FIN 2114 Exam 2 (Ch 5-8)

Cash Management

The management of cash and near cash (liquid) assets

Deciding how much to keep in liquid assets and where to keep it

Liquid Assets

Cash and investments that can easily be converted into cash, such as checking accounts, money market funds, and CD’s

Deposit-type financial institutions

Financial institutions that provide traditional checking and savings accounts. Commonly referred to as “banks”

Nondeposit-type financial institutions

Financial institutions, such as mutual funds and stock brokerage firms, don't provide checking and savings accounts.

Banks or Deposit Type Financial Institutions

Commercial Banks

Savings and Loan Associations

Savings Banks

Credit Unions

Non Deposit Financial Institutions

Mutual Funds

Stockbrokerage Firms

What to look for in a Financial Institution

• Which financial institution offers the kind of services you want and need

• Is your investment safe? Is your investment insured? Is this financial institution sound?

• Where are all the costs and returns associated with the services you want

Checking account

A federally protected account in which you deposit your liquid funds so you can withdrawal them quickly and easily by a check or debit car

Demand Deposit Account

A type of checking account that pays no interest on your balance

NOW Account

(Negotiable order of withdrawal) A checking account that pays interest on your balance

Savings account

A time deposit account that pays interest

Allows you to keep your money in a safe, federally insured financial institution while it earns a guaranteed fixed return or interest.

Money Market Deposit Account (MMDA)

A bank account that pays a rate of interest that varies with the current market rate of interest

Certificate of deposit (CD)

Is a savings alternative paying a fixed rate of interest while keeping your funds on deposit for a set period of time, which can range from 30 days to several years

Money Market Mutual Funds (MMMF)

A mutual fund that invests in short-term (generally with a maturity of less than 90 days) notes of relatively high denomination

Draws together the savings of many individuals and invest those funds in very large, creditworthy debt issued by the government or by large corporations

Asset Management Accounts

A comprehensive financial service package offered by a brokerage firm, which can include a checking account, credit and debit cards, MMMF, loans, automatic payment or fixed payments such a mortgages, brokerage services, and a system for the direct payment of interest, dividends, and proceeds from security sales into the MMMF

U.S Treasury Bills, T-Bills

A short term note of debt issued by the federal government, with a maturity ranging from a few days to 12 months

Denomination

The face value or amount that's returned to the debtholder at maturity. AKA debts per value.

U.S Savings Bonds

A type of security that’s actually a loan on which you receive interest, generally every 6 months for the life of the bond. When the bond matures,  or comes due, you get back your investment, or “loan”. What you get back at maturity is usually the face value of the loan, although the amount you get could be more or less than what you paid for the bond originally.

Issued by the US Treasury

Annual Percentage Yield (APY) or Effective Annual Rate

Also referred to as the EAR, is the amount you earn on an investment in one year, expressed as a percentage. The APY formula converts interest rates compounded for different periods into comparable annual rates, allowing you to easily compare interest rates

Truth in Savings Act of 1993

requires financial institutions to report the rate of interest using the APY so that it’s easier for the consumer to make comparisons

Federal Deposit Insurance Corporation

The federal agency that insures deposits at commercial banks and S&Ls

National Credit Union Association

The federal agency that insures accounts at credit unions

What are the 3 C’s of choosing a financial institution?

Cost

Convenience

Consideration

Safety (Final consideration)

Direct Deposit

The depositing of payments, such as payroll checks, directly into your checkings account. This is done electronically

Safe Deposit Boxes

A storage unit at a bank or other financial institution in which valuables and important documents are stored for safekeeping

Overdraft protection

The provision of an automatic loan to your checking account whenever sufficient funds are not available to cover checks that have been written against the account

Stop payment

An order you can give your financial institution to stop payments on a check you've written

Cashier Check

A check drawn on a banks or financial institution account

Certified Check

A personal check that’s been certified as being good by the financial institution on which its drawn

Money order

A variation of the cashiers check except that it is generally issued by the US postal service or some other non banking institutions

Travelers Check

Checks issued by large financial institutions, such at Citibank, Visa, and American Express, that are sold through local banking institutions and are similar to cashier checks except that they don’t specify payee and they come in specific denominations (20, 50, and 100)

Electronic funds transfer

Any financial transaction that takes place electronically

Take palace fast and customer doesn't have to carry cash or write a check

Automated teller machine or cash machine (ATM)

A machine found at most financial institutions that can be used to make withdrawals, deposits, transfers, and account inquiries

Personal Identification Number (PIN)

A four to seven digit personal identification number assigned to your account.

