Personal Financial Planning Study Set 5

Business

Quiz 4 :

Managing Your Cash and Savings

Quiz 4 :

Managing Your Cash and Savings

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Explain the effects that historically low interest rates have on borrowers, lenders, savers, and retirees.
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There are both positive and negative effects resulting from the historically low interest rates that have been present since the 2008-2009 financial crisis. These low rates have most significantly affected four groups: borrowers, lenders, savers, and retirees.
• Borrowers : Low interest rates are favorable for borrowers, and are in fact an incentive to borrow money. Loans with lower interest rates ultimately mean that borrowers are able to access money for lower costs over the life of the loan.
• Lenders : Low interest rates mean that lenders see increased business from those looking to borrow money. While these rates may help to prop up large financial institutions, some believes they also help protect banks from the consequences of questionable decisions and redistribute wealth away from those that would normally save their money.
• Savers : Low interest rates dampen the incentive to save money. Banks are paying less than 1% interest on savings, leading savers choosing to put their money elsewhere. The inflation-adjusted real interest rate results in money saved not keeping up with inflation, meaning that savers are actually losing money!
• Retirees : Low interest rates reduce income to retirees and pension funds. This means that retirees have to access the principal of their retirement accounts instead of just receiving interest payments. This could lead to more retirees accessing welfare programs, or for the government to increase financial support of underfunded pension funds.
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Your parents are retired and have expressed concern about the really low interest rates they're earning on their savings. They've been approached by an advisor who says he has a "sure-fire" way to get them higher returns. What would you tell your parents about the low-interest-rate environment, and how would you advise them to view the advisor's new prospective investments
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Suppose your retired parents have told you about a financial advisor who has approached them with a "sure-fire" way to earn higher returns on their savings. Your parents have expressed concerned regarding the extremely low rates they are currently earning and are very interested in a way to earn more.
Today's historically low interest rate environment, stemming from the 2008-09 financial crisis, means that retirees and savers have seen a significant decline on their interest earnings. Many retirees now need to access the principal of their retirement funds instead of relying on regular interest payments.
In addition, banks have been paying less than 1% on traditional savings account , meaning that the money saved is not keeping up with the inflation-adjusted real interest rate.
This low interest rate environment has led many savers and retirees to search for higher returns , sometimes with investments of questionable risk. Your parents should be informed that there is no "sure-fire" way to earn higher returns on savings.
In addition, any attempt to earn higher returns should be tempered by the consideration of the higher risk that is involved. Perhaps your parents should consider high-quality corporate bonds, or even stocks as a new investment direction.

