Deck 5: Banking and Interest Rates

Question 1

Financial institutions that accept deposits (that are insured up to a maximum level)from individuals and provide loans are called

A)finance companies.
B)depository institutions.
C)investment companies.
D)nondepository institutions.

Answer 1

depository institutions.

Question 2

Which of the following is a nonprofit depository institution that provides services only to members who have a common affiliation?

A)Commercial banks
B)Savings institutions
C)Credit unions
D)Finance companies

Answer 2

Credit unions

Question 3

Finance companies are more selective in choosing the lender they serve,and therefore usually charge lower interest rates than banks or credit unions.

Answer 3

False

Question 4

To join a credit union,you need to

A)have a steady job.
B)be a member of a group with a common bond.
C)have established good credit.
D)be sponsored by an existing member of that credit union.

Question 5

Bank ATM charges may be substantial if you make many transactions monthly and use out-of-network machines.

Question 6

Savings institutions differ from commercial banks in that they tend to focus less on providing commercial loans.

Question 7

Introductory high interest rates paid by financial institutions for new accounts are usually a good deal and you should therefore take advantage of them without question.

Question 8

Financial institutions loan funds at a ________ they pay depositors.

A)lower interest rate than
B)higher interest rate than
C)rate equal to what
D)cost plus 3 percent of what

Question 9

Which of the following is not a depository institution?

A)Commercial bank
B)Securities firm
C)Savings institution
D)Credit union

Question 10

Which of the following financial institutions would be used the most by business customers wishing to borrow money?

A)Commercial banks
B)Savings institutions
C)Credit unions
D)All are used equally by business customers.

Question 11

Depository institutions are financial institutions that accept deposits (that are insured up to a maximum level)from individuals or firms and provide loans.

Question 12

Deposits in commercial banks which are members of the FDIC,are insured up to a maximum of $50,000 per account.

Question 13

Securities firms primarily sell insurance to protect individuals from adverse events.

Question 14

Deposits at commercial banks are insured up to ________ per depositor by the Federal Deposit Insurance Corporation (FDIC).

A)$100,000
B)$75,000
C)$250,000
D)$150,000

Question 15

Nondepository institutions are financial institutions that provide various financial services,but their deposits are not federally insured.

Question 16

Which of the following is not a depository institution?

A)First National Bank of Chicago
B)Butterfield and Edwards Brokerage firm
C)American 1 Federal Credit Union
D)New England Savings Bank

Question 17

Bank fees for use of an Automatic Teller Machine (ATM)are not usually a large consideration in choosing a bank with which to do business.

Question 18

A mutual fund is a means by which investors with only a small amount of money can invest in a portfolio of securities.

Question 19

An example of a depository financial institution is an insurance company.

Question 20

Credit unions are nonprofit depository institutions that serve members who have a common affiliation (such as the same employer or same community).

Question 21

A nondepository institution facilitating transactions in stocks or bonds is a(n)________.

Question 22

________ are nondepository institutions that facilitate the purchase or sale of securities by firms or individuals by providing investment banking services and brokerage services.

A)Finance companies
B)Securities firms
C)Insurance companies
D)Investment companies

Question 23

Debit cards allow you to pay for a purchase later when the bill arrives.

Question 24

You have $3,000 that you may need any day to replace the furnace in your house.Which of the following would be the best place to put the $3,000?

A)A one-year CD earning 4%
B)A common stock mutual fund earning 9%
C)A savings account earning 2%
D)Shares of stock in a high tech company that could double in 6 months

Question 25

________ are nondepository institutions that provide insurance to protect individuals or firms against possible adverse events.

A)Finance companies
B)Securities firms
C)Insurance companies
D)Investment companies

Question 26

Which of the following financial institutions specializes in making personal loans to people who are perceived to have a higher risk of default?

A)Finance companies
B)Commercial banks
C)Savings institutions
D)Credit unions

Question 27

In order to have a safety deposit box at a bank,a person needs to also maintain another checking or savings account at that bank.

Question 28

________ are nondepository institutions that sell shares to individuals and use the proceeds to invest in securities to create mutual funds.

A)Investment companies
B)Finance companies
C)Securities firms
D)Insurance companies

Question 29

ATM cards are declining in use because they are expensive and the machines are becoming more difficult to locate.

Question 30

You can be assured that if your ATM query shows you have a certain balance in your checking account,that figure is more accurate than the amount in your check register.

