Finance Chapter 6

T/F money management is a series of decisions made over a short term period regarding case inflows and outflows true
T/F liquidity refers to your ability to cover any long term cash deficiencies false
T/F money management has no relationship to the personal cash flow statement false
T/F you should attempt to have a sufficient amount of funds in liquid assets to draw on when your cash outflows exceed your inflows true
T/F maintaining liquid assets that you can easily access when you need funds allows you to avoid using credit and paying finance charges true
T/F in general, the more liquid the asset, the higher its return false
liquidity is necessary because there are times during the year when your cash inflows are not adequate to cover your cash outflows true
to achiever both liquidity and a adequate return, you should consider investing in only one money market investment with a fixed interest rate and long term maturity date false
good cash management requires some liquidity, but excessive liquidity has an opportunity cost true
Which of the following does money management not involve?A) A series of decisionsB) A long-term time periodC) Cash inflowsD) Cash outflows B
A disadvantage of using credit as a source of liquidity is theA) inconvenience of using credit.B) potential cost of finance charges.C) acceptability of credit by creditors.D) poor records available after credit use. B
Generally, yields are ________ for securities that are exposed to ________ liquidity risk.A) higher; moreB) higher; lessC) lower; lessD) Both A and C are correct D
To achieve both liquidity and an adequate return, you should consider investing inA) only one money market investment with a high return and low liquidity.B) only one money market investment with low return and high liquidity.C) multiple money market investments with varied returns and levels of liquidity.D) multiple money market investments with high returns and high liquidity. C
T/F overdraft protection for a checking account is a low cost short term loan False
T/F stopping payment on a check should be used if you paid to have your bathroom remolded and the job was not completed true
T/F if you loose your checkbook, the bank will not charge you for stopping payment on any unused blank checks false
T/F because most regular checking accounts do not pay interest, you should keep only enough funds in your account to cover anticipated expenses with a small reserve for unanticipated expenses true
T/F an advantage of Negotiable Order of Withdrawal (NOW) account over a traditional checking account is that your money is more readily available to you false
the $5oo minimum balance you are required to keep in your NOW checking account represents an opportunity cost true
certificates of deposit (CDs) are highly liquid and pay the highest investment return false
CDs that have small denominations (such as $10,000 or less) are sometimes referred to as retail CDs because they are more attractive to individuals than to firms true
since CDs are insured by the FDIC, the rates are usually the same from one institution to the other false
to calculate interest earned, multiply the deposit amount times the annual interest rate times the adjustment for the investment period true
a money market deposit account (MMDA) requires a minimum balance, pays interest, and allows a limited number of checks to be written each month true
treasury securities are T-bills with a maturity of one year or less true
t-bills may be purchased by individuals, but require a minimum investment of $10,000 par value true
t-bills are more liquid that CDs because there is a secondary market for T-bills true
money market funds (MMFs) which invest in commercial paper are insured by the FDIC false
a money market account combines deposit accounts with a brokerage account and provides a single consolidated statement, and “sweeps” the unused balance from the checking account to a savings account daily false
an asset management account combines deposit accounts with a brokerage account and provides a single account statement true
Which of the following is not a money market investment?A) Shares of corporate stockB) NOW accountC) Savings accountD) Treasury bills A
Which of the following should not be considered when evaluating a checking account?A) The overdraft protection availableB) The stop payment feature and the cost of itC) The fees charged monthlyD) The type of account insurance carried by the bank D
Stopping payment on a check A) is possible after the check clears in cases of disputes.B) can only be used if the check has not cleared.C) is free if your checkbook is lost or stolen.D) is encouraged by most banks as a customer service. B
If a bank provides overdraft protection at a rate of 12% for each $100 (or portion of $100) borrowed when an overdraft occurs, what amount of interest would a customer pay for a $188 overdraft?A) $24.00B) $22.56C) $10.56D) $12.00 A
Checking accounts may offer all of the following exceptA) account balance insurance in excess of $250,000.B) stop payment services.C) overdraft protection.D) ATM privileges. A
Which of the following is NOT an advantage of a checking account?A) Stop payment servicesB) Overdraft protectionC) Interest earned on balancesD) Liquidity C
Which of the following is not true of a NOW account?A) Offered by depository institutionsB) Pays relatively low interestC) Only three checks per month can be writtenD) Requires a minimum balance C
Kayla deposits $1,500 into a NOW account that requires a minimum balance of $500 and offers an interest rate of 2.4%. How much interest will she earn in one year in the NOW account?A) $360B) $24C) $12D) $36 D
Which of the following is not true regarding a savings account?A) It does not provide checking services.B) It is less liquid than a checking account.C) It pays lower interest than a checking account.D) It is less convenient than a checking account. C
You have $3,000 that you may need to use to replace the furnace in your home. If you need the funds, it would be on no less than a week’s notice. Into which type of account would it be best for you to deposit the $3,000?A) Checking accountB) Savings accountC) NOW accountD) All of the above would be equally acceptable. B
Which of the following is not true about a certificate of deposit (CD)?A) It pays higher interest than a saving account.B) Are only offered in denominations of $100,000 or more.C) It is not as liquid as a savings account.D) Funds are locked in for specific periods of time. B
