FINC 300 Final Exam

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The FDIC and the National Credit Union Association insures accounts up to

$250,000

Christopher Garcia Christopher just received his checking account statement from his bank. He has a NOW account with free checking that pays​ 0.75% APR on the balance and requires a​ $500 minimum balance. His statement shows that he currently has a balance of​ $3,950. In looking at his statement he notices that his car payment check for​ $400 is still​ outstanding, and that his recently received payroll deposit of​ $3,600 had not posted at the time the statement was created. His normal living expenses average​ $1,500 per month including his car payment. Other than his car​ loan, he rarely writes any checks as he prefers to use his debit card and ATM card for day−to−day living expenses. He pays his credit card balance in full every month. Other than his checking account he does not own any investments. He has always dreamed of owning a​ house, and would like to buy one within the next five years. He has access to a​ 401(k) pension plan at work where his employer will match contributions up to​ 6% of his salary. He currently contributes​ 2% of his salary to this plan. After balancing his checking account, what will his current balance be today?

$7,150

Money Market Deposit Accounts enjoy one advantage over savings accounts found in commercial banks. This advantage is

A variable rate that is generally higher

The ____________ converts interest rates compounded for different periods into comparable annual rates, allowing you to compare interest rates easily

APY

When you are considering different investment options and want to maximize your returns, be sure to compare the investments'

APYs

Online and mobile banking allows you to do the following

Access your accounts at any time of day; pay bills and receive payments online; transfer funds between accounts

Which of the following is an advantage of online and mobile banking?

Accessibility to and management of your accounts

A disadvantage of an MMMF is

Administrative fees

Comprehensive financial services packages that offer checking accounts, debit and credit cards, loans and brokerage services are known as?

Asset management accounts

What is the name for comprehensive financial services packages offered by brokerage firms?

Asset management accounts

Christopher Garcia Christopher just received his checking account statement from his bank. He has a NOW account with free checking that pays​ 0.75% APR on the balance and requires a​ $500 minimum balance. His statement shows that he currently has a balance of​ $3,950. In looking at his statement he notices that his car payment check for​ $400 is still​ outstanding, and that his recently received payroll deposit of​ $3,600 had not posted at the time the statement was created. His normal living expenses average​ $1,500 per month including his car payment. Other than his car​ loan, he rarely writes any checks as he prefers to use his debit card and ATM card for day−to−day living expenses. He pays his credit card balance in full every month. Other than his checking account he does not own any investments. He has always dreamed of owning a​ house, and would like to buy one within the next five years. He has access to a​ 401(k) pension plan at work where his employer will match contributions up to​ 6% of his salary. He currently contributes​ 2% of his salary to this plan. What recommendations would you give Christopher concerning his cash management?

Automate a savings plan using EFT; Create a budget and set some savings goals; Set up an account at a mutual fund company

Your bank, First Bank, charges you $1.50 every time you use an ATM that is not owned by them. Unfortunately, there is no First Bank ATM near your school. There is a Second Bank ATM in the Student Center, which you use several times a week to withdraw $10 at a time for lunch, video games, etc. What is the best piece of advice regarding these transactions?

Avoid them since you are effectively paying 15% interest to access your cash

When college students start saving early

By automating their savings, they are less likely to spend money; In an account earning interest, they immediately put their money to work; They can take advantage of the time value of money and achieve their financial goals

Which of the following is not an advantage of a CD as a cash management alternative?

CDs offer liquidity

A check drafted on the financial institution's account is a(n)

Cashier's check

Suppose that you go to a bank at which you have no account, give the bank cash, and in return obtain a check drawn against that bank which you will use to pay someone else. This is called a

Cashier's check

With online banking and EFT, many people don't really need checks anymore. If you seldom need a paper check for transactions, what option is available to you that may be cheaper than maintaining a checking account?

Cashiers checks; money orders

A savings alternative that pays a fixed rate of interest while keeping your funds on deposit for a contracted period of time that can range from 30 days to several years is called a

Certificate of deposit

The Johnson family is very conservative financially. They have a retirement plan where John works and share a joint checking account at their bank. They keep a lot of money in their checking account to cover short-term needs and emergencies. Both of them want to step up to higher interest rate than a checking or savings account pays, and at the same time stay with their bank. What would be your suggestion for the next account John and Maile should open?