Debit card

A card that allows you to access the money in your accounts electronically

Smart Cards

Similar to a debit card, but this card actually magnetically stores its own accounts. Funds are transferred into the card, which is then used the same way you’d use a debit card. When the funds run out, the card is useless until more funds are magnetically transferred in.

Chapter 6

Credit

Receiving cash, goods, or services with an obligation to pay later

Consumer credit

Credit purchases for personal needs other than for home mortgages, this can include anything from an auto loan to credit card debt

Open Credit or Revolving Credit

A line of credit that you can use and then pay back at whatever pace you like so long as you pay a minimum amount each month, paying interest on the unpaid balance

Annual Percentage Rate (APR)

The true simple interest rate paid over the life of the loan. It's a reasonable approximation of the true cost of borrowing, and the Truth in Lending Act requires that all consumer loan agreements disclose the APR in bold point

Method of determining the balance (balance calculation method)

The method by which a credit card balance is determined. The finance charges are then based on the level of this balance

Average Daily Balance Method

A method of calculating the balance on which interest is paid by summing the outstanding balances owed each day during the billing period and dividing by the number of day in the period

Previous balance method

Interest payments are charged against what you owed at the end of the previous billing period. There is no credit given for current month’s payments. This method is relatively simple, but it’s also expensive.

Adjusted balance method

Interest is charged against the previous month’s balance only after any payments have been subtracted. Because interest isn’t charged on payments, this method results in lower interest charges than the previous balance method

Grace period

The length of time given to make a payment before interest is charged against the outstanding balance on a credit card

Annual Fee

A fixed annual charge imposed by a credit card issuer

Merchant Discount Fee

The percentage of the sales that the merchant pays to the credit card issuer

Cash Advance Fee

A charge for making a cash advance, paid as either a fixed amount or a percentage of the cash advance

2009 CARD Act

credit card late fees are capped at 25 for occasional late payments

Over-the-limit

A fee imposed wherever you go over your limit

Penalty Rates

The rate you pay if you don't make your minimum payment on time

What the CARD Act Means for You

• Notification of rate increase

• Notification of schedule for payoff

• No interest rate increases for the first year

• Increased rates apply only to new charges

• Restrictions on over-the-limit transactions

• Caps on high fee cards

• Protections for underage consumers

• Standard payment dates and times

• Payments directed to highest interest balances first

• Fee limits

• No inactivity fee

Bank Credit Card

A credit card issued by a bank or large corporation, generally as visor Mastercard

Premium or prestige credit cards

A bank credit that offers credit limits as high as $100,000 or more in addition to numerous added perks, including emergency medical and legal services, travel services, rebates, and insurance on new purchases

Affinity Card

A credit card issued in conjunction with a specific charity or organization. It carries the sponsoring group’s name and/or picture on the credit card itself and sends a portion of the annual fee or a percentage of the purchases back to the sponsoring organization

Secured credit card

A credit card backed by the pledge of some collateralized asset

Travel and Entertainment Cards

A credit card initially meant for business customers to allow them to pay for travel and entertainment expenses, keeping them separate from their other expenditures

Single purpose credit card

A credit card that can be used only at a specific company

Traditional Charge Account

Can be used to make purchases only at the issuing company

What are the 5 C’s of Credit

Character

Capacity

Capital

Collateral

Conditions

Credit Bureau

A company that gathers information on consumers' financial history, including how quickly they have paid bills and whether they have been delinquent on paying bills in the past. The company summarizes this information and sells it to customers

Credit Scoring

The numerical evaluation of “scoring” of credit applicants based on their credit history

What’s in your credit report?

• Identifying information

• Trade Lines or Credit Accounts

• Inquiries

• Public Record and Collection Items

Factors that determine your credit score

• Payment History (35% of your score)

• Amount you owe (30% of your score)

• Length of credit history (15% of your score)

• Types of Credit Used (10% of your score)

• New Credit (10% of your score)

The Fair and Accurate Credit Transactions (FACT) (2003)

Act allows you to request one free copy of your credit report each year from the three major credit bureaus: Experian, Equifax, and TransUnion.

Fair Credit Billing Act (FCBA)

provides a procedure for correcting billing errors.

