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  1. 1. Managing Liquidity (Checking Accounts and Bank Savings) 9
  2. 2. The Roles of Money Management and Savings <ul><li>If you can’t manage your checking and savings accounts properly, you’ll have trouble managing more complicated investments, such as retirement accounts </li></ul><ul><li>Why maintain cash balances? </li></ul><ul><ul><li>It’s expensive (because you’re forgoing interest income) </li></ul></ul><ul><ul><li>But we like the convenience </li></ul></ul>
  3. 3. The Roles of Money Management and Savings <ul><li>Why savings are so important </li></ul><ul><ul><li>Very liquid </li></ul></ul><ul><ul><li>Serves as an emergency fund </li></ul></ul><ul><ul><li>Allows us to achieve a certain goal (vacation, car down payment, etc .) </li></ul></ul><ul><ul><li>Americans save less than 2.5% of their income </li></ul></ul><ul><ul><ul><li>Europeans save about 10%+ </li></ul></ul></ul>
  4. 4. The Roles of Money Management and Savings <ul><li>How much savings do you need? </li></ul><ul><ul><li>Emergency fund </li></ul></ul><ul><ul><ul><li>Should have amount equal to about 3 to 6 months of after-tax income </li></ul></ul></ul><ul><ul><li>Additional amount depends on your goals (short- and long-term) </li></ul></ul><ul><ul><ul><li>Do you want to buy a house soon? Need to save for the down payment </li></ul></ul></ul><ul><li>Have money automatically transferred to your savings account from each paycheck </li></ul><ul><ul><li>Treat it as a fixed expense </li></ul></ul>
  5. 5. The Roles of Money Management and Savings <ul><li>How fast your savings will grow depends upon: </li></ul><ul><ul><li>What interest rate your savings earn (stated or nominal rate) </li></ul></ul><ul><ul><li>Frequency of compounding </li></ul></ul><ul><ul><li>How much money you deposit periodically </li></ul></ul><ul><ul><li>How your account balance is determined </li></ul></ul>
  6. 6. What Determines How Fast Your Savings Will Grow? <ul><li>The impact of time on interest earned </li></ul><ul><ul><li>If interest is being compounded (earning interest on interest), time can have a significant impact </li></ul></ul><ul><li>The frequency of compounding </li></ul><ul><ul><li>The more frequently money is compounded, the more often interest is paid—so money grows faster </li></ul></ul><ul><ul><ul><li>Your effective interest rate is greater the more often interest is compounded </li></ul></ul></ul><ul><li>The treatment of deposits and withdrawals </li></ul><ul><ul><li>Most financial institutions use the day-of-deposit-to-day-of-withdrawal method of computing interest </li></ul></ul><ul><ul><ul><li>Interest is based on the exact number of days the money is in your account </li></ul></ul></ul><ul><ul><li>Other methods include minimum balance (will earn less interest this way) </li></ul></ul>
  7. 7. Choosing a Financial Institution <ul><li>Financial institutions include banks and credit unions </li></ul><ul><li>Factors influencing your decision </li></ul><ul><ul><li>How important is convenience to you? </li></ul></ul><ul><ul><ul><li>Do you choose a bank just because it’s right around the corner from your house? </li></ul></ul></ul><ul><ul><ul><li>Convenience is important, but nowadays with electronic banking it’s not nearly as important </li></ul></ul></ul><ul><ul><ul><ul><li>Direct deposit, online-banking, epay, etc . </li></ul></ul></ul></ul>
  8. 8. Choosing a Financial Institution <ul><li>What services do you expect? </li></ul><ul><ul><li>Electronic banking </li></ul></ul><ul><ul><li>Safe deposit box </li></ul></ul><ul><ul><li>Do you want good, personal service where the tellers know you by name? </li></ul></ul><ul><li>What insurance safeguards are present? </li></ul><ul><ul><li>Most financial institutions (banks, credit unions) are federally insured up to $250,000 </li></ul></ul>
