Personal Financial Planning Ch 4 Financial Services: Savings Plans and Payment Accounts

Credit alternatives include: home mortgages credit cards cash loans checking account

home mortgages credit cards cash loans

asset management account

An all-in-one account that includes savings, checking, borrowing, investing, and other financial services for a single fee; also called a cash management account.

ATM stands for Automatic taking machine. Available teller machine. Automatic teller machine. Available token machine. Automatic token machine.

Automatic teller machine.

What is not typically a basic concern of a financial services customer? How can I minimize costs for checking and savings? Does the bank have a safe deposit box? Will I be able to borrow money when I need it? Where can I get the best return on savings?

Does the bank have a safe deposit box?

___________________ individuals are those who have bank accounts, but still use high-cost financial service companies. Banked Unbanked Underbanked Overbanked Banking

Underbanked

rate of return

The percentage of increase in the value of savings as a result of interest earned; also called yield.

debit card

A plastic access card used in computerized banking transactions; also called a cash card.

_____ deposits include checking accounts and other payment methods. This is taken directly from the text under types of financial services.

Demand

annual percentage yield (APY)

The percentage rate expressing the total amount of interest that would be received on the $100 deposit based on the annual rate and frequency of compounding for a 365-day period.

Financial services can change due to such factors as changing interest rates and rising consumer prices. True or False

True

A current shortage of cash will require two basic choices: _____ savings or _____ .

liquidate borrow

An automated teller machine (ATM) is oftentimes referred to as a(n) "_____ machine." This is taken directly from the text.

cash

A _____ bank is a financial institution that offers a full range of services.

commercial

A _____ and loan association traditionally specializes in passbook accounts and mortgage loans.

savings

When choosing a savings investment and interest rates are rising, you should not: choose short-term savings accounts choose short-term CDs "lock in" long-term interest rates

"lock in" long-term interest rates

Will is currently in a 22% tax bracket and has a 7.2% savings rate of return. What is his after-tax savings rate of return? 22% 7.2% 6.06% 5.62% 1.58%

5.62% -------------- Step 1: Determine your top (marginal) tax rate = 22% Step 2: Subtract your tax rate from 1.0 = 1.0 - 0.22 = 0.78 Step 3: Multiply the yield on your savings account with step 2 answer. = 0.072 x 0.78 = 5.62%

Earnings on savings can be measured by the Compounding. Liquidity. Minimum deposit. Rate of return. Safety.

Rate of return.

compounding

A process that calculates interest based on previously earned interest.

Common mistakes made when managing current cash needs include: lacking sufficient funds delaying a purchase for a lower price leaving funds in low interest accounts too long using savings for current expenses saving too much money overspending

lacking sufficient funds leaving funds in low interest accounts too long using savings for current expenses overspending

certificate of deposit (CD)

A savings plan requiring that a certain amount be left on deposit for a stated time period to earn a specified interest rate.

money market fund

A savings-investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments.

A legal agreement that provides for the management and control of assets by one party for the benefit of another is known as A checking account. A trust. A loan. A savings account. None of these.

A trust.

A payday loan company charges 2.2 percent interest for a two-week period. What would be the annual interest rate from that company? Assume an even 52 weeks per year. (Enter your answer as a percent rounded to 1 decimal place.) Annual interest rate %

Annual interest rate 57.2% -------------------- 52 wks / 2wks = 26 26 x 2.2% = 0.572 round to % 0.572 x 100 = 57.2

Certain stores reward customers for paying with cash. Certain stores reward customers for paying with cash. It is harder to track expenses with pre-paid cards. Pre-paid cards are considered more secure. A and C A, B, and C

Pre-paid cards are considered more secure.

Credit cards are different from debit cards because: you do not need a receipt you are borrowing money you are spending your own money you can easily return the item

you are borrowing money

credit union

A user-owned, nonprofit, cooperative financial institution that is organized for the benefit of its members.

This type of card is a plastic access card used in computerized banking transactions. Convenience card Loyalty card Debit card Coin card

Debit card

What is the annual opportunity cost of a checking account that requires a $320 minimum balance to avoid service charges? Assume an interest rate of 4.5 percent. (Round your answer to 2 decimal places.) Opportunity cost $

Opportunity cost $14.4 320 x 4.5% = 14.4

trust

A legal agreement that provides for the management and control of assets by one party for the benefit of another.