Question 31

Which of the following is classified as a nondepository institution?

A)Credit union
B)Insurance company
C)Commercial bank
D)Savings and loan

Question 32

List four types of financial institutions that you have made use of or plan to deal with in the future.

Question 33

Organizations that offer a diverse set of financial services to individuals and firms are ________.

Question 34

A debit card differs from a credit card in that it does not provide credit; instead,it deducts the purchase from your checking account immediately.

Question 35

To prevent an overdraft or "bounced check," it is always a good idea to record your check written in your check register and reconcile your account balance when you receive your monthly bank statement.

Question 36

Financial institutions offering traditional checking and savings accounts as well as providing loans to both individuals and firms are called ________.

Question 37

If you were taking out a personal loan,the highest rate would probably be charged by a

A)commercial bank.
B)finance company.
C)member of your family.
D)credit union.

Question 38

A financial conglomerate offers a diverse set of services that include which of the following?

A)Credit cards
B)Personal loans
C)Brokerage subsidiary
D)All of the above.

Question 39

If you have $10,000 that you do not currently need for expenses and you wish to put it somewhere so that it will earn a return,which of the following financial institutions would you not choose?

A)Savings institution
B)Finance company
C)Securities firm
D)Investment company

Question 40

Which of the following will not vary at a commercial bank?

A)Interest rates
B)Limit on FDIC insurance on accounts
C)Loan conditions
D)Service fees

Question 41

Which of the following is not a disadvantage of using ATM cards?

A)Forgetting to record the transaction
B)Fees from your bank and other banks for using out-of-network machines
C)Increased fees if you make too many transactions per period
D)Difficulty of withdrawing funds

Question 42

Certificates of deposit (CDs)with shorter maturity dates tend to pay higher interest rates than those with longer maturity dates.

Question 43

A ________ is a check that is written on behalf of a person to a specific payee and will be charged against a financial institution's account.

A)cashier's check
B)money order
C)traveler's check
D)personal check

Question 44

Lorenzo is considering two banks for his checking account.Suny Bank requires a minimum deposit of $100,charges a monthly fee of $8,plus 5 cents a check.Merchants Bank also requires a minimum deposit of $100,charges no monthly fee,but a per check charge of 15 cents.How many checks would Lorenzo need to write each month to make Suny Bank cheaper to use than Merchants?
(a)Over 50
(b)Over 60
(c)Over 70
(d)Over 80

Question 45

Convenience,deposit rates and insurance,and fees are the primary considerations in choosing a financial institution for your needs.

Question 46

Which of the following should not affect your choice of a financial institution?

A)Convenience
B)Whether it is state or federally chartered
C)Deposit rates and insurance
D)Fees

Question 47

You should select only one financial institution for all of your checking,savings,and investing needs.

Question 48

Since rates and fees differ only slightly between all national banks,there is little need to consider these when choosing your financial institution.

Question 49

If you wish to make purchases that are charged against your checking account without writing a check you need to have a(n)________.

Question 50

A(n)________ card allows you to pay for a purchase at a later time when the bill arrives.

A)credit
B)debit
C)expense
D)ATM

Question 51

Describe four factors you should consider when choosing a financial institution.

Question 52

You are closing on the purchase of a new home and your closing costs including down payment are $10,500.To process the loan and be assured of funding,the title company would request your payment as a

A)personal check.
B)money order.
C)cashier's check.
D)traveler's check.

Question 53

A ________ is a check that is written on behalf of an individual and will be charged against a large well-known financial institution or credit card sponsor's account.

A)cashier's check
B)money order
C)traveler's check
D)personal check

Question 54

Which of the following is not an advantage of using ATM cards?

A)It is easy and convenient to withdraw funds
B)Your total banking expenses are likely to be lower
C)You have access to your account any time of the day
D)You can bank at remote locations all over the world

Question 55

A ________ is a check that is written on behalf of a person and will be charged against a nonfinancial institution's account.

A)cashier's check
B)money order
C)traveler's check
D)personal check

Question 56

Cashier's checks,money orders,and traveler's checks are secured check alternatives to a personal check and therefore are more risk-free for the payee.