  9. 9. Choosing a Financial Institution <ul><li>How much does it cost? </li></ul><ul><ul><li>Before deregulation financial institutions offered many services for ‘free’ </li></ul></ul><ul><ul><ul><li>Charged a basic fee for having an account </li></ul></ul></ul><ul><ul><ul><li>Provided free checks, help with reconciliation, etc . </li></ul></ul></ul><ul><ul><ul><li>Banks competed on the basis of service because basically all banks paid customers same interest rate on deposits </li></ul></ul></ul><ul><ul><ul><li>The spread between interest paid to customers and interest charged on loans was large </li></ul></ul></ul><ul><ul><li>Since deregulation banks compete for deposits based on interest rates </li></ul></ul><ul><ul><ul><li>Spread on interest paid vs. charged has narrowed </li></ul></ul></ul><ul><ul><ul><li>Banks have eliminated ‘free’ services and now charge fees (sometimes very HIGH fees) </li></ul></ul></ul><ul><ul><ul><ul><li>Banks collect about $20 billion in fees (up 200% from 10 years ago) </li></ul></ul></ul></ul><ul><ul><ul><li>Fees vary widely from bank to bank </li></ul></ul></ul><ul><ul><ul><ul><li>Shop around </li></ul></ul></ul></ul>
  10. 10. What are the Major Financial Institutions? <ul><li>Commercial banks (AKA full-service banks) </li></ul><ul><ul><li>Offer: </li></ul></ul><ul><ul><ul><li>Checking and savings accounts </li></ul></ul></ul><ul><ul><ul><li>Personal and business loans </li></ul></ul></ul><ul><ul><ul><li>Trust services </li></ul></ul></ul><ul><ul><ul><li>Safe-deposit boxes </li></ul></ul></ul><ul><ul><ul><li>Mortgage loans </li></ul></ul></ul><ul><ul><ul><li>Discount brokerage serves (maybe) </li></ul></ul></ul><ul><ul><li>Convenient (Over 65,000 branch offices across U.S.) </li></ul></ul>
  11. 11. What are the Major Financial Institutions? <ul><li>Savings Banks (S&Ls) </li></ul><ul><ul><li>Traditionally serve consumers </li></ul></ul><ul><ul><li>Mortgage loans (make about 40% of all mortgage loans) </li></ul></ul><ul><ul><li>Today are more similar to commercial banks </li></ul></ul><ul><li>Credit Unions </li></ul><ul><ul><li>Cooperative venture owned by depositors and borrowers </li></ul></ul><ul><ul><li>Organized to serve specific groups of people </li></ul></ul><ul><ul><li>Non-profit so offer lower interest rates on loans, pay higher interest rates on deposits </li></ul></ul><ul><ul><li>Generally don’t want to take a great deal of risk </li></ul></ul>
  12. 12. What are the Major Financial Institutions? <ul><li>Brokerage Firms </li></ul><ul><ul><li>Offer central asset management accounts </li></ul></ul><ul><ul><ul><li>Combines a checking account, debt/credit card, and a money market fund with a traditional brokerage account </li></ul></ul></ul><ul><ul><li>Cash earned from dividends, interest, etc . is automatically swept into a money market account </li></ul></ul><ul><ul><ul><li>You start earning interest on your money immediately </li></ul></ul></ul><ul><ul><li>You can write a check (or use debit/credit card) to access your funds </li></ul></ul><ul><ul><li>Minimum investment required, which varies across brokerage firms </li></ul></ul><ul><ul><ul><li>Check out minimum investment amount and fees (if any), customer service, choice of money market funds, credit/debit card features, margin rates </li></ul></ul></ul>
  13. 13. Checking Accounts <ul><li>Regular checking accounts </li></ul><ul><ul><li>Some banks require a minimum balance (average is $500) which give you unlimited check writing privileges </li></ul></ul><ul><ul><li>Some banks charge no fee unless you exceed a certain number of checks per month </li></ul></ul><ul><ul><li>Banks can pay interest on checking accounts but rarely do </li></ul></ul><ul><li>Special checking accounts </li></ul><ul><ul><li>Require no minimum balance </li></ul></ul><ul><ul><li>Most banks charge a per check fee ($0.10-$0.15 per check) plus monthly maintenance fee </li></ul></ul><ul><ul><ul><li>May be a good choice for college student if write only a few checks </li></ul></ul></ul>
