit unions.

Question 49

If you only use your Debit Card and ATM card and rarely write paper checks, overdraft protection is still a good thing to have.

Question 50

You are examining two different MMMfs. Fund A is tax-exempt and pays 7%. Fund B is taxable and pays 9.5%. You live in a state that imposes no income taxes and you are in the 25% federal tax bracket. Which of these two alternatives is better?

A) Find A is the better choice.
B) Fund B is the better choice.
C) Fund A and Fund B are equal so they both are a wise choice.
D) Neither Fund A nor Fund B are wise choices.

Question 51

What is the FDIC?

A) Federal Deposit Insurance Corporation
B) Federal Deposit Insurance Collective
C) Federal Depository Insurance Committee
D) Federal Department of Insurance and Compensation
E) None of the above are correct.

Question 52

With the Check 21 Law, there is really no reason to reconcile your check book anymore.

Question 53

You are considering an MMMF. The fund is taxable and pays 8.5% interest. If your top federal tax bracket is 25% and you live in a state that doesn't impose income taxes, what after-tax return would you realize from this investment?

A) 6.375%
B) 2.125%
C) 7.4375%
D) 8.25%

Question 54

The APY is the APR after taxes.

Question 55

List the common deposit-type financial institutions.

Question 56

When you use your Debit Card or ATM card, you should enter the transaction into your check register.

Question 57

A tax free investment will always have a higher after-tax return than a taxable investment.

Question 58

You are considering the purchase of one of two different investments. Investment A is tax exempt and pays 6%. Investment B is taxable and pays 8.33%. You live in a state that imposes no income taxes and are in a 28% federal tax bracket and want to earn the highest after tax return possible. Which of the following is true? (round to two decimal places)

A) Investment A is preferred.
B) Investment B is preferred.
C) Investments A and B have identical after tax yields.
D) Investments A and B have identical APYs.
E) Not enough information has been provided.

Question 59

With the new Check 21 Law, it is important to make sure that funds are available immediately in your checking account because checks clear automatically and funds are withdrawn immediately.

Question 60

Why is it important to convert interest rates into the APY on different accounts and with different banks?

A) Some banks and accounts pay higher advertised rates.
B) The same advertised rate will vary with different compounding periods.
C) The Truth in Savings Act of 1993 omits this comparison.
D) With FDIC Banks it is not necessary to convert interest rates for comparison.

Question 61

Your bank, First Bank, charges you $1.50 every time you use an ATM that is not owned by them. Unfortunately, there is no First Bank ATM near your school. There is a Second Bank ATM in the Student Center, which you use several times a week to withdraw $10 at a time for lunch, video games, etc. What is the best piece of advice regarding these transactions?

A) They will make it hard to balance your account since these transactions won't show up on your monthly statements.
B) They're OK as long as you enter the transactions in your check register.
C) Avoid them since you are effectively paying 15% interest to access your cash.
D) Make sure you have overdraft protection on your account.

Question 62

A travelers check is typically less liquid than a personal check.

Question 63

Barbara Stallins had her bank certify one of her personal checks as being good. Which type of check has been issued?

A) traveler's check
B) certified check
C) cashier's check
D) money order
E) audited check

Question 64

Four banking conveniences are listed below. Which one is not typical?

A) safety deposit boxes
B) online banking services
C) direct deposit
D) overdraft protection
E) All of the above are typical banking conveniences.

Question 65

Many banks offer free checking accounts. What may be the opportunity costs associated with free checking?

A) low interest rates
B) overdraft protection
C) high minimum balance requirements
D) Both A and C are correct answers.

Question 66

A certified check is a personal check that has been certified as being good by the financial institution on which it is drawn.

Question 67

Overdraft protection is an automatic loan made to your checking account whenever your account does not contain enough cash to cover the checks that you have written against it.

Question 68

Electronic funds transfer applies to which of the following?

A) debit cards
B) smart cards
C) direct deposit
D) ATM
E) All of the above are correct answers.

