CH 5 Personal Finance Institutions
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
a
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
a
Deposits at commercial banks are insured by a government owned insurance agency called A) Federal Deposit Insurance Corporation. B) National Credit Union Share Insurance Fund. C) Federal Deposit Interest Company. D) Insurance Regulatory and Development Authority
a
If the Federal Reserve buys or sells Treasury securities to affect the money supply, it uses A) open market operations. B) reserves at commercial banks. C) discount rate adjustments. D) federal funds adjustments.
a
If the government borrows funds to finance a military build-up in the Middle East, this will cause a A) shift in the demand for funds. B) shift in the supply of funds. C) shift in monetary policy. D) shift in open-market operations.
a
Interest rates could change due to all of the following except A) United Nation's resolution to change the Fed fund rate. B) shift in savings by investors. C) shift in monetary policy of the Fed. D) shift in business demand for funds. Answer: A
a
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
a
The relationship between risk and return A) is positive. B) is negative. C) is inverse. D) has no correlation.
a
The term structure of interest rates is the relationship between the maturities of ________ debt securities and the annualized yields offered on those securities. A) risk-free B) risk premium C) specific return D) nominal return
a
The yield curve is typically ________, meaning that the annualized interest is higher for debt securities with longer terms to maturity. A) upward sloping B) horizontal C) downward sloping D) vertical
a
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.
a
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
a
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
a
Your checkbook balance at the end of May is $1,041. When you receive May's bank statement, you discover the following additional items: Bank fees, $271; Interest earned, $163. Your adjusted checkbook balance after considering these items is A) $933. B) $770. C) $1,204. D) $920.
a
________ 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
a
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
b
An increase in spending by the U.S. government will result in all of the following except A) upward pressure on interest rates. B) reduction in government borrowing. C) an increase in the demand for funds. D) an increase in the issuance of Treasury securities.
b
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% of what
b
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.
b
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
b
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.
b
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
b
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.
b
The term structure of interest rates is measured by a(n) ________, which shows the interest rate offered at each maturity level. A) economist B) yield curve C) graph D) index
b
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.
b
Which of the following is classified as a nondepository institution? A) Credit union B) Insurance company C) Commercial bank D) Savings and loan
b
Which of the following is not a depository institution? A) Commercial bank B) Securities firm C) Savings institution D) Credit union
b
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
b
Which of the following is not a service that a depository institution might offer? A) Checking services B) Credit counseling C) On line services D) The use of a debit card
b
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.
b
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.
b
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
b
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
b
Your commercial bank is offering a one-year CD with an interest rate of 7 percent. A competing bank offers an interest of 10% 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.
b
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
c
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
c
Jack has $1,000 that he wishes to invest for the next two years. One-year CDs are currently paying 8% 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% B) 14 percent C) 12 percent D) 10 percent
c
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% 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
c
The risk-free rate on borrowed funds is determined by A) the Federal Reserve. B) congress. C) supply and demand. D) the banking system.
c
The term structure is often based on rates of return or yields offered by ________ which are ________ issued by the U.S. Treasury with different maturities. A) Treasury securities; mutual fund securities B) Treasury securities; equity securities C) Treasury securities; debt securities D) None of the above.
c
When interest rates rise, individuals who make deposits will earn a ________ rate of interest, while individuals who need to borrow funds will have to pay a ________ rate. A) higher; lower B) lower; higher C) higher; higher D) lower; lower
c
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.
c
Which of the following characteristics is common to both commercial banks and credit unions? A) lower fees B) lower credit card rates C) insurance up to $250,000 D) nonprofit
c
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
c
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
c
Which of the following is not a reason that your checking account balance might change from one month to another? A) Deposits to your account B) Cleared checks C) Purchasing new shoes with a credit card D) Bank fees
c
Which of the following is true with regards to rising interest rates? A) Use short-term loans to take advantage of low interest rates. B) Select long-term savings options to lock in current interest rates. C) Use long-term loans to take advantage of current low rates. D) The term of the loan option is not impacted by rising interest rates.
c
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
c
Your great aunt Mary passed away and left you and inheritance of $5,000. Since you don't have a need for the money in the near future, which of the following would be the best place to put the $5,000? A) A savings account earning 1% interest B) A checking account C) A five-year CD paying 4.38% annually D) High risk stock in a producer of natural gas that is predicted to triple in the next year
c
________ 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`
c
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.
