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Chapter Five

Management of Monetary Assets

Copyright ©Houghton Mifflin Company. All rights reserved. 5 - 2

Learning Objectives

1. List and define tools of monetary asset management and providers of financial services

2. Understand key aspects of electronic banking and legal protections available

3. Describe different types of checking accounts.

4. Identify key aspects and benefits of a savings account.

5. Explain the importance of placing excess funds in an appropriate money market account.

6. List the benefits of putting money into longer-term savings instruments.


What Is Monetary Asset Management?

• Monetary Assets – Cash and near-cash items that can readily be converted to cash.

• Monetary Asset (Cash) Management – How you handle your monetary assets.

• Cash Equivalents

– Retain a constant or nearly constant value.

– Have ready liquidity.

– Examples???Liquidity – Speed and ease in which an asset can be converted to cashSafety – Freedom from financial risk


Four Tools of Monetary Asset Management

• A low-cost, interest-earning checking account from which to pay monthly living expenses.

• A small savings account in a local financial institution for irregular expenses and emergency cash

• When income begins to exceed expenses regularly, open a money market account.

• Your monetary asset management plan is complete when you transfer some funds into longer-term savings instruments.

– Examples: CDs, U.S. Savings Bonds


Figure 5.1: Four Tools of Monetary Asset Management


Who Provides Monetary Asset Management Services?

Financial Services Industry – providers of monetary asset management services.

1. Banks and Depository Institutions

2. Mutual Funds

3. Stock Brokerage Firms

Examples of each???


Banks and Depository Institutions

Recognized and regulated by the federal government as firms that offer loans and banking services to businesses and individuals. – Commercial Banks – corporations chartered

under federal and state regulations. – Savings and Loan Associations (S&Ls)– Credit Unions (CUs)– Mutual Savings Banks (MSBs)


Deposit Insurance (FDIC): A Feature of Depository Institutions

• The maximum insurance on all single-ownership accounts (in one name) is $100,000.

• The maximum insurance on all joint accounts held with other individuals is $100,000.

• The maximum insurance on all retirement accounts is $100,000.

• A maximum of $100,000 in insurance per beneficiary is payable on “death accounts.”


Other Financial Institutions

Mutual Fund

Investment company that raises money by selling shares to the public and then invests that money in a diversified portfolio of investments.

Stock Brokerage Firm

Financial institution that specializes in selling and buying stocks, bonds, and other investments.

Offer money market mutual fund accounts (operated by mutual funds) into which clients place money while waiting to make investments.


Electronic Banking

• Electronic Banking – Occurs whenever banking transactions are conducted via computers without the customer using paper documents or having face-to-face contact with financial services personnel.

• Electronic Funds Transfers (EFTs) – funds are shifted electronically among various bank accounts.

Does anyone use an Internet (online only) bank?


Electronic Banking (Continued)

• Direct Deposits – Having your paycheck or other regular income deposited directly into your account rather than being paid by check.

• Preauthorized Payments – Having certain payments, such as monthly utility bills, automatically paid by your bank when billed by the entity to whom the payment is owed.


You Can Do Your Banking with an Automatic Teller Machine

• Automated Teller Machine (ATM or Cash Machine) – Computer terminal through which customers make deposits, make withdrawals, and complete other financial transactions

• Personal Identification Number (PIN) – Confirms that you are authorized to access the account. Keep it secure!!!

• ATM Transaction Fee – May be assessed for using an ATM– Own financial institution and/or machine provider– High percentage for a low withdrawal amount


You Can Make Purchases at POS Terminals Using a Debit Card

• Point-of-Sale (POS) Terminal – A computer terminal located at a store or other merchant location that allows the customer to make purchases electronically via a debit or credit card.

• Debit (or Check) Card – A plastic card that provides instant access to your checking account.

– Advantages of debit cards???


Smart Cards and Stored-Value Cards

• Smart Cards and Stored-Value Cards – Plastic payment devices that use built-in computer chips or magnetic strips to store data and handle payment functions.

• Electronic Benefits Transfer (EBT) – Directs cash benefits to recipients using smart cards as the delivery mode.

– Examples???


Consumer Protection Regulations

• Disclosure Statement—Notification by financial institution of the rules of the EFT account and depositor rights

• Periodic Statement—Your monthly account statement


Monetary Asset Management: Tool #1 – Interest-Earning Checking Accounts

Checking Account – Allows you to write checks against amounts on deposit to transfer money to others (also, online, ATM,etc.)– A.K.A., “Demand Deposits” – Because financial

institution must withdraw funds and make payments whenever “demanded” to do so by a checking account depositor.

