Personal Finance, 6e (Madura) Chapter 6 Managing Your Money

Personal Finance, 6e (Madura) Chapter 6 Managing Your Money

6.1 Background on Money Management

1) Money management is a series of decisions made over a short-term period regarding cash inflows and outflows. Answer: TRUE Diff: 1 Question Status: Previous edition

2) Liquidity refers to your ability to cover any long-term cash deficiencies. Answer: FALSE Diff: 2 Question Status: Previous edition

3) Money management has no relationship to the personal cash flow statement. Answer: FALSE Diff: 1 Question Status: Previous edition

4) You should attempt to have a sufficient amount of funds in liquid assets to draw on when your cash outflows exceed your cash inflows. Answer: TRUE Diff: 1 Question Status: Previous edition

5) Maintaining liquid assets that you can easily access when you need funds allows you to avoid using credit and paying finance charges. Answer: TRUE Diff: 1 Question Status: Previous edition

6) In general, the more liquid an asset, the higher its return. Answer: FALSE Diff: 1 Question Status: Previous edition

7) Liquidity is necessary because there are times during the year when your cash inflows are not adequate to cover your cash outflows. Answer: TRUE Diff: 1 Question Status: Previous edition

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8) To achieve both liquidity and an adequate return, you should consider investing in only one money market investment with a fixed interest rate and a long maturity date. Answer: FALSE Diff: 2 Question Status: Previous edition

9) Good cash management requires some liquidity, but excessive liquidity has an opportunity cost. Answer: TRUE Diff: 1 Question Status: Previous edition

10) Which of the following does money management not involve? A) A series of decisions B) A long-term time period C) Cash inflows D) Cash outflows Answer: B Diff: 2 Question Status: Previous edition

11) ________ management is a series of decisions made over a short-term period regarding cash inflows and outflows. A) Cash B) Money C) Liabilities D) Both A and B are correct. Answer: B Diff: 1 Question Status: Revised

12) Your ability to cover any short-term cash deficiencies is called A) solvency. B) wealth. C) liquidity. D) cash planning. Answer: C Diff: 1 Question Status: Previous edition

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13) A disadvantage of using credit as a source of liquidity is the A) inconvenience of using credit. B) potential cost of finance charges. C) acceptability of credit by creditors. D) poor records available after credit use. Answer: B Diff: 1 Question Status: Previous edition

14) In general, the more liquid an investment is, the ________ the return you will receive. A) lower B) higher C) less predictable D) There is no relationship between liquidity and return. Answer: A Diff: 1 Question Status: Previous edition

15) Generally, yields are ________ for securities that are exposed to ________ liquidity risk. A) higher; more B) higher; less C) lower; less D) Both A and C are correct. Answer: D Diff: 2 Question Status: Previous edition

16) To achieve both liquidity and an adequate return, you should consider investing in A) 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. Answer: C Diff: 2 Question Status: Previous edition

17) Your ability to cover short-term cash deficiencies is a measure of your ________. Answer: liquidity Diff: 1 Question Status: Previous edition

18) Describe the relationship between return and liquidity using a one-year CD and a checking account to illustrate. Answer: The highest return is least liquid (the CD). In exchange for liquidity, the return is lower with a checking account. Diff: 1 Question Status: Previous edition

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Use the following two columns of items to answer the matching questions below:

A) a series of decisions made over a short-term period regarding cash inflows and outflows B) ability to cover cash deficiencies C) cash outflows are more than inflows

19) money management Diff: 1 Question Status: Revised

20) liquidity Diff: 1 Question Status: Revised

21) cash deficiency Diff: 1 Question Status: Revised

Answers: 19) A 20) B 21) C

22) Financial advisors often advise having 4-6 months of income in "near cash" for rainy day funds. Which of these investments do not provide the necessary liquidity to meet this need? A) Bank money market fund B) Stock market listed money market fund C) High dividend paying blue chip stock D) B and C do not provide the necessary liquidity Answer: C Diff: 2 Question Status: New

23) Developing a monthly budget as part of your annual financial plan to determine excess cash or cash deficiencies, and then developing a plan to invest (or fund) the excess (deficient) cash position is a process called A) personal financial accountability. B) money management. C) liquidity management. D) budgeting. Answer: B Diff: 3 Question Status: New

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6.2 Money Market Investments

1) Overdraft protection for a checking account is a low-cost short-term loan. Answer: FALSE Diff: 1 Question Status: Previous edition

2) Stopping payment on a check should be used if you paid to have your bathroom remodeled and the job was not completed. Answer: TRUE Diff: 2 Question Status: Previous edition

3) If you lose your checkbook, the bank will not charge you for stopping payment on any unused blank checks. Answer: FALSE Diff: 3 Question Status: Previous edition

4) 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. Answer: TRUE Diff: 1 Question Status: Previous edition

5) An advantage of a NOW account over a traditional checking account is that your money is more readily available to you. Answer: FALSE Diff: 2 Question Status: Previous edition

6) The $500 minimum balance you are required to keep in your NOW checking account represents an opportunity cost. Answer: TRUE Diff: 2 Question Status: Previous edition

7) Certificates of deposit are highly liquid and pay the highest investment returns. Answer: FALSE Diff: 1 Question Status: Previous edition

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