MGMT Ch 4 Mindtap

Definition of Cash Management

The day-to-day administration of liquid assets

Definition of Liquid Assets

Cash or assets that can be converted to cash quickly with little to no loss in value

Two primary purposes of Liquid Assets

Near-term cash for daily expenses and future/unplanned savings for emergencies

Asset with the lowest typical return in the liquidity hierarchy

Cash (Pocket money)

Asset with the highest typical return in the provided liquidity hierarchy

U.S. Treasury Securities (T-Bills/T-Notes)

Definition of Depository Institutions

Financial institutions that accept cash deposits and are federally insured (e.g. Commercial Banks)

Definition of Nondepository Institutions

Institutions like brokerages or mutual funds that offer banking-like services but do not accept federally insured deposits

Commercial Bank ownership structure

For-Profit (Owned by shareholders)

Credit Union ownership structure

Not-For-Profit (Owned by members)

The "Common Bond" requirement

A requirement (job, location, etc.) needed to join a specific Credit Union

Four parties in the Credit Card Model

The Issuer, The Network, The Merchant, The Customer

Role of "The Network" (Visa/Mastercard)

Handles data transfer like a toll road and takes zero credit risk

Role of "The Issuer" (Chase/Citi/etc)

Lends the money, takes the risk, and collects interest

Economic goal of raising interest rates

To fight inflation and cool an overheated economy

Economic goal of lowering interest rates

To stimulate the economy and encourage spending

Checking Account: Demand Deposits

Regular checking accounts at commercial banks that usually pay no interest

NOW Accounts

Negotiable Order of Withdrawal accounts (Checking that pays interest)

Share Draft Account

The Credit Union version of a checking account

MMDA (Money Market Deposit Account)

A federally insured bank account with high minimum balance and limited check writing

MMMF (Money Market Mutual Fund)

An uninsured investment fund that pools money to buy short-term debt

Asset Management Account (AMA)

An all-in-one account offered by brokerages combining checking, investing, and borrowing

"Sweep" Feature in AMAs

Automatically moves excess cash into a high-interest money market mutual fund

FDIC

Agency that insures Banks

NCUA

Agency that insures Credit Unions

Standard Deposit Insurance Limit

$250,000 per depositor, per institution, per ownership category

List of assets NOT covered by deposit insurance

Stocks, Bonds, and Mutual Funds

Main cause of Silicon Valley Bank (SVB) collapse

Mismanagement of interest rate risk where rising rates devalued their bond holdings

Pay Yourself First strategy

Setting up automatic transfers from checking to savings immediately upon getting paid

Why Credit Unions can offer better rates than banks

They are tax-exempt non-profits that do not have to pay dividends to outside shareholders

Why Visa/Mastercard does not lose money if you default

They are only the network provider, not the lender

Relationship between Interest Rates and Bond Prices

Inverse relationship (When rates go up, bond prices go down)

Difference in safety between MMDAs and MMMFs

MMDAs are government insured while MMMFs are investments not covered by FDIC

How a married couple can insure $1.5 Million at one bank

By utilizing Individual accounts for each person and a Joint account to maximize coverage categories

Psychological benefit of "Saving by Default"

It removes the daily decision-making process preventing procrastination

Primary difference between Depository and Nondepository institutions

Whether the money is held as a government-insured deposit or as an investment

The result of the Fed raising rates in 2022-2023 on bonds

It negatively impacted bond values (prices dropped)

Interchange Fees

Fees paid by the merchant to the bank for credit card transactions

Rule regarding Interest on Savings Accounts

Banks must pay interest on the full balance, not just the lowest daily balance

SIPC vs FDIC

SIPC covers fraud at brokerages while FDIC covers value loss at banks