Certificates of Deposit; Money Market Deposit Account

Brenda White had her bank certify one of her personal checks as being good. Which type of check has been issued?

Certified check

Which of the following is not a liquid asset?

Credit cards

Which of the following financial institutions is a not-for-profit organization that is open only to members of that institution and tends to offer more favorable interest rates to borrowers and savers?

Credit union

Electronic funds transfer applies to which of the following?

Debit cards; direct deposit; smart cards; ATM

Financial institutions that provide traditional checking and savings accounts are commonly referred to as

Deposit-type financial institutions

The Johnson family is very conservative financially. They have a retirement plan where John works and share a joint checking account at their bank. They keep a lot of money in their checking account to cover short-term needs and emergencies. Both of them want to step up to higher interest rate than a checking or savings account pays, and at the same time stay with their bank. The Johnsons have been thinking about the financial principle - Pay Yourself First. Being very conservative, they might consider having their bank

Do a direct deposit of some of John's paycheck into a savings fund

A debit card is the same thing as a smart card

False

A debit card, also known as as memory card, can hold ID information, insurance information, and medical history

False

A money order is typically less liquid than a personal check

False

A store-valued card, only used at one store for one purpose, is known as an "open-loop" card

False

A tax free investment will always have a higher after-tax return than a taxable investment

False

A traveler's check is a personal check that has been certified as being good by the financial institution on which it is drawn

False

Brick-and-mortar banks typically offer superior interest rates for borrowers and savers

False

Cash advances generally require an upfront fee of 4 to 6 percent of the amount advanced

False

It is best for college students to wait and begin saving once they are "making more money"

False

It is wise to wait until you are earning a substantial amount of money before you establish a disciplined financial plan for your future

False

Keeping your funds in liquid assets is riskier than keeping them in illiquid assets and therefore investors require a higher expected rate of return on liquid assets

False

Most credit cards offer a 31 to 35 day grace period from the date of the bill to make payments

False

One of the advantages of T-bills is that they are exempt from federal taxes but subject to state income taxes

False

The APY can never be the same as the APR

False

The APY is the APR after taxes

False

Two advantages of carrying cash are that it's easy to spend and many times you can even recall where you spent it

False

What is the FDIC?

Federal Deposit Insurance Corporation

Christopher just received his checking account statement from his bank. He has a NOW account with free checking that pays 0.75% APR on the balance and requires a $500 minimum balance. His statement shows that he currently has a balance of $3,950. In looking at his statement he notices that his car payment check for $400 is still outstanding, and that his recently received payroll deposit of $3,600 had not posted at the time the statement was created. His normal living expenses average $1,500 per month including his car payment. Other than his car loan, he rarely writes any checks as he prefers to use his debit card and ATM card for day-to-day living expenses. He pays his credit card balance in full every month. Other than his checking account he does not own any investments. He has always dreamed of owning a house, and would like to buy one within the next five years. He has access to a 401(k) pension plan at work where his employer will match contributions up to 6% of his salary. He currently contributes 2% of his salary to this plan. How is Christopher doing with his cash management?

He is not maximizing his return on his liquid assets

Christopher just received his checking account statement from his bank. He has a NOW account with free checking that pays 0.75% APR on the balance and requires a $500 minimum balance. His statement shows that he currently has a balance of $3,950. In looking at his statement he notices that his car payment check for $400 is still outstanding, and that his recently received payroll deposit of $3,600 had not posted at the time the statement was created. His normal living expenses average $1,500 per month including his car payment. Other than his car loan, he rarely writes any checks as he prefers to use his debit card and ATM card for day-to-day living expenses. He pays his credit card balance in full every month. Other than his checking account he does not own any investments. He has always dreamed of owning a house, and would like to buy one within the next five years. He has access to a 401(k) pension plan at work where his employer will match contributions up to 6% of his salary. He currently contributes 2% of his salary to this plan. Christopher has not received an Income Tax refund in 4 years. Is there anything you could recommend to him?

