CFF Exam 2

Monetary Asset

cash and low-risk items that can be converted to cash with little or no loss in value; checking and savings accounts

What are the three ways you can use monetary assets?

day-to-day spending, accumulate funds to meet 3-6 months of expenses, make investments

Monetary Asset Management

task of maximizing interest earnings; minimizing fees on all your funds kept available for use

What does successful monetary asset management look like?

allows you to earn interest on your money while maintaining reasonable liquidity and safety

Liquidity

refers to the speed and ease with which an asset can be converted to cash

Low levels of liquidity include

real properties, precious metals, paintings

High levels of liquidity include

cash, checking accounts, saving accounts, money market accounts

Safety

your funds are free from financial risk

FDIC (what does it do?)

Federal Deposit Insurance Corporation --> protects your deposits.

The maximum insurance on a) single ownership account, b) joint account held with other individuals, and c) all retirement accounts is

$250,000

True or False: if you make a wrong investment decision, FDIC will reimburse you up to the maximum insurance coverage.

FALSE.

Checking Account

"transaction account;" deposit account held at a financial institution that performs transactions that allow for withdraws and deposits

Special Purpose Checks: Certified Check

bank certifies/freezes the check amount in your account

Special Purpose Checks: Cashier Check

only available at financial institutions (bank or credit union); no limit

Special Purpose Checks: Money Order

available at checking cashing locations, convenience stores, gas stations, post office, retailers; 1,000 limit

Money Market Account

any of a variety of interest-earning accounts that pays slightly higher interest rates and offers some check-writing privilege

The investment of money market accounts must mature in less than ______.

one year.

CD: Certificate of Deposit (They're subject to...)

interest earning savings instrument purchased for a fixed period of time. subject to interest-rate risk

Ranges of CDs

Short Term: less than one year

Mid Term: one to three years

Long Term: more than three years

CD Laddering

strategy in which an investor divides the amount of money to be invested into equal amounts to CDs with different maturity dates

An individual account can be set up with a _____, also known as the Totten Trust (what accounts use this?)

POD - payable on death; checking and savings accounts, retirement accounts

Joint Ownership of Assets: Joint Tenancy with right of survivorship

the property shares of one co-tenant are directly transferred to surviving co-tenant

Joint Ownership of Assets: Tenancy in common

form of joint ownership with two or more parties owning the asset, but each retains control over a separate piece of the property rights

Joint Ownership of Assets: Tenancy by the entirety

type of shared ownership of property available only to married couples, each spouse owns an undivided interest of the property

Credit

describes an arrangement in which goods, services, or money is received in exchange for a promise to repay at a future time

Consumer credit often takes the form of what?

A loan, which is repaid in equal payment over a set of time

Credit Cards

allow repeated use of credit as long as the consumer makes regular monthly payments

Interest

the charge for the privilege of borrowing money, typically expressed as an annual percentage rate (APR)

Advantages of using credit

Enjoy the convenience

Enjoy goods and services now

Reduce the need to carry cash

Make travel reservations

To shop on the internet and by phone

To buy expensive items sooner than later, like a home or vehicles

Disadvantages of using credit

• It is tempting to spend more money

• Future income is committed to previous credit contracts

• The risk of overindebteness is real

• Increases credit related solicitations via mail, e-mail, and phone calls

• Users worry and stress about their debts

• Could result on declaring bankruptcy

Student Loans help pay for what? And if you have to get one, get what type?

Help pay for an education. Get the minimum.

TILA

Truth In Lending Act requires lenders to disclose the interest rate in APR and finance charges to credit applicants (examples include late fees, balance transfer fees, membership fees, cash advance fee)

Credit Report

A record of how you borrowed and repaid debts; up-to-date, reasonably objective description of the status of your credit accounts; also known as the credit history

Three major credit reporting agencies:

Equifax, Experian, TransUnion

A credit report includes five major components:

personal information, credit accounts, inquiries, public records, collection items

Who can see your credit report?

Creditors, Employers, Government Agencies, Insurance Companies, Landlords

FCRA

Fair Credit Reporting Act allows you to challenge the errors as the law requires that report contains accurate information

What happened if the credit bureau refuse to make a correction?