  14. 14. Checking Accounts <ul><li>Overdraft Protection </li></ul><ul><ul><li>If you write a check for an amount greater than the balance in your checking account it is still covered </li></ul></ul><ul><ul><ul><li>You pay a fee (essentially interest on a short-term loan) </li></ul></ul></ul><ul><li>NOW Accounts (Negotiable Order of Withdrawal) </li></ul><ul><ul><li>Combined checking and savings account </li></ul></ul><ul><ul><ul><li>Pays interest on balance (but lower rate than savings account) </li></ul></ul></ul><ul><ul><ul><li>Can write checks (actually are authorizations to take money from savings) </li></ul></ul></ul><ul><ul><li>Minimum balance of about $1,000 </li></ul></ul><ul><ul><ul><li>If balance drops below the minimum a fee is charged </li></ul></ul></ul><ul><ul><ul><ul><li>Shop around! </li></ul></ul></ul></ul><ul><ul><li>NOW accounts at credit unions are called Share-Draft Accounts </li></ul></ul>
  15. 15. Checking Account Basics <ul><li>A checking account allows you to write checks to make payments. </li></ul><ul><ul><li>A check is a written order to a bank to pay the amount stated to the person or business named on it. </li></ul></ul><ul><ul><li>A checking account is also called a demand deposit , because the money may be withdrawn at any time—that is, “on demand.” </li></ul></ul>
  16. 16. Checking Account Basics <ul><li>Checks follow a process through the banking system. </li></ul><ul><ul><li>The payee cashes your check. </li></ul></ul><ul><ul><li>The bank that cashed the check returns it to your bank. </li></ul></ul><ul><ul><li>Your bank withdraws the money from your account and sends it to the other bank. </li></ul></ul><ul><ul><li>Your bank then stamps the back of your check, indicating that it has cleared. </li></ul></ul><ul><ul><ul><li>A canceled check is a check that has cleared your account. </li></ul></ul></ul>(continued)
  17. 17. Checking Account Basics <ul><li>Many banks no longer send paper checks to other banks for processing. </li></ul><ul><ul><li>To make processing faster and more efficient, they exchange check information electronically by transmitting an image of the check, called a substitute check. </li></ul></ul><ul><ul><li>A substitute check can be used in the same way as an original check. </li></ul></ul>(continued)
  18. 18. Checking Account Basics <ul><li>You must also maintain enough money in your account to cover all the checks you write. </li></ul><ul><li>A check written for more money than your account contains is called an overdraft . </li></ul><ul><ul><li>A bank that does not honor a check usually stamps the check with the words “not sufficient funds” (NSF) and returns the check to the payee’s bank. </li></ul></ul><ul><ul><li>When this occurs, the check has bounced. </li></ul></ul><ul><ul><li>Your bank will charge you a fee for each NSF check processed. </li></ul></ul>(continued)
  19. 19. Checking Account Basics <ul><li>Floating a check is writing a check and hoping to deposit money to cover it before the check clears. </li></ul><ul><li>Floating a check is very risky because today’s electronic systems allow checks to process very quickly. </li></ul><ul><li>Floating a check is illegal in most states. </li></ul>(continued)
  20. 20. Checking Account Advantages <ul><li>Convenience </li></ul><ul><li>Safety </li></ul><ul><li>Built-in record keeping system </li></ul><ul><li>Access to bank services </li></ul>
  21. 21. Opening a Checking Account <ul><li>Signature authorization form </li></ul><ul><li>Initial deposit </li></ul>
  22. 22. Parts of a Check Check Number ABA Number Name and Address of Maker Date Payee Numeric Amount Written Amount Signature Account and Routing Numbers Memo
  23. 23. Using Your Checking Account <ul><li>Writing checks </li></ul><ul><li>Paying bills online </li></ul><ul><li>Making deposits </li></ul><ul><li>Using a checkbook register </li></ul><ul><ul><li>A checkbook register is a booklet used to record checking account transactions. </li></ul></ul>
  24. 24. Bank Reconciliation <ul><li>The process of matching your checkbook register with the bank statement is known as bank reconciliation . </li></ul>
  25. 25. Reconciling Your Checking Account <ul><li>1. Write ending balance from bank statement. </li></ul><ul><li>2. Add credits or deposits not on statement. </li></ul><ul><li>3. Total lines 1 and 2. </li></ul><ul><li>4. List checks, withdrawals, and debits made but not shown on statement. </li></ul><ul><li>5. Total outstanding checks/debit transactions. </li></ul><ul><li>6. Subtract line 5 from line 3. (Result should match checkbook balance) </li></ul>
