Question

3. Passbook savings accounts and NOW accounts (part of checkable deposits) are both interest bearing bank deposits, but NOW accounts have checkable privileges and passbook savings accounts have no checkable privileges. Then why would anyone have a passbook savings deposit? Provide the economic concept behind this argument

4. Given the following three sets of bonds:

90 day Commercial Paper (AAA rated)

90 day Commercial Paper (BAA rated)

90 day Treasury Bills

Rank their interest rates from lowest to highest. Defend your ranking.

Answer 1

3. A person should have a passbook savings account inspite of it not having a checkable facility. Savings accounts pay interest, so it helps our money to grow. It is beneficial to keep the funds not currently required in a savings account rather than a checkable account to help the money grow in itself without making a withdrawal. Also savings account is the most liquid investments. If we has invested the funds in a bond it would have been difficult ti easily liquidate the bond.

4. The rankings of interest rates are :

• 90 - Day Commercial Paper : Since, it has the lowest ratings and probably the highest chance of a default, This bond pays the highest interest.
• 90 - Day commercial paper : This bond has a very good rating which is AAA. So, the probability of default is very low. So, the interest paid on these bonds are also low in comparison to the bond with a BAA rating.
• 90 day Treasury Bills : these are the safest instrument, Backed by the full faith of the US government. these are default free bonds. So, the interest paid on these bonds are the lowest.