Econ Exam (Module 5)

What is the current limit of FDIC coverage for a customer's combined accounts at a bank? What types of accounts at banks are insured? What types of accounts at banks are not insured?

- $250,000 - insured: negotiable order of withdrawal (NOW), money market, checking, IRA, savings, and certificate of deposit (CD) accounts - not insured: mutual funds, annuities, life insurance policies, stocks and bonds

How many districts are in the Federal Reserve system? Why are there more districts in the eastern half of the country than in the western half? Explain.

- 12 districts - determined mostly by the geographic distribution of the U.S. population at the time the Federal Reserve System was created (1913), to accommodate local needs

How long is the term in office for a member of the Board of Governors? Can a member ever serve for longer than one term? Explain. Can a member be reappointed after serving a complete 14 year term?

- 14 years - No - a Governor who has served a full term may not be reappointed, but a Governor who was appointed to complete the balance of an unexpired term may be reappointed to a full 14-year term

What law created the FDIC? When did this occur? What do the letters "FDIC" represent?

- 1933 - Federal Deposit Insurance Corporation Act (AKA Glass-Steagall Act)

What was the last Michigan bank to close? When did that happen?

- 2012 - Fidelity Bank of Dearborn

How many members serve on the Board of Governors of the Fed? How are they chosen?

- 7 members - nominated by the President and confirmed by the Senate

Which district bank covers the Detroit metro area?

- Chicago

Which four states had the highest number of bank closings from 2008 through 2012? How many banks failed in the country during that time? Approximately, what percentage of those bank failures came from those four states?

- Florida, Georgia, Illinois, California - 417 banks closed - 50% of bank closings

When does a consumer pay taxes on funds in a traditional IRA?

- IRA owner taking distributions prior to age 59½ or a beneficiary not following Internal Revenue Service requirements for distributions after the account owner's death

What is a traditional IRA?

- Individual Retirement Account - readily available - you get back taxes on money you've made & it is done independently - meant to be long term (Age 59.5) - may or may not have a penalty of 10% if taken out before age 59.5 - have to start taking distributions by age 70.5 - meant for someone who doesn't have the opportunity of a pension plan or 401-K

Who is the current Chairman of the Fed? Who was the Fed's previous Chairman?

- Janet Yellen - Alan Greenspan

Are Governors affected by public pressure or by political pressure? Explain.

- Mostly public pressure - protests

How does preferred stock differ from common stock? Do both types have voting rights?

- a class of ownership in a corporation that has a higher claim on the assets and earnings than common stock - generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights - common stock holders have voting rights, preferred stock holders do not

What are CDs (certificates of deposit)? What are the typical time periods for CDs?

- a savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate & can be issued in any denomination. CDs are generally issued by commercial banks & are insured by the FDIC. - The term of a CD generally ranges from 1 month to 5 years

What is a common stock? What does the owner of a share of common stock actually own? Is the owner of a share of common stock guaranteed a certain value for the stock, or an increase in value? Is this owner guaranteed dividends (or earnings) on this stock?

- a security that represents ownership in a corporation - holders exercise control by electing a board of directors & voting on corporate policy - on the bottom of the priority ladder for ownership structure - in the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders & other debtholders have been paid in full

Who can open a traditional IRA?

- almost anyone can contribute to a traditional IRA, provided you (or your spouse) receive taxable income & you are under age 70 ½ - but your contributions are tax deductible only if you meet certain qualifications

What is a mutual fund? Do mutual funds have similar/lower/higher risk than money market accounts? Explain. What types of securities are in a mutual fund?

- an investment program funded by shareholders that trades in diversified holdings & is professionally managed - stocks & bonds

When would a person be penalized for withdrawing money from a 401-K? What is the penalty?

- before age 59.5 - 10% penalty

What is a 403-B?

- colleges, non-profit organizations - identical to 401-K but is specific to organizations - a 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers

If a company goes out of business, when would the owners of common stock be repaid? When would the owners of preferred stock be repaid? Explain. Is this repayment to the stockholder guaranteed?

- common: last bc they have a residual claim on the assets in the firm & are a tier below the preferred stock classification -common shareholders often receive nothing at all, as there is usually very little left over once a firm has paid its debts - preferred: increased chance of receiving a payment upon liquidation because this class of ownership has a higher claim on assets - not guaranteed

What is a money market account? What is the customer "buying" when he/she puts money in a money market account? How do rates on money market accounts compare to traditional savings accounts? What securities are behind money market accounts?

- deposit account is a non-financial account that pays interest based on current interest rates in the money markets - a money market deposit account is a bit different. The restrictions on what a bank can do with that money are somewhat looser - they can often invest that money in things such as treasury notes, CD's, municipal bonds, & so on in addition to the tight restrictions of a normal savings accounts. In other words, the bank can take your money & invest it in other investments that are very safe

Do the bank employees typically know the bank is in trouble? Do the bank customers typically know?