• Lifeline Banking Account – Offers access to certain minimal financial services that every consumer needs, regardless of income, to function in our society.


Types of Interest-earning Checking Accounts

• Negotiable Order of Withdrawal (NOW) Account – Earns interest or dividends as long as minimum-balance requirements are satisfied.

• Share Draft Account – Credit-union version of a NOW account.

– CU members own the organization

– Deposits are called “shares”

– Costs are often lower than at a bank


Aspects of the Check Clearing Process

• Check Truncation – An alternative to receiving a canceled check.

• Image Statements – Show miniature computer pictures of checks.

• Substitute Checks – Warranted by banks as an acceptable version of original checks written by you.

• Bad Check – A check for which there are insufficient funds in the account (NSF)


Payment Instruments for Special Needs

• Traveler’s Checks- Accepted almost everywhere; sign twice; fee to purchase

• Money Orders-Bought for a specific amount

• Certified Checks-Shows that account has enough money; fee charged

• Cashier’s Checks- Backed by financial institution; fee charged


Monetary Asset Management: Tool #2 – Savings Accounts

Statement Savings Account (or Passbook Savings Account)

• Permits frequent deposits or withdrawals of funds.

• No fee if minimum balance maintained

• Printed receipts and periodic statements

• Can usually be accessed through ATMs


Savings Account Interest

The calculation of interest to be paid on deposits in financial institutions is primarily based on four variables:

– the amount of money on deposit

– the method of determining the balance

– the interest rate applied and

– the frequency of compounding.


Savings Account Interest (Continued)

Annual Percentage Yield (APY) Percentage based on the total interest that would be received on a $100 deposit for a 365-day period, given the institution’s annual rate of simple interest and frequency of compounding.

• More frequent compounding, the greater the effective return

• APY must be used in advertising and disclosures…Why???


Monetary Asset Management: Tool #3 – Money Market Accounts

Money Market Account – Any of a variety of interest-earning accounts that:– Pay relatively high interest rates

(compared with regular savings accounts)

– Offer some limited check-writing privileges

– Four types:• Super NOW accounts

• Money market deposit accounts

• Money market mutual funds

• Asset management accounts


Super NOW Accounts

Super NOW Account – Government-insured money market account offered through depository institutions.

• High interest NOW checking account

• Usually allow 6 checks per month

• Usually $1,000 to $2,500 minimum deposit to earn highest interest


Money Market Deposit Accounts

Money Market Deposit Account (MMDA) – Has minimum-balance requirements and tiered interest rates that vary with the size of the account balance; government insured.

• Typically limited to 3 to 6 transactions per month

• Institution sets minimum deposit to

earn highest interest

• Usually pay higher rates than Super NOWs


Money Market Mutual Funds

Money Market Mutual Fund (MMMF) – A money market account in a mutual fund investment company (rather than at a depository institution).– Interest is calculated daily

– Buys debts with short-term maturities

– Usually $500 to $1,000 to open account

– Limited check-writing

– NO government (FDIC) insurance


Asset Management Accounts

Asset Management Account (AMA or All-in-One Account) – A coordinated account that places a customer’s monetary assets into a unified account and reports them on a single monthly statement.

– Money market mutual fund

– Credit card

– Checking account

– Stock brokerage account


Monetary Asset Management: Tool #4 – Long-Term Savings Instruments

• Involves placing money into long-term savings instruments for a given period of time (anywhere from 6 months to two years or longer)

• Instruments include

– Certificates of Deposit (CDs)

– U.S. Government Savings Bonds• EE bonds (buy at half of face value)

• I bonds (buy at full face value)


Certificates of Deposit

• Certificate of Deposit (CD) – An interest-earning savings instrument purchased for a fixed period of time.– Interest rate remains fixed for entire term

• Variable-Rate Certificates of Deposit (or Adjustable-Rate CDs) – Pay an interest rate that is adjusted periodically.

– Reduces predictability

Can buy CDs from banks and brokerage firms


Golden Rules of Managing Monetary Assets

1. Choose an interest-earning checking account and reconcile the bank statement monthly.

2. Minimize ATM fees by making fewer large withdrawals rather than frequent small withdrawals.

3. Monitor bank fees and, if necessary, change financial institutions to avoid fees.

4. Build an emergency fund sufficient to cover three months’ expenses and keep in higher-interest accounts.

5. Start saving regularly when you are young. The sooner you start, the more money you will amass.

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