Your maximum liability for a lost or stolen debit card is $500 if the card issuer uses the same rules that apply to lost or stolen credit cards. True or False

False

For each of these situations, determine the savings amount. Use the time value of money tables in Exhibit 1-A, Exhibit 1-B, Exhibit 1-C. a. What would be the future value of a savings account started with $575, earning 5 percent (compounded annually) after 12 years? (Round time value factor to 3 decimal places and final answer to the nearest whole dollar.) Future value $ b. Brenda Young desires to have $14,000 eight years from now for her daughter's college fund. If she will earn 8 percent (compounded annually) on her money, what amount should she deposit now? Use the present value of a single amount calculation. (Round time value factor to 3 decimal places and final answer to the nearest whole dollar.) Present value $ c. What future value amount would you have if you deposited $1,900 a year for 20 years at 6 percent (compounded annually)? (Round time value factor to 3 decimal places and final answer to the nearest whole dollar.) Future value $

a. Future value $1,033 (use table 1-A page 40) 575 x 1.796 = 1,032.70 (round) b. Present value $7,560 (use table 1-C page 42) 14,000 x 0.540 = 7,560 c. Future value $69,893 (use table 1-B page 41) 1,900 x 36.786 = 69,893.40 (round)

Heather is currently in a 15% tax bracket and has a 3.4% savings rate of return. What is her after-tax savings rate of return? 22.67% 12.75% 2.89% 1.36% 0.51%

2.89% -------------- Step 1: Determine your top (marginal) tax rate = 15% Step 2: Subtract your tax rate from 1.0 = 1.0 - 0.15 = 0.85 Step 3: Multiply the yield on your savings account with step 2 answer. = 0.034 x 0.85 = 2.89%

What is the APY for a savings account with a $250 balance that receives $9 interest for the year? 2.5% 3.6% 4.32% 10.4% 20.8%

3.6% ---------------- APY = 100 * (interest/principal) = 100 * (9/250) = 3.6%

Fraud charges on your debit card should be reported within _____ days of receiving your statement to protect your right not to be charged for the transaction. This is taken directly from the text.

60

What is the APY for a one-year $4,000 certificate of deposit with $280 interest? 5.8% 9% 8% 11.2% 7%

7% --------------- APY = 100 * (interest/principal) = 100 * (280/4000) = 7%

Marsha invests $1,350 and earns a $105 return at the end of one year. What is her annual percentage yield (APY)? 7.78% 8.43% 11.86% 12.85% 92.22%

7.78% --------- APY = 100(Interest/Principal) = 100(105/1,350) = 7.78%

According to the video, which of the following is mentioned as a tip or trick regarding high-cost financial services? Ask questions, read the fine print, and understand the risks involved with the high-cost loans. Determine the annual coupon rate for a prospective loan. Compare the interest rate to the average interest rate for loans from a bank or similar financial institution. A and C A, B, and C

A and C

automatic teller machine (ATM)

A computer terminal used to conduct banking transactions; also called a cash machine.

mutual savings bank

A financial institution that is owned by depositors and specializes in savings accounts and mortgage loans.

commercial bank

A financial institution that offers a full range of financial services to individuals, businesses, and government agencies.

savings and loan association (S&L)

A financial institution that traditionally specialized in savings accounts and mortgage loans.

overdraft protection

An automatic loan made to checking account customers to cover the amount of checks written in excess of the available balance in the checking account.

________________________ is a check that you have written but has not been presented to the bank for payment. A deposit in transit A certified check A bank error A money order An outstanding check

An outstanding check

According to the video, which is not a fee that is mentioned for pre-paid cards? Adding funds fee Cash deposit fee Transaction fee Balance-inquiry fee Activation fee

Cash deposit fee

When you select a financial services provider, you may find all of the following to be major factors except Company logo. Convenience. Fee structure and other charges. Personal service. Rates for savings and borrowed funds.

Company logo.