- employees have no knowledge - customers have no knowledge

What is a 401-K account?

- employer doesn't hold on to funds - allows to earn money towards retirement - putting money aside till retirement will lead to a lower interest rate - only some employers use it - 1 - 3 days to choose whether you want to participate - age 59.5 then you can start taking withdrawals no penalty but it will be taxed - younger than 59.5 you will be hit with 10% penalty. Can also utilize stock but it is very risky

Will an account with higher risk have a higher or lower rate of return? Will an account with lower risk have a higher or lower rate of return? Is there such a thing as a "riskless" investment, one that is completely safe?

- higher risk = high rate of return - lower risk = low rate of return - no such thing as a "riskless" investment

When does a consumer pay taxes on funds in a 401-K?

- if taken out before age 59.5 - after you're retired

What is the tax advantage of putting money into a 401-K (or similar account)?

- if you make a small contribution to a 401(k), or if you increase your contribution by 1% or so a year, chances are you'll hardly even notice the difference in your pay checks, and your tax bill will be lower

Explain why Weston believes there is no such thing as a "safe" investment?

- if you want safety, you give up returns. If you want better returns, you have to take some risks

. Why was the FDIC created? What happened to customers' deposits when banks failed during the Great Depression?

- in response to the thousands of bank failures that occurred in the 1920s - money disappeared, they frantically withdrew their money if at all possible

Where does the Fed get its funding? Does the Fed get its funding from our tax dollars? Explain.

- interest on U.S. government securities that it trades through open market operations - interest on foreign currency investments - check clearing, funds transfers, and automated clearinghouse operations; and interest on loans to depository institutions - government budget (we pay for it indirectly)

If a bank is failing, the FDIC has three options to handle the bank closing. What are those three options? Which of the options requires the FDIC to pay all depositors out of its insurance fund (up to the insurance limit)? What option does the FDIC use most often?

- it can close it and pay off depositors up to the insurance limit, run the bank itself, or, most often, it will try to find a buyer

What are Weston's three "myths" about investing in stocks? Describe each.

- myth #1: The risk of stocks go away if you hold them long enough - myth #2: Asset allocation eliminates risk - myth #3: "I'm young [or risk tolerant, or a long-term investor]. I don't need bonds."

Are stock and mutual funds covered by the FDIC insurance? Why or why not?

- no - the risk of a company going bankrupt, resulting in the loss of investors' funds - is more spread out because you own a piece of a lot of companies instead of a portion of a single enterprise

What is Liz Weston's set of three rules for investing? What was the old-school rule? ...the bubble economy rule? ...the new rule?

- old school: Don't gamble in the stock market w/ $ you can't afford to lose - bubble economy: There's no real risk if you stay diversified & invest for the long term - new rule: Risk is part of life. While you can't avoid it, you can make sure the risks you're taking are appropriate for your goals

What is the tax advantage of putting money into a traditional IRA?

- once it is held for 5 years you can pull contributions out w/ out paying tax bc taxes have already been taken out - if you pull money you've earned on it then you want to pay it at 59.5 w/ out worrying about being taxed

How can a customer get higher rates on his/her savings accounts?

- paying on time - abiding by the strict regulations

Some employers offer a 401-K "match" on an employee's contributions. What does this mean, and why would an employee want to take advantage of that benefit?

- people are attracted to employers w/ good benefits packages. Also, employers receive a tax benefit for contributing to employee 401(k) accounts. A company match has the power to greatly increase the value of an employer-sponsored retirement savings account

How is the FDIC funded? Does it receive its funding through tax dollars? Why could it be said that consumers pay into this fund "indirectly"? Explain.

- premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities (according to banks size) - we are charged for things or we don't receive rates of return (pay indirectly)

Describe regular savings accounts (sometimes called 'passbook' or 'statement' savings accounts). Are there any restrictions on a customer's access to these funds? Describe.

- requires you to commit to putting aside a small amount of $ each month - miss one and you might find your competitive 8% rate is pulled and drops to 1% - usually a limit on how much you can save per month - limit your access to your cash and will slash your interest rate if you make any withdrawals - only last a year

What are the functions of the Fed?

- serves as Bank of U.S. Gov't - serves as Banker's Bank - supervises banks - serves as clearing house (moving payments from one part of the country to another) - to manage countries money supply

What is a 408-K?

- small businesses w/ under 25 employees - the small business does not hold on to your money - it is held by financial services but operates the same as a 401-K

How is the Chairman of the Fed chosen? How long is his/her term as Chairman?

- the President (w/ Senate confirmation) - 4 years

What is the typical penalty if a customer withdraws funds from a CD before it has matured?

- the most common penalty for CDs with maturities of less than a year continues to be three months' interest

In the 60 Minutes video, who knew in advance that the bank might close? Why did this bank fail?

- the owner - damaging bets on real estate (risky lending)

When can a consumer be penalized for withdrawing funds from a traditional IRA? What is the penalty?