  26. 26. Endorsing Checks <ul><li>A check generally cannot be cashed until it is endorsed. </li></ul><ul><li>To endorse a check, the payee signs the top part of the back of the check in ink. </li></ul><ul><li>There are three major types of endorsements. </li></ul><ul><ul><li>Blank endorsement </li></ul></ul><ul><ul><li>Special endorsement </li></ul></ul><ul><ul><li>Restrictive endorsement </li></ul></ul>
  27. 27. Blank Endorsement <ul><li>A blank endorsement is the signature of the payee written exactly as his or her name appears on the front of the check. </li></ul>
  28. 28. Special Endorsement <ul><li>A special endorsement , or an endorsement in full, is an endorsement that transfers the right to cash the check to someone else. </li></ul>
  29. 29. Restrictive Endorsement <ul><li>A restrictive endorsement restricts or limits the use of a check. </li></ul>
  30. 30. Types of Checking Accounts <ul><li>Joint accounts </li></ul><ul><li>Special accounts </li></ul><ul><li>Standard accounts </li></ul><ul><li>Interest-bearing accounts </li></ul><ul><li>Share accounts </li></ul>
  31. 31. Banking Services and Fees <ul><li>GOALS </li></ul><ul><li>Describe banking services available at most financial institutions. </li></ul><ul><li>List and explain fees charged by financial institutions for their services. </li></ul>
  32. 32. Banking Services <ul><li>A full-service bank is one that offers every possible kind of service, from savings and checking accounts to credit cards, safe deposit boxes, loans, and ATMs. </li></ul><ul><li>Other services commonly offered are online banking, telephone banking, certified checks, cashier’s checks, money orders, and debit cards. </li></ul><ul><li>Most banks offer FDIC (Federal Deposit Insurance Corporation) insurance, which protects the deposits of customers against loss up to $250,000 per account. </li></ul>
  33. 33. Guaranteed-payment Checks <ul><li>A certified check is a personal check that the bank guarantees or certifies to be good. </li></ul><ul><li>A cashier’s check , also called a bank draft, is a check written by a bank on its own funds. </li></ul><ul><li>Traveler’s checks are check forms in specific denominations that are used instead of cash while traveling. </li></ul>
  34. 34. Money Orders <ul><li>Banks sell money orders to people who do not wish to use cash or do not have a checking account. </li></ul><ul><li>A money order is like a check, except that it can never bounce. </li></ul><ul><li>There is a charge for purchasing a money order. </li></ul><ul><li>You also can purchase money orders through the post office and local merchants. </li></ul>
  35. 35. Debit Cards <ul><li>A debit card is a plastic card that deducts money from a checking account almost immediately to pay for purchases. </li></ul><ul><li>The debit card is presented at the time of purchase. </li></ul><ul><li>When a debit card is used, the amount of the purchase is quickly deducted from the customer’s checking account and paid to the merchant. </li></ul>
  36. 36. Bank Credit Cards <ul><li>You can apply to a full-service bank for a bank credit card, such as a Visa or MasterCard. </li></ul><ul><li>If you meet the requirements and are issued a card, you can use it instead of cash at any business that accepts credit cards. </li></ul><ul><li>Banks offering national credit cards usually charge both an annual fee for use of the card and interest on the unpaid account balance. </li></ul>
  37. 37. Overdraft Protection <ul><li>Overdraft protection allows you to cover checks or withdrawals up to a specified amount, usually between $100 and $1,000, depending on the typical balance in your account. </li></ul><ul><li>With overdraft protection , your checks will be covered even if you have insufficient funds in your checking account. </li></ul>
  38. 38. Automated Teller Machines <ul><li>An Automated Teller Machine is often called an ATM. </li></ul><ul><li>To use ATMs, you must </li></ul><ul><ul><li>Have a card that is electronically coded </li></ul></ul><ul><ul><li>Know your personal identification number (PIN) </li></ul></ul><ul><li>Getting cash is a common ATM transaction. </li></ul><ul><ul><li>Using a debit card you can withdraw cash from your checking or savings account. </li></ul></ul><ul><ul><li>Using a Visa or MasterCard, you can receive a cash advance electronically. </li></ul></ul>