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Briefly describe the basic operations of-and the products and services offered by-each of the following financial institutions: (a) commercial bank, (b) savings and loan association, (c) savings bank, (d) credit union, (e) stock brokerage firm, and (f) mutual fund.
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Basic operations and products and services offered by different financial institutions:
The basic operations and products and services offered by different financial institution are tabulated below:
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What role does the FDIC play in insuring financial institutions What other federal insurance program exists Explain.
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Would it be possible for an individual to have, say, six or seven checking and savings accounts at the same bank and still be fully protected under federal deposit insurance Explain. Describe how it would be possible for a married couple to obtain as much as $1,500,000 in federal deposit insurance coverage at a single bank.
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Judith Bao is a registered nurse who earns $3,250 per month after taxes. She has been reviewing her savings strategies and current banking arrangements to determine if she should make any changes. Judith has a regular checking account that charges her a flat fee per month, writes an average of 18 checks a month, and carries an average balance of $795 (although it has fallen below $750 during 3 months of the past year). Her only other account is a money market deposit account with a balance of $4,250. She tries to make regular monthly deposits of $50-$100 into her money market account but has done so only about every other month. Of the many checking accounts Judith's bank offers, here are the three that best suit her needs. • Regular checking, per-item plan: Service charge of $3 per month plus 35 cents per check. • Regular checking, flat-fee plan (the one Judith currently has): Monthly fee of $7 regardless of how many checks written. With either of these regular checking accounts, she can avoid any charges by keeping a minimum daily balance of $750. • Interest checking: Monthly service charge of $7; interest of 3 percent, compounded daily (refer to Exhibit 4.8). With a minimum balance of $1,500, the monthly charge is waived. Judith's bank also offers CDs for a minimum deposit of $500; the current annual interest rates are 3.5 percent for 6 months, 3.75 percent for 1 year, and 4 percent for 2 years. Critical Thinking Questions 1. Calculate the annual cost of each of the three accounts, assuming that Judith's banking habits remain the same. Which plan would you recommend and why 2. Should Judith consider opening the interest checking account and increasing her minimum balance to at least $1,500 to avoid service charges Explain your answer. 3. What other advice would you give Judith about her checking account and savings strategy REFERENCE: img
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Determine the annual net cost of these checking accounts: a. Monthly fee $4, check-processing fee of 20 cents, average of 23 checks written per month b. Annual interest of 2.5 percent paid if balance exceeds $750, $8 monthly fee if account falls below minimum balance, average monthly balance $815, account falls below $750 during 4 months
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Give two reasons for holding liquid assets. Identify and briefly describe the popular types of liquid assets.
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Suppose that someone stole your ATM card and withdrew $950 from your checking account. How much money could you lose according to federal legislation if you reported the stolen card to the bank: (a) the day the card was stolen, (b) 6 days after the theft, (c) 65 days after receiving your periodic statement
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Briefly describe the key characteristics of each of the following forms of interestpaying checking accounts: (a) NOW account, (b) MMDA, and (c) MMMF.
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Describe some of the short-term investment vehicles that can be used to manage your cash resources. What would you focus on if you were concerned that the financial crisis would increase inflation significantly
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You're getting married and are unhappy with your present bank. Discuss your strategy for choosing a new bank and opening an account. Consider the factors that are important to you in selecting a bank-such as the type and ownership of new accounts and bank fees and charges.
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Define and discuss (a) demand deposits, (b) time deposits, (c) interest-paying checking accounts.
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What difference does it make where you keep your money The returns are so low on checking and savings accounts that you certainly won't grow rich on their earnings! It's no wonder that many people tend to overlook the importance of managing their cash and liquid assets. This project will help you evaluate your cash management needs and the various financial service providers available so that you can select the one best suited to your needs. First, spend some time making a list of your needs and preferences. Do you like to visit your banking institution in person, or would you rather do your banking electronically or by mail Is a high yield important to you, or is your typical balance usually pretty low so that any earnings would be minimal What other services might you need, such as a safe-deposit box, brokerage account, trust services, or financial and estate planning Next, go back through this chapter and review all the types of financial institutions and the services they provide. Then, beside each need on your list, write down the institutions that would best meet that need. Is there one banking institution that would meet all your needs, or do you think you'd require several After identifying the type or types that are appropriate for you, survey your community via the phone book, interviews with finance professionals, and other methods to identify the various financial institutions in your area. Look beyond your area as well, and consider what services are available over the Internet or from other regions of the country. Make a list of your top choices and find out more information concerning their services, products, and fees charged to help you decide where you'd like to do business. Bring your findings to class to compare and discuss with your classmates.
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If you put $6,000 in a savings account that pays interest at the rate of 4 percent, compounded annually, how much will you have in 5 years ( Hint: Use the future value formula.) How much interest will you earn during the 5 years If you put $6,000 each year into a savings account that pays interest at the rate of 4 percent a year, how much would you have after 5 years
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Use Worksheet 4.1. Felipe Aguilar has a NOW account at the Second State Bank. His checkbook ledger lists the following checks: img img Felipe's checkbook ledger shows an ending balance of $286.54. He has just received his bank statement for the month of November. It shows an ending balance of $622.44; it also shows that he earned interest for November of $3.28, had a check service charge of $8 for the month, and had another $12 charge for a returned check. His bank statement indicates the following checks have cleared: 654, 662, 672, 674, 675, 676, 677, 678, 679, and 681. ATM withdrawals on 11/1 and 11/14 and deposits on 11/2 and 11/6 have cleared; no other checks or ATM activities are listed on his statement, so anything remaining should be treated as outstanding. Use a checking account reconciliation form like the one in Worksheet 4.1 to reconcile Felipe's checking account. REFERENCE: img
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What is cash management, and what are its major functions
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Distinguish between a checking account and a savings account.
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Scott and Angela Lamar are college students who opened their first joint checking account at the American Bank on September 14, 2015. They've just received their first bank statement for the period ending October 5, 2015. The statement and checkbook ledger are shown in the table on the next page. Critical Thinking Questions 1. From this information, prepare a bank reconciliation for the Lamars as of October 5, 2015, using a form like the one in Worksheet 4.1. 2. Given your answer to Question 1, what, if any, adjustments will the Lamars need to make in their checkbook ledger Comment on the procedures used to reconcile their checking account and their findings. 3. If the Lamars earned interest on their idle balances because the account is a money market deposit account, what impact would this have on the reconciliation process Explain. img (Reference Worksheet 4.1) img
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What type of bank serves your needs best Visit the Web sites of the following institutions and prepare a chart comparing the services offered, such as traditional and online banking, investment services, and personal financial advice. Which one would you choose to patronize, and why a. Bank of America (http://www.bankofamerica.com)-a nationwide full-service bank b. A leading local commercial bank in your area c. A local savings institution d. A local credit union
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