According to the video, which of the following is not mentioned as a financing opportunity for the unbanked? Car Title Loans Check Cashing Outlets Pawnshops Corporate Bonds Payday Loans

Corporate Bonds

Which of the following deposit-type institutions serve as financial intermediaries? Credit unions Investment companies Savings and loans Insurance companies Commercial banks

Credit unions Savings and loans Commercial banks

According to the video, what is the most common reason that the adjusted bank balance and your checkbook balance don't agree? Either you or the bank made a mistake. Other individuals hacked into your bank account. Other individuals robbed a bank or branch of the bank. A and B A and C

Either you or the bank made a mistake.

A bank that provides overdraft protection charges 8 percent for each $100 (or portion of $100) borrowed when an overdraft occurs. a. What amount of interest would the customer pay for an overdraft of $180? (Assume the interest is for the full amount borrowed for a whole year.) (Round your answer to 2 decimal places.) Interest amount $

Interest amount $16 ------------- 100 x 8% = $8 80 portion of 100 = $8 $8 + $8 = $16

What would be the net annual cost of the following checking accounts? a. Monthly fee, $4.00; processing fee, 45 cents per check; assume checks written average to 15 per month. (Round your answer to 2 decimal places.) Net annual cost $_____ b. Interest earnings of 5 percent with a $550 minimum balance; average monthly balance, $750; monthly service charge of $13 for falling below the minimum balance, which occurs four times a year (no interest earned in these months). (Do not round intermediate calculations. Round your answer to 2 decimal places.) Net annual cost $_____

Net annual cost $ 129 [15 checks x 12 (months) x 0.45] + [4.00 x 12(mo's)] = 129 ------------------- Net annual cost $ 27 [750 x .05 = 37.5] x [8(months)/12(mo's)] = 25 13 x 4 = 52(no interest earned mo's) 52 - 25 = 27

Another name for a regular savings account is a Certificate of deposit. Checking account. Money market account. Money market fund. Passbook or statement account.

Passbook or statement account.

Common payment choices for everyday activities include all of the following except Cash. Check. Credit card. Short-term loan. Debit card.

Short-term loan.

If a check is lost or stolen, you should use a Stop-payment order. Stale check. Bank statement. Blank endorsement. Deposit ticket.

Stop-payment order.

According to the video, what is step 3 in the bank reconciliation process for individuals? Add deposits in transit to the balance shown on the bank statement. Add all outstanding checks from the balance shown on your monthly bank statement. Add interest and direct deposits that you have not recorded in your checkbook. Subtract all outstanding checks from the balance shown on your monthly bank statement. Subtract any bank fees, ATM withdrawals, automatic payments, and other charges made by the bank that have not been recorded in your checkbook.

Subtract any bank fees, ATM withdrawals, automatic payments, and other charges made by the bank that have not been recorded in your checkbook.

Why are some financial service operations referred to as financial supermarkets? They offer a combination of services from one source. Customers can receive cash and a receipt. They have many locations, like supermarkets. They are often located in supermarkets or convenience stores. Their prices are similar to those in a supermarket.

They offer a combination of services from one source. Customers can receive cash and a receipt.

An effective cash management plan is needed for buying groceries, paying the rent, and other routine spending. True or False

True

According to the video, all of the following are advantages of pre-paid cards, except: Unlimited purchasing Savings account options Budget considerations In-store or online purchases Controlled spending

Unlimited purchasing

Time deposits do NOT include (this is found under Types of Financial Services): savings accounts certificates of deposits money market accounts checking accounts

checking accounts

When interest rates are falling, you should not: choose short-term savings options "lock in" short-term loans choose long-term savings options refinance a home loan

choose short-term savings options

Non-deposit institutions mentioned in the text include: life insurance companies payday loan companies investment companies pawnshops brokerage firms

life insurance companies investment companies brokerage firms

A _____ fund is an account used for saving offered by investment companies. This is taken under Comparing Saving Plans. mutual market money market credit market municipal market

money market

Financial services include: payment services savings investments insurance financial planning forced retirement borrowing

payment services savings investments insurance financial planning borrowing

money market account

A savings account offered by banks, savings and loan associations, and credit unions that requires a minimum balance and has earnings based on market interest rates.

Asset management accounts are a collection of financial services offered for a single fee. True or False

True