He should increase his 401(k) contributions to 6% of his salary

Christopher Garcia Christopher just received his checking account statement from his bank. He has a NOW account with free checking that pays​ 0.75% APR on the balance and requires a​ $500 minimum balance. His statement shows that he currently has a balance of​ $3,950. In looking at his statement he notices that his car payment check for​ $400 is still​ outstanding, and that his recently received payroll deposit of​ $3,600 had not posted at the time the statement was created. His normal living expenses average​ $1,500 per month including his car payment. Other than his car​ loan, he rarely writes any checks as he prefers to use his debit card and ATM card for day−to−day living expenses. He pays his credit card balance in full every month. Other than his checking account he does not own any investments. He has always dreamed of owning a​ house, and would like to buy one within the next five years. He has access to a​ 401(k) pension plan at work where his employer will match contributions up to​ 6% of his salary. He currently contributes​ 2% of his salary to this plan. What would you recommend to Christopher concerning his cash management?

He should switch his current account to a Money Market Deposit Account; He should set up EFT payments for his auto loan; He should give up some liquidity

The Truth in Savings Act of 1993

Helps investors compare interest rates on investment options

Pick the advantage of a certificates of deposit from this list of possibilities

Interest rates are generally higher than typical savings accounts

Cash and investments that can be easily converted into cash are termed

Liquid assets

Which of the following is not a consideration in determining cost of a financial institution?

Location

Many banks offer free checking accounts. What may be the opportunity costs associated with free checking?

Low interest rates; High minimum balance requirements

Money-market mutual funds (MMMFs) provide an alternative to traditional liquid investments offered by financial institutions. What are/is the advantage(s) of an MMMF?

Minimal risk; Check-writing privileges; High interest rates; Convenience - deposits made through payroll deductions

All of the following are advantages of CDs except

Minimum deposit required

Credit unions and internet - only banks typically offer

More attractive interest rates to both borrowers and savers

What is the name of an investment company that raises funds from investors, pools the money, and invests in stocks or bonds?

Mutual fund firm

What is another name for an interest-bearing checking account?

NOW

Another name for an interest bearing checking account is a(n)

NOW account

What is the name for an automatic loan made to your checking account whenever your account does not contain enough cash to cover the checks that you have written against it?

Overdraft protection

John and Maile Johnson The Johnson family is very conservative financially. They have a retirement plan where John works and share a joint checking account at their bank. They keep a lot of money in their checking account to cover short-term needs and emergencies. Both of them want to step up to a higher interest rate than a checking or savings account pays, and at the same time stay with their bank. Which of the following is not an advantage of a CD as a cash management alternative for John and Maile?

Pays money market interest rates

Liquid assets or funds are important to

Prevent overdrafts in checking accounts; Cover unplanned expenses; Prevent interrupting your long-term investments; Cover some planned expenses

Pay yourself first refers to

Put money in a savings account

According to the Keown book, one way to think of liquid assets is as a(n)

Reservoir, with money moving in as wages are received and moving out as living expenses are paid

Four banking conveniences are listed below. Which one is not typical?

Safety deposit boxes; online banking services; direct deposit; overdraft protection

Which of the following financial institutions were originally established to provide mortgage loans to depositors?

Savings and loan associations

What are short-term notes of debt issued by the federal government commonly called?

T-Bills

How do you compare cash management alternatives to determine which is best for you?

Take into account their tax status; Compare returns using comparable interest rates; Consider their safety or risk

Please choose the method to use when calculating the after-tax return

Taxable return x (1 - marginal tax rate) + nontaxable return

NOW accounts offer an option to traditional demand deposits. All of the following are characteristics of NOW accounts except one. Which is it?

The interest rate is generally higher than other savings accounts

Why is it important to convert interest rates into the APY on different accounts and with different banks?

The same advertised rate will vary with different compounding periods

John and Maile Johnson The Johnson family is very conservative financially. They have a retirement plan where John works and share a joint checking account at their bank. They keep a lot of money in their checking account to cover short-term needs and emergencies. Both of them want to step up to a higher interest rate than a checking or savings account pays, and at the same time stay with their bank. What financial principle do they need to understand better?

The time value of money; Taxes affect personal finance decisions; Risk and return go hand in hand

Money market mutual funds provide attractive competition for bank deposits becuase

Their short term, higher returns are generally regarded as practically risk-free

The Johnson family is very conservative financially. They have a retirement plan where John works and share a joint checking account at their bank. They keep a lot of money in their checking account to cover short-term needs and emergencies. Both of them want to step up to higher interest rate than a checking or savings account pays, and at the same time stay with their bank. For John Maile, money market deposit accounts may offer some advantages. Select the one or ones below that would be the most valuable to John and Maile.