Provide a consumer statement --> your version of disputed information in your credit report

Credit Scoring Factors

FICO Score - payment history, money owed, credit history, new credit, types of credit

Identity Theft

the fraudulent acquisition and use of a person's private identifying information, usually for financial gain.

Identity theft can wreck your

credit report and credit score

Credit freeze prevents a credit reporting company from releasing your credit report...

without your consent

How to avoid identity theft

shred documents, secure personal information in home, do not carry social security card with you

Overindebted

when a person's excessive debts make repayment difficult and cause them financial distress

Signs of Overindebted

Debt-consolidation loan, garnishment, repossession, foreclosure

FDCPA

Fair Debt Collection Practices Act - prohibits debt collectors from using abusive, unfair, or deceptive practices to collect past-due debts

Ways to get out of debt

reduce your spending budget, contact your creditors, increase your income, free budget and credit advice, consumer credit counseling agency, consider bankruptcy as a last resort

Bankruptcy: Chapter 7

immediate liquidation plan or straight bankruptcy. debtor's assets are sold, creditors receive paument, debtor is freed from his or her debts.

People cannot file for C7 bankruptcy for at least

six years.

In C7 bankruptcy, people are still liable for

tax debt, child support, alimony, federal student loan

Bankruptcy: Chapter 13

Wage earner plan or regular income plan. A bankruptcy protection scheme that allows income earners to satisfy outstanding debts in whole or in part within a specific time frame

Open-end credit

a form of credit extended in advance of any transaction

Credit limit

the maximum outstanding debt allowed on the account

Grace period

the time the creditor gives people to pay their new charges without paying interest

Financial charge

the cost of borrowing (interests, late fees, foreign transaction fees, cash advance fees, balance transfer fees)

Credit Statements: Statement Date

the last day of the month for which any transactions are reported on the statement

Credit Statements: Minimum payment

The amount due monthly on a credit card statement that is not smaller than the amount required by the creditor

Credit Statements: Payment Due Date

The specific day credit card company should receive payment from the card holder

TILA limits a card holder's credit card liability for lost or stolen credit cards:

$0 liability if notify the CCard company within two days; $50 if notify the CCard company after two days

time limit of correcting errors on credit card statement

Within 60 days after the statement date; lender had 30 days to acknowledge you; within 90 days, lender must provide error correction or justify why the bill is correct

Unsecured Loans

issued and supported only by the borrower's creditworthiness, rather than a type of collateral

Secured Loans

loans where the borrower has pledged as security for repayment of a loan and can be forfeited in the event of a default

Lenders will put this on your property in a secured loan.

Lien --> the legal right to have your property When the loan is repaid, the lien is removed.

Cosigner is

a person that accepts legal obligation to make payment on another person's debt when that person is in default

Home equity loan

type of loan in which a borrower uses equity of his/her home as collateral

Equity equation

Equity = Home FMV - Money still owed on home mortgage

Overdraft happens when

a customer spends more than the amount in their account

Loans to Avoid

Payday Loan and Pawnshop

Risk

Risk is uncertainty about the outcome of an event.

This risk exists in situations where there is potential for gain as well as loss.

Speculative Risk

Pure risk exists when there is

no potential for gain, only the potential for losses

Speculative risk is ____, while the pure risk is

uninsurable, insurable

Risk Management

The process of identifying and evaluating purely risky situations to determine and implement appropriate management

Five steps to risk management process

1. Identify risk exposures (perils are the actual cause of a loss)

2. Estimate risk and potential losses (frequency and severity of loss)

3. How to handle risk of loss

4. Implement risk-management program (insure the risks that you cannot afford, and retain the ones you can)

5. Evaluate and adjust program (period review of insurance policies means annually checking insurance needs)

Handling Risk of Loss: Avoidance, Retention, Loss Control, and Risk Transfer

Avoidance - avoiding doing such activities

Retention - to accept or retain the risk

Loss control - designed to reduce loss frequency and severity

Transfer - to transfer risk to insurance company

The loss frequency and loss severity are both low

Retention

The loss frequency is high, but the severity is low

Reduction

The loss frequency is low, but the severity is high

Transfer

The loss frequency and severity are both high.

Avoidance

Insurer

the party calculating risks; insurance companies

insured

the person or party covered under the insurance policy; consumer