A breakdown of the Steeles’ $27,440 of liquid assets at December 31 appears on the shown below.
Account Amount
Coins and currency .......... $ 440
Regular checking .......... 5,400
Savings account ........... 10,600
60-month CDs ........... 5,000
U.S. Series EE bonds ........ 6,000
Total ................ $ 27,440
The Steeles like to shop at flea markets and antique malls where purchases must often be made in cash. So, they typically keep about $2,000 or more in their checking account than would otherwise be necessary. Also, as you may recall from their budget in Chapter, there are three months—January, July, and August—that show negative cash flows.
1. Considering their income, does the total liquid asset amount of $27,440 seem adequate for the Steeles?
2. Is the Steeles’ reason for keeping an excessive checking account balance sensible? Can you offer a better approach, assuming they will continue their shopping habits?
3. Assume that the deposit rates shown in Table 5.1 currently exist. How would you advise the Steeles to allocate the $27,440 among the various types of deposits? Show the specific amounts you suggest for each type of deposit. If you think the appropriate amount is zero, so indicate.
4. Hopefully, your plan created in your answer to Question 3 shows superior returns to the Steeles’ existing arrangement. Show the enhanced yield, but also discuss whether or not your plan offers more or less safety and more or less liquidity.