Which of the following is not true about a certificate of deposit (CD)?A) They pay higher interest than T-bills.B) They are long-term investments of two years or more.C) Funds are locked in for specific periods of time.D) A penalty is imposed for early withdrawal. B
When purchasing a certificate of deposit (CD)A) you are always better off to buy the longer-term CDs.B) you will earn more interest percentage-wise on the lower dollar CDs.C) the amount you invest is at risk, so choose carefully.D) it is wise to shop around as rates vary among financial institutions. D
Which of the following items will give you the highest return?A) One year CDB) Savings accountC) NOW accountD) Checking account A
Which of the following items will give you the greatest liquidity?A) One year CDB) Savings accountC) Checking accountD) NOW account C
Which of the following is NOT true regarding a money market deposit account (MMDA)?A) A minimum balance is required.B) It has a maturity date.C) The account pays interest.D) A limited number of checks may be written monthly. B
In comparing an MMDA to a NOW account, the MMDA does all of the following exceptA) it pays a higher interest rate.B) MMDA accounts are less liquid.C) it provides more limited checking services.D) MMDA accounts must maintain a larger balance. B
All of the following are true of money market deposit accounts (MMDA) exceptA) a minimum balance is required.B) the account pays higher interest.C) a limited number of checks may be written monthly.D) they are the same regardless of the depository institution offering them. D
Which of the following accounts would tend to give you the higher interest combined with ease of access to your funds on a limited basis?A) Checking accountB) MMDAC) NOW accountD) CD B
Which of the following is not a good, short-term money market investment?A) NOW accountB) Savings accountC) AT&T common stockD) Treasury bills C
Which of the following is a feature of Treasury bills (T-bills)?A) They have a maturity of more than one year.B) They are available with a minimum value at maturity of $100.C) They are purchased at a discount from par value.D) They must be held to maturity. C
All of the following are true of Treasury securities except theyA) are a means by which the U.S. government lends money.B) have a maturity range from 3 months to 30 years.C) have a minimum par value of $100.D) can be bought and sold on the secondary market C
The secondary market for T-bills means thatA) they cannot be sold before their maturity date with the help of a brokerage firm.B) an individual may purchase T-bills that were owned by some other investor rather than from the government.C) T-bills are less liquid than CDs.D) All of the above. B
The market where an investor could sell T-bills that he owns is called theA) primary market.B) secondary market.C) stock market.D) T-bill market B
Money market funds (MMF) have all of the following characteristics exceptA) pooled money provided by individuals to invest.B) unlimited check writing.C) short-term maturity.D) a minimum investment amount. B
Which of the following is not a characteristic of money market funds (MMFs)?A) Pooled money provided by individuals to investB) Short-term maturityC) High-risk investmentsD) A minimum investment amount C
Money market funds (MMFs) offer all of the following exceptA) short-term maturity securities.B) safe investments with higher rates than T-bills.C) insured savings.D) check writing privileges. C
An asset management account combinesA) assets and expenses.B) deposit accounts with a brokerage account.C) a savings account with a brokerage account.D) a savings account with long-term investments. B
An asset management account that moves any unused balance in the brokerage account into a money market investment at the end of each business day is called a(n)A) sweep account.B) asset management account.C) money market fund.D) secondary market. A
An asset management account does all of the following exceptA) combines deposit accounts with a brokerage account that is used to buy or sell stocks.B) provides a single consolidated statement showing the ending balance and activity of all accounts.C) requires a small initial investment to start.D) sweeps any unused balance in the checking account into a money market account at the end of the day. C
Which of the following affords you access to a “sweep account”?A) Asset management accountB) NOW accountC) MMDA accountD) MMF A
T/F Some investments are subject to credit risk. This means that the borrowers may not repay on a timely basis true
T/F For relatively safe investments such as savings accounts, CDs, MMDAs, and T-bills, liquidity is rarely a concern. false
Generally, savings account yields are ________ than certificates of deposit that are exposed to ________ liquidity risk.A) lower; moreB) higher; lessC) higher; moreD) lower; less A
A one-year CD has a ________ return and ________ liquidity than a checking account.A) lower; lowerB) higher; higherC) higher; lowerD) lower; higher C
________ risk is the risk that an investment could decline as a result of a change in interest rates.A) CreditB) Interest rateC) LiquidityD) Asset B
________ risk is the potential loss of converting an investment into cash.A) CreditB) Interest rateC) LiquidityD) Asset C
If you purchase a bond that matures in 5 years but you may have to cash it in before that time, it exposes you to theA) credit risk.B) default risk.C) interest rate risk.D) liquidity risk. C
Because of the active bond market in Chicago, one risk that a corporate bond is less likely to expose you to is theA) liquidity risk.B) credit risk.C) default risk.D) interest rate risk. A
T/F Generally, short-term debt securities issued by large corporations, also known as commercial paper, typically offer a slightly higher return than Treasury bills. true
T/F Since the potential for default is very low for some types of money market securities, it’s not necessary to assess the risk before investing your money in one. false
Risk management of money market investments involves assessing the risk exhibited by the investment. true
Risk management of money market investments involves all of the following exceptA) credit risk.B) interest rate risk.C) potential for default when backed by the federal government.D) liquidity risk. C
The following money market securities are insulated from credit risk with the exception ofA) treasury securities.B) bank deposits.C) commercial paper.D) CDs. C

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