Question 69

Tony just received his checking account statement from his bank. He has a NOW account with free checking that pays 0.75% APR on the balance and requires a $500 minimum balance. His statement shows that he currently has a balance of $3,950. In looking at his statement he notices that his car payment check for $400 is still outstanding, and that his recently received payroll deposit of $3,600 had not posted at the time the statement was created. His normal living expenses average $1,500 per month including his car payment. Other than his car loan, he rarely writes any checks as he prefers to use his debit card and ATM card for day-to-day living expenses. He pays his credit card balance in full every month. Other than his checking account he does not own any investments. He has always dreamed of owning a house, and would like to buy one within the next five years. He has access to a 401K pension plan at work where his employer will match contributions up to 6% of his salary. He currently contributes 2% of his salary to this plan.
What would you recommend to Tony concerning his cash management?

A) He should set up EFT payments for his auto loan.
B) He should switch his current account to a Money Market Deposit Account.
C) He should give up some liquidity.
D) all the above are correct
E) all but C are correct

Question 70

When using an ATM, keep in mind that

A) computer errors can occur.
B) it is never safe to deposit cash in an ATM.
C) you should report electronic transaction mistakes to the bank immediately.
D) human problems in handling the transactions can occur.
E) All of the above are correct.

Question 71

With online banking and EFT, many people don't really need checks anymore. If you seldom need a paper check for transactions, what option is available to you that may be cheaper than maintaining a checking account?

A) certified checks
B) cashiers checks
C) money orders
D) both B and C are good options

Question 72

Which of the following is not a common fee arrangement for checking accounts?

A) monthly fee
B) minimum balance requirement
C) variable interest rates to reflect fee activity
D) charge per check
E) balance-dependent scaled fees

Question 73

What is the name for an automatic loan made to your checking account whenever your account does not contain enough cash to cover the checks that you have written against it?

A) no fee checking coverage
B) overdraft protection
C) automatic check coverage (ACC)
D) draft-free checking
E) None of the above are correct answers.

Question 74

A debit card is something of a cross between a credit card and a checking account.

Question 75

A debit card is the same thing as Smart Card.

Question 76

Tony just received his checking account statement from his bank. He has a NOW account with free checking that pays 0.75% APR on the balance and requires a $500 minimum balance. His statement shows that he currently has a balance of $3,950. In looking at his statement he notices that his car payment check for $400 is still outstanding, and that his recently received payroll deposit of $3,600 had not posted at the time the statement was created. His normal living expenses average $1,500 per month including his car payment. Other than his car loan, he rarely writes any checks as he prefers to use his debit card and ATM card for day-to-day living expenses. He pays his credit card balance in full every month. Other than his checking account he does not own any investments. He has always dreamed of owning a house, and would like to buy one within the next five years. He has access to a 401K pension plan at work where his employer will match contributions up to 6% of his salary. He currently contributes 2% of his salary to this plan.
How is Tony doing with his cash management?

A) He is doing pretty well since he has a lot of cash in his checking account.
B) He is doing pretty well since he pays his credit cards in full every month.
C) He is not maximizing his returns on his liquid assets.
D) He has a good checking account.
E) All but C are correct answers.

Question 77

Tony just received his checking account statement from his bank. He has a NOW account with free checking that pays 0.75% APR on the balance and requires a $500 minimum balance. His statement shows that he currently has a balance of $3,950. In looking at his statement he notices that his car payment check for $400 is still outstanding, and that his recently received payroll deposit of $3,600 had not posted at the time the statement was created. His normal living expenses average $1,500 per month including his car payment. Other than his car loan, he rarely writes any checks as he prefers to use his debit card and ATM card for day-to-day living expenses. He pays his credit card balance in full every month. Other than his checking account he does not own any investments. He has always dreamed of owning a house, and would like to buy one within the next five years. He has access to a 401K pension plan at work where his employer will match contributions up to 6% of his salary. He currently contributes 2% of his salary to this plan.
After balancing his checking account, what will his current balance be today?

A) $3,950
B) $7,550
C) $3,550
D) $7,150
E) $9,500

Question 78

Suppose that you go to a bank at which you have no account, give the bank cash, and in return obtain a check drawn against that bank which you will use to pay someone else. This is called a

A) cashier's check.
B) certified check.
C) traveler's check.
D) None of the above are correct.

Question 79

Name the three Cs of choosing a financial institution.

Question 80

For a consumer who does not have a checking account a ________ check is a means of paying for goods and services.

A) certified
B) cashier's