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M5 Individual Assignment ECON-3122, Money & Banking

1. Not all financial assets are the right vehicle for everyone. Give an example of someone for whom a certificate of deposit would be useful. Also, give an example of someone for whom a certificate of deposit would be a bad choice. Certificate of deposit is an illiquid bank account (Brandl, 2021, p. 274). It is “a savings product that earns interest on a lump sum for a fixed period of time (Fernando, 2023). It differs from other kinds of savings accounts since the money on the account must not be touched the entire term, or the person will face penalty fees or lost interest. CDs are best for conservative savers who want safer investments than stocks or bonds. It is a useful investment for them since CDs offer non-volatility and guaranteed rate of return (Fernando, 2023). On the other hand, CDs can be a bad choice for people who need an emergency fund. Since CDs are a long-term fixed investment that penalizes for early access, it is not for people who need quick access to the money on their account (Shilling, 2023). 2. One tool used to evaluate a potential borrower is collateral. What is collateral? Why can some assets not function as collateral? Collateral is a secondary source of payment if a borrower fails to repay a loan (Brandl, 2021, p. 284). For an asset to qualify as a collateral, the asset must be of high value, low depreciation rate or high appreciation rate, and easily convertible into cash (Carbajo, 2017). Some things cannot function as collateral. Some of them are assets that are difficult to value such as intellectual

property, patents and copyrights. These assets do not have a physical form or a clear market value which makes it hard to give them a certain value. Because of their high volatility, cryptocurrencies might not be accepted as a collateral by some. There might be too much risk and uncertainty associated with assets like crypro which makes it undesirable. I think other assets that might not be accepted as collateral are high risk assets, and the risks might be legal, operational or environmental. For example, if an asset carries too many environmental risks that might even lead to legal issues, the asset most likely will not be accepted as collateral. 3. The Community Reinvestment Act was created in response to the issue of redlining. What is/was redlining and how did the act attempt to address it? Redlining was (and may still is) a banking practice when bankers would deny financial services to people living in certain areas (Brandl, 2021, p. 319). In order to address the issue of redlining, President Carter signed into law the Community Reinvestment Act in 1977 passed by Congress. According to the act, banks had to get the CRA certification to undertake actions that need regulatory approval. The CRA certification was given to banks that could demonstrate the fact that they approve financial services to people all across their geographical area. The act basically obliged banks to get a certification that showed that they do not practice any kind of discrimination towards people from certain areas.

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Reference: Brandl, M. (2021). Money, Banking, Financial Markets and Institutions. Boston: Cengage Learning. Carbajo, M. (2017, December 31). Asset-Based Lending: What is the Upside and Downside? Small Business Administration. https://www.sba.gov/blog/asset-based-lending-what- upside-downside Fernando, J. (2023, May 3). What Is a Certificate of Deposit (CD) and What Can It Do for You? Investopedia. https://www.investopedia.com/terms/c/certificateofdeposit.asp Shilling, A. (2023, July 28). Are certificates of deposit (CDs) worth it? MarketWatch. https://www.marketwatch.com/picks/are-certificates-of-deposit-cds-worth-it- f8e02f42#:~:text=CDs%20are%20also%20not%20right,or%20a%20money%20market %20account .

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