They are insured; They may have limited checking privileges; They have relatively attractive rates of return; They have variable market interest rates

Which of the following characteristics apply to liquid assets?

They involve low risk; The temptation to spend is greater; They are characterized by low returns

After reading the new account insert in his monthly statement, Tony Mercadante determined that the FDIC considers a joint account as a separate depositor. He and his wife, Cynthia, have three accounts at ABC Bank & Trust, one joint account with a balance of $60,000 and two individual account - his has a $150,000 balance, and hers has a $254,000 balance. What amount of FDIC coverage do Tony and Cynthia have on their accounts?

Tony's account balance of $150,000 is completely covered as is their joint account of $60,000; both accounts are under the $250,000 FDIC limit. Cynthia's account is over the insurance limit by $4,000, but their money would be covered if she moved some into their joint account or into another institution.

A debit card is something of a cross between a credit card and a checking account

True

Because liquid assets can be turned into cash quickly and with little loss, they have little risk associated with them and therefore provide a low rate of return for the consumer

True

Card-blocking occurs when you use a debit card (or credit card) to check into a hotel or rent a car and the anticipated expenses are blocked - in effect, placing a hold on the money

True

Credit unions and internet - only banks typically offer more attractive interest rates to both borrowers and savers

True

For a consumer who does not have a checking account a prepaid debit card is a means of paying for goods and services

True

If you only use your debit card and ATM card and rarely write paper checks, overdraft protection is still a good thing to have

True

Late library fines and unpaid parking tickets can hurt your credit score

True

Liquid assets allow you to cover unplanned expenses without having to interrupt your long-term investments or liquidate any tangible assests

True

Nondeposit-type financial institutions are commonly referred to as mutual funds and brokerage firms

True

One way to think of liquid assets is as a reservoir, with money moving in as wages are received and moving out as living expenses are paid

True

Online banking simplifies cash management and budgeting for consumers

True

Overdraft protection is an automatic loan made to your checking account whenever your account does not contain enough cash to cover the checks that you have written against it

True

T-bills are extremely sage investments, having been issued by the federal government

True

Taking a cash advance on your credit card for daily living expenses may not be a wise financial decision because interest begins on the cash advance balance amount immediately.

True

The National Credit Union Association is a federal agency that insures deposits at credit unions

True

The deregulation of the 1980s has allowed brokerage firms to offer traditional banking services, and has also let banks offer services formerly found only at investment companies

True

The interest rate earned on a money market deposit account is generally higher than the interest earned on a Bank savings account

True

Virginia Tech's Hokie Passport is an example of a smart card

True

When comparing returns on cash management investment alternatives, it is important to make sure that the rates you compare are all on the same tax basis

True

When you automate your savings you are less likely to spend those dollars because they never become part of the funds in your checking account

True

When you use your debit card or ATM card, you should enter the transaction into your check register

True

With online banking, you are able to access your accounts and conduct business transactions through the Internet, your mobile phone, and devices

True

Your bank may offer a line of credit, a credit card, or a link to your savings account to cover transactions when you overdraw your account

True

Which of the following is not a common fee arrangement for checking accounts?

Variable interest rates to reflect fee activity

Christopher just received his checking account statement from his bank. He has a NOW account with free checking that pays 0.75% APR on the balance and requires a $500 minimum balance. His statement shows that he currently has a balance of $3,950. In looking at his statement he notices that his car payment check for $400 is still outstanding, and that his recently received payroll deposit of $3,600 had not posted at the time the statement was created. His normal living expenses average $1,500 per month including his car payment. Other than his car loan, he rarely writes any checks as he prefers to use his debit card and ATM card for day-to-day living expenses. He pays his credit card balance in full every month. Other than his checking account he does not own any investments. He has always dreamed of owning a house, and would like to buy one within the next five years. He has access to a 401(k) pension plan at work where his employer will match contributions up to 6% of his salary. He currently contributes 2% of his salary to this plan. What recommendations would you give Christopher about his goal of buying a house in five years?

You need to develop a savings plan; You need to estimate what down payment would be

When using an ATM, keep in mind that

You should report electronic transaction mistakes to the bank immediately; It is never safe to deposit cash in an ATM; Human problems in handling the transactions can occur; Computer errors can occur

All of the following are advantages of MMDA's except

rates below alternatives


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