  39. 39. Online and Telephone Banking <ul><li>Online and telephone banking services give you the ability to access your accounts from a computer or telephone anytime, day or night. </li></ul><ul><li>Services include: </li></ul><ul><ul><li>Transferring money from one account to another </li></ul></ul><ul><ul><li>Paying bills by authorizing the bank to disburse money </li></ul></ul><ul><ul><li>Getting account balances </li></ul></ul><ul><ul><li>Seeing which checks have cleared and which deposits have been entered </li></ul></ul>
  40. 40. Online and Telephone Banking <ul><li>Most banks also allow and encourage electronic transfers of money. </li></ul><ul><ul><li>An electronic funds transfer (EFT) uses a computer-based system that enables you to move money from one account to another without writing a check or exchanging cash. </li></ul></ul>(continued)
  41. 41. Stop Payment Orders <ul><li>A stop-payment order is a request that the bank not honor a specific check. </li></ul><ul><li>The usual reason for stopping payment is that the check has been lost or stolen. </li></ul><ul><li>Most banks charge a fee for stopping payment on a check. </li></ul>
  42. 42. Safe Deposit Boxes <ul><li>Financial institutions offer customers a safe deposit box to store valuable items or documents. </li></ul><ul><li>They charge a yearly fee based on the size of the box. </li></ul><ul><li>Keeping important documents and other items in a safe deposit box ensures that the items won’t be stolen, lost, or destroyed. </li></ul>
  43. 43. Safe Deposit Boxes <ul><li>Examples of items commonly kept in a safe deposit box include </li></ul><ul><ul><li>Birth, marriage, and death certificates </li></ul></ul><ul><ul><li>Deeds and mortgage papers </li></ul></ul><ul><ul><li>Stocks and bonds </li></ul></ul><ul><ul><li>Jewelry </li></ul></ul><ul><ul><li>Coin collections </li></ul></ul>(continued)
  44. 44. Loans and Trusts <ul><li>Financial institutions also make loans to finance the purchase of cars, homes, home improvements, vacations, and other items. </li></ul><ul><li>Banks can also provide advice for estate planning and trusts. </li></ul><ul><li>Banks can act as trustees of estates for minors and others. </li></ul><ul><ul><li>A trustee is a person or an institution that manages property for the benefit of someone else under a special agreement. </li></ul></ul>
  45. 45. Notary Public <ul><li>A notary public verifies a person’s identity, witnesses the person’s signature on a legal document, and then “notarizes” the signature as valid. </li></ul><ul><li>Financial institutions typically have a person on their staff who is a notary public. </li></ul><ul><ul><li>This person provides notary services for account holders, usually without charge. </li></ul></ul><ul><ul><li>For noncustomers, however, there is typically a small fee. </li></ul></ul>
  46. 46. Financial Services <ul><li>Purchasing or selling savings bonds </li></ul><ul><li>Investment brokerage services </li></ul>
  47. 47. Bank Fees <ul><li>Banks charge fees to their customers to help cover their operating costs. </li></ul><ul><li>The best way to avoid fees is to choose the right kind of account. </li></ul><ul><ul><li>Shop around and find the account that is right for you. </li></ul></ul><ul><ul><li>Be aware of the rules of your account, so that you don’t violate them and be required to pay high fees. </li></ul></ul>
  48. 48. Examples of Bank Fees <ul><li>Loan fees </li></ul><ul><li>Trustee fees </li></ul><ul><li>Check cashing fees </li></ul><ul><li>Per-check fees </li></ul><ul><li>Monthly service fees </li></ul><ul><li>Overdraft fees </li></ul><ul><li>NSF check charges </li></ul><ul><li>ATM transaction fees </li></ul><ul><li>Safe deposit box fees </li></ul><ul><li>Teller service fees </li></ul><ul><li>Minimum balance fees </li></ul><ul><li>Fees for guaranteed-payment checks </li></ul><ul><li>Notary service fees </li></ul><ul><li>Online bill payment fees </li></ul><ul><li>Fees to return canceled checks </li></ul>
