Any financial professionals who can help me?

[CDNSushi]

Heya all... I'm trying to work through a question I was asked on an open-book test dealing with U.S. banking. There is nothing in the rules that says I cannot consult friends or colleagues to derive the answers to the test, so I wonder if there is anyone who can provide some insight.

The biggest problem I have here is that the textbook does not deal with this sufficiently, and I am not American -- I live in a country where there are no checks or checking accounts. Here, savings accounts ARE transaction accounts...

Anyway, here's what the question says. If you like you can send a PM with your thoughts.

Thanks all!

Jim

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Original question deleted (just in case) and because the question was successfully answered. This forum gets spidered by search engine-bots mercilessly. Probably best to stop it here. Thanks, Brooster. Yer tops!

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Any ideas to help clarify this?

[BroosterB1]

Sush,

For this question the answer is A CD's are not transaction accounts. they cannot be accessed via the Automated Clearing House transactions act, they carry penalties for early withdrawl or termination of the contract and generally they can not be added to or withdrawn from during the time period of the certificate.

None of these apply to Savings or Share Draft accounts (Credit unions). FYI, whilesavings accounts in the States are not as open as they are elsewhere in the world; hybrid accounts exist which allow almost the same access as a checking account. In the US most debit cards are tyed to checking accounts, while some purchasing cards are tied to drawing accounts.

Cheers!

[CDNSushi]

So, to summarize -- of the listed account types, CDs are the most restrictive in how they may be used to liquidize and use for market transactions, whereas savings accounts (which, although not transaction accounts per se) can be hybridized to tie in with a transaction account.

Is that about right?

P.S. The textbook scarcely mentions the Automated Clearing House (ACH) -- I had to do a web search after reading your post to learn more about that. Happily, however, I have been edumuhcated! :-)

[BroosterB1]

Sush,

I was talking about how thing currently are; the reason why your text book mentions not is they are most likely going back to the old definitions of Bearer vs non-bearer instruments. Liquidity is determined by the ability to "present on demand". Examples :

Ancient times - Gold or goods presented as payment carrier by the bearer.

Modern times- Circa 1650-1700- bearer instruments issued by a banking institution that were presentable for gold or silver. Known as letters of deposit or bearer bonds, these were the forerunners of modern cash.

Cash- A note of obligation, originally presentable for the face value in gold or silver. Legal Tender were notes issued by government entities, Bank tender were notes issued by banks (chartered or non-chartered private banks).

Depository accounts evolved as a form of financing the ability of the "bank" to have enough cash on hand to redeem the bearer instruments. Leverage was gained by lending deposits to third parties.

the simplest depository account was the savings account, whereby the "bank" paid interest for the money left on deposit.

Checking accounts are drawing accounts, that originally did not pay interest, but rather provided the issuer (check writer) a way to give a bearer note payable at the bank of choice. With the advent of the Federal reserve clearing houses checking accounts became the preferred way to transact business. The ACh system Automates these transactions.

As electronic transfer and deposit became more and more prevalent, savings accounts went through a transformation, basically into transaction accounts as well (NOW accounts or accounts that had the properties of both a checking account and a savings account became very popular).

That leaves us with CD's. CD's go back to the old idea of a depository account, except the difference is the time agreement. For longer lengths of time the issuing entity would pay higher than current rate interest wise. Because of the aspects of time and premature penalty, CD's have not been considered transaction accounts, but rather capital accounts ( accounts that are placed on the balance sheet as a long term liability, and thus provide capital for the "bank" to lend.

This is all very, very simplified. One could write books about the US banking system, how it is similar and different than the rest of the World's. But hopefully this gives you an idea of what the difference is.

Oh, BTW the FDIC insurance has nothing to do with what kind of account it is, only if the US Government will back up the account should the bank fail.