Chapter 12: Problem 12

Define the following: a. Time deposit b. Money market mutual fund c. Money market deposit account d. Fractional reserve banking e. Reserves

Short Answer

Expert verified

a. Time deposit is a fixed deposit at a bank, which can't be withdrawn before a fixed term. b. Money market mutual fund is an investment that aims to earn interest for shareholders. c. Money market deposit account is an account that pays a higher interest rate than a savings account. d. Fractional reserve banking is a system where only a fraction of bank deposits are backed by actual cash. e. Reserves are banks' holdings of deposits in accounts with their central bank, plus currency physically held in the bank's vault.

Step by step solution

Define Time Deposit

A time deposit is a fixed deposit at a bank, which cannot be withdrawn for a predetermined fixed 'term' or period of time. If withdrawn before the end of the term, a penalty is charged. When the term is over it can be withdrawn or it can be held for another term. The longer the term the better the yield on the money.

Define Money Market Mutual Fund

A money market mutual fund is a type of fixed income mutual fund that invests in debt securities characterized by their short maturities and minimal credit risk. It's an investment whose objective is to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share.

Define Money Market Deposit Account

Money market deposit account is an interest-bearing account that typically pays a higher interest rate than a savings account, and which provides the account holder with limited check-writing ability.

Define Fractional Reserve Banking

Fractional reserve banking is a banking system where only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. The rest can be used by the bank to make loans.

Define Reserves

Reserves are banks' holdings of deposits in accounts with their central bank (minimum reserves), plus currency that is physically held in the bank's vault (vault cash). In a fractional reserve banking system, reserves are the amount of funds that a bank keeps on hand and does not loan out or invest.