d
In saving or investing, the ________ the risk, the ________ the return. A) higher; higher B) lower; lower C) higher; lower D) A and B
d
Information such as ________ can be easily found on a variety of Web sites. A) loan rates B) stock quotes and company information C) yields of Treasury securities D) All of the above.
d
Savings institutions accept deposits and provide mortgage and personal loans to individuals. Another name for these types of financial institutions is A) trust institution. B) economy institution. C) insured institution. D) thrift institution.
d
The Act that allows banks to transmit electronic images of checks, thus allowing funds to be transferred immediately is known as A) Check 2004. B) The Check Clearing Act of 2004. C) Fraud Detecting Act. D) Check 21.
d
When the Federal Reserve wishes to ________ interest rates, it ________ the amount of funds at commercial banks. A) increase; increases B) reduce; reduces C) reduce; increases D) Both A and B are correct.
d
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
d
________ is a movement that began in September 2011 to protest against large banks that are believed to receive excessive support from the government. A) The 15-M B) March on Washington C) Anti-corruption D) Occupy Wall Street
d
Financial institutions offering traditional checking and savings accounts as well as providing loans to both individuals and firms are called ________.
depository institutions
Certificates of deposit (CDs) with shorter maturity dates tend to pay higher interest rates than those with longer maturity dates
false
It is illegal for a federally insured financial institution to charge those with poor credit higher interest rates than those with good credit.
false
T/F 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.
false
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.
false
The one-year loan rate for individuals is usually about the same as the one-year CD rate
false
t/f ATM cards are declining in use because they are expensive and the machines are becoming more difficult to locate.
false
t/f An example of a depository financial institution is an insurance company.
false
t/f Debit cards allow you to pay for a purchase later when the bill arrives.
false
t/f Deposits in commercial banks which are members of the FDIC, are insured up to a maximum of $50,000 per account.
false
t/f Finance companies are more selective in choosing the lender they serve, and therefore usually charge lower interest rates than banks or credit unions.
false
t/f 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.
false
t/f 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.
false
t/f Securities firms primarily sell insurance to protect individuals from adverse events.
false
t/f Since rates and fees differ only slightly between all national banks, there is little need to consider these when choosing your financial institution.
false
t/f 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.
false
t/fYou should select only one financial institution for all of your checking, savings, and investing needs.
false
specializes in personal loans
finance company
Organizations that offer a diverse set of financial services to individuals and firms are ________.
financial conglomerates
protection against adverse events
insurance company
mutual fund or combination of investments
investment company
The ________ is the return that is guaranteed on an investment for a specified period of time.
risk free rate
A nondepository institution facilitating transactions in stocks or bonds is a(n) ________.
securities firm
The risk-free rate on borrowed funds is determined by the ________ and ________ of funds.
supply and demand
A certificate of deposit guarantees or locks in an interest rate for a specified time and rate
true
A risk-free rate is a return on an investment that is guaranteed for a specified period.
true
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.
true
Investments with a higher risk of default pay higher rates of interest than those which are less risky.
true
Risk premium is the amount of interest you might receive over and above the risk-free return insured by the federal government.
true
t/f 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.
true
t/f A mutual fund is a means by which investors with only a small amount of money can invest in a portfolio of securities
true
t/f Bank ATM charges may be substantial if you make many transactions monthly and use out-of-network machines.
true
t/f Because they have lower expenses, Web-based financial institutions tend to pay higher interest rates on deposits than institutions with physical branches.
true
t/f 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.
true
t/f Convenience, deposit rates and insurance, and fees are the primary considerations in choosing a financial institution for your needs.
true
t/f Credit unions are nonprofit depository institutions that serve members who have a common affiliation (such as the same employer or same community).
true
t/f Depository institutions are financial institutions that accept deposits (that are insured up to a maximum level) from individuals or firms and provide loans.
true
t/f Nondepository institutions are financial institutions that provide various financial services, but their deposits are not federally insured.
true
t/f Savings institutions differ from commercial banks in that they tend to focus less on providing commercial loans.
true
t/f 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.
true