Question 57

Allison is a recent college graduate and is looking for a bank in which to open a checking account.She has narrowed her choice to two.First National requires a $100 minimum deposit and charges 15 cents per check.City Bank requires a $500 minimum deposit,but charges only 5 cents per check.Both pay the same interest rate on the minimum deposit.Allison estimates that she will write 40 checks per month.Assuming that Allison could invest any funds not required for a minimum deposit in a one-year CD paying 6 percent,what would be the monthly cost to Allison for First National and City Bank? Which should she choose?
(a)First National -$6.00; City Bank -$2.00
(b)First National -$6.00; City Bank -$4.00
(c)First National -$6.00; City Bank -$26.00
(d)First National -$6.00; City Bank -$8.00

Question 58

A(n)________ card allows you to pay for a purchase directly from your checking account without writing a check.

A)credit
B)debit
C)expense
D)travel

Question 59

Which of the following is not a fee that financial institutions charge?

A)Checking account service charge
B)ATM usage fee
C)Depository insurance
D)Safety deposit box rental

Question 60

Because they have lower expenses,Web-based financial institutions tend to pay higher interest rates on deposits than institutions with physical branches.

Question 61

Investments with a higher risk of default pay higher rates of interest than those which are less risky.

Question 62

It is illegal for a federally insured financial institution to charge those with poor credit higher interest rates than those with good credit.

Question 63

The ________ is an additional return beyond the risk-free rate that can be earned from a deposit guaranteed by the government.

A)risk-free rate
B)risk premium
C)specific return
D)nominal return

Question 64

The ________ is the return that is guaranteed on an investment for a specified period of time.

Question 65

Risk premium is the amount of interest you might receive over and above the risk-free return insured by the federal government.

Question 66

The one-year loan rate for individuals is usually about the same as the one-year CD rate.

Question 67

Wanda Clark expects interest rates to decline in the next few months.To maximize her earnings,she should put her savings in a

A)two-year certificate of deposit.
B)six-month certificate of deposit.
C)money market account.
D)passbook savings account.

Question 68

A certificate of deposit guarantees or locks in an interest rate for a specified time and rate.

Question 69

The relationship between risk and return

A)is positive.
B)is negative.
C)is inverse.
D)has no correlation.

Question 70

Interest rate changes are affected by the relationship of the total supply of funds provided by all investors and the total demand for funds by all borrowers.

Question 71

The monetary policy of the Federal Reserve System (The Fed)has very little to do with the changes in interest rates a consumer will experience.

Question 72

Jack has $1,000 that he wishes to invest for the next two years.One-year CDs are currently paying 8 percent while two-year CDs are paying 12 percent.Economists are predicting that interest rates will rise by the end of the year.What is the minimum amount interest rates would have to increase to make the one-year CD better than the two-year?
(a)16 percent
(b)14 percent
(c)12 percent
(d)10 percent

Question 73

Your commercial bank is offering a one-year CD with an interest rate of 7 percent.A competing bank offers an interest of 10 percent on their one-year certificate.The risk premium offered by the competing bank is

A)7 percent.
B)3 percent.
C)4 percent.
D)1)5 percent.

Question 74

Which of the following is not true regarding certificates of deposit (CDs)?

A)The longer the term,the higher the interest rate paid
B)All banks offer the same rates on CDs
C)Early withdrawals of money are subject to a penalty
D)The investment of large amounts will pay higher interest than lower amounts

Question 75

The interest rate is composed of the ________ and the ________.

A)risk-free rate; risk discount
B)risk-free rate; risk premium
C)risk-free rate; default risk premium
D)None of the above.

Question 76

When you invest in a CD that has a maturity of one year,you are guaranteed the interest rate offered on that CD.Your return would be termed

A)risk premium.
B)money in the bank.
C)risk-free return.
D)liquid assets.

Question 77

The ________ is the return on an investment that is guaranteed for a specified period.

A)risk-free rate
B)risk premium
C)specific return
D)fair market return

Question 78

A risk-free rate is a return on an investment that is guaranteed for a specified period.

Question 79

Juan has $1,000 that he would like to invest in a CD.His bank offers two alternatives,i.e.,a one-year CD paying 6 percent or a two-year CD paying 9 percent.Juan has been reading that interest rates are rising and,based on his research,he estimates that by year-end the rate on one-year CDs will increase to 10 percent.What alternative would give Juan the most interest and what would the total interest be?
(a)Two one-year CDs returning $120 interest
(b)Two one-year CDs returning $160 interest
(c)One two-year CD returning $180 interest
(d)One two-year CD returning $1,900 interest

Question 80

In saving or investing,the ________ the risk,the ________ the return.

A)higher; higher
B)lower; lower
C)higher; lower
D)A and B