  49. 49. Consumer Loans <ul><li>Car loans </li></ul><ul><li>Mortgage loans </li></ul><ul><li>College loans </li></ul><ul><li>Home improvement loans </li></ul><ul><li>Unsecured personal loan </li></ul>
  50. 50. Bank Credit Cards <ul><li>Allow consumers to purchase items in lieu of cash or check </li></ul><ul><li>Can also get a cash advance </li></ul><ul><li>Even pay your taxes </li></ul>
  51. 51. Other Banking Services <ul><li>Retirement Plans </li></ul><ul><ul><li>IRAs and Keoghs </li></ul></ul><ul><ul><li>Trustee Services </li></ul></ul><ul><ul><li>Managing money for others </li></ul></ul><ul><ul><li>Estate planning and management </li></ul></ul><ul><li>Safe-Deposit Boxes </li></ul><ul><ul><li>Fees vary (up to  $100) </li></ul></ul><ul><li>Bank Wire Transfers </li></ul><ul><ul><li>Send money to someone (quickly & long distances) </li></ul></ul><ul><li>Debt Management and Counseling </li></ul><ul><ul><li>Often free </li></ul></ul>
  52. 52. Savings Options <ul><ul><ul><li>Money Market Deposit Account (MMDA) </li></ul></ul></ul><ul><ul><ul><ul><li>Interest rate fluctuates with the market rate </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Initial deposit  $1,000 </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Only a certain number of withdrawals are allowed per month (penalty assessed if rules aren’t followed) </li></ul></ul></ul></ul><ul><li>Fixed-Time Deposits </li></ul><ul><ul><li>Saver agrees to keep money in account for a certain time period (earn higher interest) </li></ul></ul><ul><ul><ul><li>Certificate of Deposit (CD) </li></ul></ul></ul><ul><ul><ul><ul><li>Sacrifice liquidity </li></ul></ul></ul></ul><ul><ul><ul><ul><li>If interest rates are rising, and you’ve locked in a long-term CD, is it worth it to pay the interest penalty? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Some banks offer variable rate CDs </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Shop around </li></ul></ul></ul></ul>
  53. 53. Money Market Mutual Funds <ul><li>Pool many investors’ funds and invest in short-term, low-risk investments </li></ul><ul><li>Not federally insured </li></ul><ul><ul><ul><li>In practice this risk is very small </li></ul></ul></ul><ul><li>Require a minimum initial deposit (  $1,000) </li></ul><ul><li>Can write checks (minimum amount of check value is about $250) </li></ul><ul><ul><li>Some funds limit the number of checks you can write each month </li></ul></ul>
  54. 54. U.S. Treasury Bills and Notes <ul><li>Issued by the U.S. government (very safe) </li></ul><ul><li>Can be sold prior to maturity </li></ul><ul><li>Interest income is not subject to state taxes </li></ul><ul><ul><li>T-bills have 3, 6 and 12 months until maturity </li></ul></ul><ul><ul><ul><li>Minimum face value of $10,000 </li></ul></ul></ul><ul><ul><ul><li>Interest is discounted </li></ul></ul></ul><ul><ul><li>T-notes have 2, 3, 5, and 10 years to maturity </li></ul></ul><ul><ul><ul><li>Pay fixed amount of interest 2x a year </li></ul></ul></ul><ul><ul><ul><li>Face value is as low as $1,000 </li></ul></ul></ul>
  55. 55. U.S. Savings Bonds <ul><li>Face amounts range from $50 to $30,000 </li></ul><ul><li>Can buy from financial institutions </li></ul><ul><li>Purchase price is ½ the face value </li></ul><ul><li>Bond will mature at some point (when exactly depends on the interest rate) </li></ul><ul><li>Interest accumulates (even after maturity) until 30 years after the issue date </li></ul><ul><li>Exempt from state taxes </li></ul><ul><li>Federal taxes are owed only when bond is cashed in or reaches 30 years from issue date </li></ul><ul><li>Series I bonds pay a fixed interest rate + the average rate of inflation </li></ul>
  56. 56. Choosing the Best Savings Option <ul><li>Need to evaluate: </li></ul><ul><ul><li>Minimum investment </li></ul></ul><ul><ul><li>Liquidity </li></ul></ul><ul><ul><li>Yield </li></ul></ul><ul><ul><li>Safety </li></ul></ul><ul><ul><li>Taxation </li></ul></ul>

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