1 Chapter 5 Cash and Liquid Assets • Liquid assets – cash or investments readily convertible to cash without loss – Checking, savings and money market accounts – Pay bills without selling long-term assets • Little risk but low returns – Need to balance risk of cash shortage against low returns
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1 Chapter 5 Cash and Liquid Assets Liquid assets – cash or investments readily convertible to cash without loss –Checking, savings and money market accounts.
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Chapter 5Cash and Liquid Assets
• Liquid assets – cash or investments readily convertible to cash without loss– Checking, savings and money market
accounts– Pay bills without selling long-term assets
• Little risk but low returns– Need to balance risk of cash shortage against
low returns
2
InstitutionsDistinctions now blurry – depositories
(banks, S&L's, credit unions) and nondepositories (mutual funds)– Depository accounts insured by Federal
Gov't– Credit Unions – nonprofits – have highest
rates on deposits and lowest rates on loans; insured
– Savings certificates – not redeemable before maturity; rates fixed until maturity
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Banks Ranked by Assets
( billions)
Citigroup $1,187
J. P. Morgan/Chase/Bank One 1,102
Bank of America 966
Wells Fargo 370
Wachovia 364
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Mergers Consumer Perspective
• Major bank mergers over last 15 years– Concentration increased, reducing choices– Cost savings = reduced employment
• Credit card effect– Four largest control 56% of the market– One brand, new rules, new fees
• Checking accounts – more ATM’s but higher fees and new account numbers
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Cash Management AlternativesUnderstand advantages/disadvantages in T 5.1
Checking MMMF's
Savings accounts Asset Management
Accounts
Savings Certificates T-bills
Bank MMF's Savings bonds
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Comparing Alternatives
Need to (1) Compare returns on same basis (2) Consider tax status (3) Safety versus riskAnnual Percentage Yield (APY) – makes non-
annual compounded rates comparableAlso need to know method used to compute
balance for interest – daily average or minimum?
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Taxes and Other Issues
• Safety – deposit accounts insured up to $100,000– MMMF not insured but buy low risk assets
• Interest on most “muni funds” not subject to Fed and some state taxes– Need to compare with taxable investments