Maddie Norton Chapter 5 Review Questions 1. What are liquid assets?

How does this category of assets relate to Principles 5: Stuff Happens, or the Importance of Liquidity and Principle 8: Risk and Return Go Hand in Hand? Liquid assets are cash and investments that can easily be converted into cash, such as checking accounts, money market funds, and certificates of deposit. It relates to Principle 5 because we all need an emergency fund so its good to have liquid assets that can be exchanged easily. It relates to Principle 8 because there is little risk, but there is little return. You also have more cash so you are more tempted to spend money. 2. Name three characteristics of liquid assets. What are the disadvantages of having too much or too little money held as liquid assets? Three characteristics is that they are easily converted to cash, its cash value stays the same, and are not risky. A disadvantage of having too much is that you are going to be tempted to spend that money. 3. What factors have affected the alternatives available to consumers for cash management? Some factors are the returns, tax status, safety or risk, and the ableness of moving money easier. 4. What is the primary advantage of automating your savings? The primary advantage is that youre less likely to spend money that never becomes part of your liquid assets reservoir. 6. What are three advantages and two disadvantages to online banking? Some advantages of online banking is personal financial management support, it is convenient, and it is efficient. Some disadvantages is the start-up time is longer, you have to adapt to online banking, and there may be bad customer service. 7. What is a credit union and what are some of its distinguishing features? Credit unions are established by a wide variety of organizations such as churches, universities, trade unions, and corporations. They are open only to members of that organization and are quite similar to commercial banks and S&Ls. Because of their tax-exempt status as not-for-profit organizations, they are generally more efficient, often pay higher interest rates, have lower fees, and have more favorable loan rates than commercial banks. 8. What is a NOW account? What are its advantages and disadvantages? A NOW( Negotiable Order of Withdrawal) account is a checking accounts on which you earn interest on your balance. Some disadvantages are a minimum balance is required, there is a monthly fee, there is an opportunity cost, and it pays less than some other alternatives for your money. A advantage is that you earn interest on your balance. 9. List three Characteristics of certificates of deposit (CDs).

Certificates of Deposits are safe and federally insured, they pay a fixed rate of interest, and keep your funds on deposit for a set period of time. 10. Describe and compare a money market deposit account (MMDA) and a money market mutual fund (MMMF). A Money Market Deposit Account is a bank account that provides a rate of interest that varies with the current market rate of interest, while Money Market Mutual Funds are mutual funds that invest in short-term notes of very high denomination. MMDAs are generally safe, have a fixed interest rate, and are convenient while MMMFs have high interest rates, check-writing privileges, limited risk due to short maturity of investments, and are convenient. However, MMDAs have a penalty for early withdrawal, fixed interest rate, and a minimum deposit required, while MMMFs have administrative fees, minimum initial investments, are not federally insured, and have a minimum check amount. 11. Describe how an asset management account works and what financial services are included. What are the disadvantages associated with this type of account? Asset Management Account are comprehensive financial services packages offered by a brokerage firm, which can include a checking account, credit and debit cards, an MMMF, loans, automatic payment of fixed payments such as mortgages, brokerage services, and a system for the direct payment of interest, dividends, and proceeds from security sales into the MMMF. Some disadvantages are it is costly, there is a minimum initial investment, and it is not federally insured. 12. Describe and compare two common federal government debt instruments: Treasury Bills and U.S. Series EE savings bonds. Treasury bills are risk free, exempt from state and local taxes, and federal taxes vary with current rates, while Saving Bonds are safe, there are no state or local taxes, it is convenient, you can redeem at any bank, and there are no sales commissions or fees. However, Treasury Bills have a low rate of return because they are risk free, while Saving Bonds have a low liquidity, long maturity, interest compounds only semi annually, there are limits on how many you can buy per year, and other investments may earn more. 13. Who would benefit the most from investing in tax-exempt securities? Why? Tax-exempt securities are more beneficial for people with a lower tax return. It is because since they pay so much they get lots in return. 16. What are electronic funds transfers (EFTs)? Describe and compare three different types of EFTs. EFTs are any financial transaction that takes place electronically. There are ATMs, Debit Cards, and Smart Cards. ATMs are convenient, but is borrowed. Debit Cards you pay with your own money and you dont have to carry cash around, but you can only spend the amount of money on the account. Smart Cards are convenient and reduce the need to carry cash.