- the rollover rule, withdraw for education, set aside money on taxes for withdrawals, avoid mandatory withholding, age 59.5 rule - 10 % penalty

When must consumers begin pulling money from their traditional IRA's?

- the year you turn 70.5

How does the FDIC insure an account with more than one owner (a joint account)?

- they must be living people, have equal rights to make withdrawals, sign the deposit account signature card (unless the account is a CD), electronic signatures meet this requirement - each co-owner's shares of every joint account at the same insured bank are added together and insured up to $250,000

If your company offers a 401-K, why should you limit the amount of your company's stock in your 401-K?

- this makes for a severely unbalanced portfolio, as it's risky to invest your money in any one company

Describe the process that is used by the FDIC to close a bank. What day of the week do these closings occur, and at what time of day? Why? Does a bank know in advance when the FDIC is coming to close that bank?

- to avoid panic they used 'CB Associates' code name & went to the bank at night (Friday 6pm) - no customer lost a penny - employees still had a job just under a different name (MB Financial) - FDIC can run the bank if need be - they can also have another institution take it over - no advance notice

When can a consumer withdraw funds from a ROTH IRA without penalty? Explain. What is a 'seasoning period'? What is the difference between withdrawing earnings on a ROTH IRA and withdrawing the principal?

- to qualify as an exception, funds being withdrawn must have been in the account for at least 5 years, measured from the beginning of the tax year when the funds were deposited - seasoning period: money has to sit for 5 years - the earnings from your principal cannot normally be withdrawn prior to age 59½ w/ out paying the 10% early withdrawal penalty - earnings can generally be withdrawn w/ out penalties after age 59½, provided you meet the five-year rule

What are EE Series bonds? Where can a consumer purchase these bonds? What is the maximum amount of EE bonds a consumer can purchase each year? What is the current rate on EE bonds?

- treasury direct, fixed rate (.10%), pull your money out & be penalized, you can cash them in after a year but if you cash them in before 5 years, you lose the last 3 months' interest, federal income tax, $10,000

What are I bonds? Who sells these bonds? Where can a consumer purchase these bonds? What is the maximum amount of I bonds a consumer can purchase each year? What is the current rate on I bonds?

- treasury direct, partially fixed and variable (depending on inflation), federal income tax, up to 30 years earning, don't cash in before 5 years, variable changes once every 6 months (1.48%), $10,000, $5,000 IRS Refund. A security that earns interest based on combining a fixed rate and an inflation rate. A combination of a fixed rate and an inflation rate than can and usually does change twice-a-year

What steps are taken if a company goes out of business? What happens to the assets of the company? Who gets paid first?

- vote to close the business, dissolve your business w/ the government, cancel permits, licenses, & fictious business names, pay your taxes & debts, notify your creditors, employees, & customers - persons who become creditors after the company files for bankruptcy - secured creditors, such as banks lending money backed by a mortgage on real estate, typically bargained for a lower level of risk

What happens if a consumer cashes in either type of bond before 5 years? What is the penalty?

- will lose a lot of interest

How many banks have been closed so far by the FDIC this year? How many of those banks were in Michigan?

-3 closings this year, none in michigan

How many banks were closed by the FDIC in 2016? How many of those banks were in Michigan?

-5 closings this year, none in michigan

Does the U.S. Constitution create the Federal Reserve? Explain.

Congress created the Federal Reserve, yet it had no constitutional authority to do so (necessary and proper clause)

What law created the Federal Reserve? When did this occur?

Federal Reserve Act 1913

Have contributions to a ROTH IRA already been taxed?

No, they are generally untaxed

Who was the Chairman of the FDIC in our 60 Minutes video?

Sheila Bair

How did "401-K" accounts get their name?

The 401K name comes from a section of the IRS code.

What are the two major controversies about the Federal Reserve?

The Fed and its leaders are often a source of controversy. While the vast majority of Fed Chairmen and Chairwomen have been experts in the fields of public policy, finance, and economics, many have made controversial decisions about how to influence the U.S. economy. While many of the Fed's decisions have proved effective, not all have proved sound.7 The most notable Fed failure was the Great Depression (1930s) when the Fed's monetary policies - pushing rates higher and making less cash available - caused a downturn to become a depression.

What are the differences between a traditional IRA and a ROTH IRA?

Traditional IRA contributions are tax deductible on both state and federal tax returns for the year you make the contribution, while withdrawals in retirement are taxed at ordinary income tax rates. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free.

Can a consumer have accounts at two banks, and have both sets of accounts insured by the FDIC?

Yes

Are IRA's at banks insured? What is the limit of coverage per customer?

Yes, $250,000

What are Liz Weston's three rules for saving for retirement? What was the old-school rule? ...the bubble economy rule? ...the new rule?

old school: You can count on a good pension to get you through your golden years bubble economy: Even if you don't save much, you can rely on stock market returns & rising home prices to fund retirement new rule: Start saving early for retirement, save as much as you can & don't stop