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Exam 5: Cash or Liquid Asset Management

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Question 21

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You have $5,000 in a 36 month Certificate of Deposit that has an APR of 3.75%. If inflation averages 4.25% during these 36 months, what is the real return on your CD?

A) 3.75%
B) 8.0%
C) negative .50%
D) negative 8.0%

E) A) and D)
F) A) and B)

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Question 22

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A travelers check is typically less liquid than a personal check.

A) True
B) False

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Question 23

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Briefly describe each of the cash management alternatives discussed in this chapter.

What are short-term notes of debt issued by the federal government commonly called?

Tony just received his checking account statement from his bank. He has a NOW account with free checking that pays 0.75% APR on the balance and requires a $500 minimum balance. His statement shows that he currently has a balance of $3,950. In looking at his statement he notices that his car payment check for $400 is still outstanding, and that his recently received payroll deposit of $3,600 had not posted at the time the statement was created. His normal living expenses average $1,500 per month including his car payment. Other than his car loan, he rarely writes any checks as he prefers to use his debit card and ATM card for day-to-day living expenses. He pays his credit card balance in full every month. Other than his checking account he does not own any investments. He has always dreamed of owning a house, and would like to buy one within the next five years. He has access to a 401K pension plan at work where his employer will match contributions up to 6% of his salary. He currently contributes 2% of his salary to this plan. -What recommendations would you give Tony about his goal of buying a house in five years?

Which of the following financial institutions were originally established to provide mortgage loans to depositors?

If you only use your Debit Card and ATM card and rarely write paper checks, overdraft protection is still a good thing to have.

The APY is the APR after taxes.

Which of the following characteristics apply to liquid assets?

Money market mutual funds provide an alternative to traditional liquid investments offered by financial institutions. Advantages of MMMFs include which of the following?

Because liquid assets can be turned into cash quickly and with little loss, they have little risk associated with them and therefore provide a low rate of return for the consumer.

Cash and investments that can be easily converted into cash are termed

Why is it important to convert interest rates into the APY on different accounts and with different banks?

Money market mutual funds provide attractive competition for bank deposits because

When you use your Debit Card or ATM card, you should enter the transaction into your check register.

Money Market Deposit Accounts enjoy one advantage over savings accounts found in commercial banks. This advantage is

The ________ converts interest rates compounded for different periods into comparable annual rates, allowing you to compare interest rates easily.

A tax free investment will always have a higher after-tax return than a taxable investment.

A certified check is a personal check that has been certified as being good by the financial institution on which it is drawn.

You are examining two different MMMFs. Fund A is tax-exempt and pays 5%. Fund B is taxable and pays 6%. You live in a state that imposes no income taxes and are in a 28% federal tax bracket. At what tax rate would the two funds have identical yields?