Chapter Five

Management of
Monetary Assets
 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.
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 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.
Liquidity – Speed and ease in which
– Examples??? an asset can be converted to cash
Safety – Freedom from financial risk
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 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

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 Figure 5.1: Four Tools of Monetary
Asset Management

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 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???

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 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)

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 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.”

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 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.
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 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?

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 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.

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 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
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 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???
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 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???

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 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

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 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.
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 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
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 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)
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 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

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 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
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 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.

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 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???
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 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

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 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

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 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
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 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
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 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
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 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)

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 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

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 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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