The Consumer Financial Protection Bureau (CFPB

provides a single location for financial protection and oversight—and its job is to help consumers make better decisions.

How do you know you have become a victim of identity theft?

• You receive a credit card that you didn't apply for

• You are denied , or you are offered less-than-favorable credit terms, such as a high interest rate, for no apparent reason.

• You receive calls or letters from debt collectors or businesses about merchandise or services you didn’t buy.

• You fail to receive bills or other mail.

Steps for identity fraud

• Contact the fraud department of any one of the three major credit bureaus to place a fraud alert on your credit file.

• Close the accounts that you know or that you believe have been tampered with or opened fraudulently.

• File a police report. Or, if you aren’t receiving bills or other mail, go to your local post office to make sure a “Change of Address” has not been submitted under your name and address.

• File a complaint with the Federal Trade Commission at the government’s consumer information Web site (http://www.consumer.gov).

Chapter 7

Decisions

• Single Payment Vs. Installment Loans

• Secured Vs. Unsecured Loans

• Variable Rate Vs. Fixed Rate

• The Loans Maturity Shorter Vs. Longer Term Loans

Consumer Loans

A loan involving a formal contract that details exactly how much you’re borrowing and when and how you’re going to pay it back.

Single Payment or balloon loan

A loan that is paid back in a single lump-sum payment at maturity, or the due date of the loan, which is usually specified in the loan contract. At that date you pay back the amount borrowed.

Bridge or Interim Loans

A short-term loan that provides funding until a longer-term source can be secured or until additional financing is found

Installment Loan

A loan that calls for repayment of both the interest and the principal at regular intervals, with the payment levels set in such a way that the loan expires at a present date

Loan amortization

The repayment of a loan using equal monthly payments that cover a portion of the principal and the interest on the declining balance. The amount of the monthly payment going toward the interest starts off large and steadily declines. While the amount going toward the principal starts off small and steadily increases.

Secured loan

A loan that’s guaranteed by a specific asset (collateral)

Unsecured loan

A loan that’s not guaranteed by a specific asset

Fixed Interest Rate Loan

A loan within an interest rate that stays fixed for the duration of the loan

Variable or adjustable interest rate loan

A loan in which the interest rate does not stay fixed but varies based on the market interest rate

Prime Rate

The interest rate bank charge to their most creditworthy or prime customers

Periodic cap

limits the maximum the interest rate can jump during one adjustment.

Lifetime cap

limits the amount that the interest rate can jump over the life of the loan.

Convertible Loan

A variable-rate loan that can be converted into a fixed-rate loan at the borrowers option at specified dates in the future

Security Statement

An agreement that identifies whether the lender or borrower retains control over the item being purchased

Default

The failure of a borrower to make a scheduled interest or principal payment

Note

The formal document that outlines the legal obligations of both the lender and the borrower

Insurance Agreement Clause

A loan requirement that a borrower purchase credit life insurance that will pay off the loan in the event of the borrowers death

Acceleration Cost

A loan requirement stating that if the borrower misses one payment, the entire loan comes due immediately

Deficiency Payments Clause

States that if you default on a secured loan, not only can the lender repossess whatever is secured, but also if the sale of that asset doesn’t cover what is owed, you can be billed for the difference

Recourse Clause

A clause in a loan contract defining what actions a lender can take to claim money from a borrower in the case of default

Home Equity/Second Mortgage

A loan that uses a borrowers build up equity in his or her home as collateral against the loan

Automobile loan

A loan made specifically for the purchase of an automobile, which uses the automobile as collateral against the loan

Loan Disclosure Statement

A statement that provides the APR and interest charges associated with a loan

N-Ratio Method

A method of approximating the APR

Rule of 78s or sum of the year’s digits

A rule to determine what proportion of each loan payment goes toward paying the interest and what proportion goes toward paying the principal

 28/36 rule

That is, if your total projected monthly mortgage payment (including insurance and real estate taxes) falls below 28 percent of your gross monthly income and your total monthly debt payments—including this mortgage payment plus any consumer credit payments—fall below 36 percent, you’re considered a good credit risk.

The debt resolution rule

used by financial planners to help control debt obligations, excluding borrowing associated with education and home financing, by forcing you to repay all your outstanding debt obligations every four years.

Credit or debt counselor

A trained professional specializing in developing personal budgets and debt repayment programs