Chapter 4 and 14 review

Multiple Choice Question Using compounding, how much interest will be earned in the second year of a savings account that has an original balance of $200 and earns 6 percent interest per year?

$12.72

What amount would you have if you deposited $2,300 a year for 25 years at 8 percent (compounded annually)?

$168,144

Gwen had three accounts as listed here. In 2020, how much was her total insurance coverage by the FDIC? Bank A: $330,000 Bank B: $100,000 Bank C: $330,000

$600,000

In 2019, Joshua gave $12,000 worth of Microsoft stock to his son. In 2020, the Microsoft shares were worth $20,000. What was the total amount removed from Joshua's estate in 2020?

0

Check-cashing outlets usually charge fees of:

1% - 20% of the face value of the check

A payday loan company charges 2.4 percent interest for a four-week period. What would be the annual interest rate from that company?

2.4*(52/4) = 31.2

If inflation is 3 percent, a saver would want to earn an interest rate greater than:

3 percent

If a person has ATM fees each month of $34 for four years, what would be the total cost of those banking fees?

34*12*4 = 1632

A $200 savings account that earned $8 after a year would have a rate of return, or yield, of ______ percent. (Assume annual compounding.)

4

Ted Riley owns a Lexus worth $42,000. He owns a home worth $325,000. He has a checking account with $500 in it and a savings account with $2,600 in it. He has a mutual fund worth $114,000. His personal assets are worth $94,000. He still owes $21,300 on his car and $195,000 on his home, and he has a balance on his credit card of $2,300. What is Ted's net worth?

42000+325000+500+2600+114000+94000-21300-195000-2300= 359,500

Brenda Young desires to have $8,000 eight years from now for her daughter's college fund. If she will earn 7 percent (compounded annually) on her money, what amount should she deposit now? Use the present value of a single amount calculation.

4656

What would be the annual percentage yield for a savings account that earned $69 in interest on $1,000 over the past 365 days?

69/1000=.069 =6.9%

What percentage of American workers are covered by Social Security?

97%

Which type of financial institution typically charges higher rates?

Check-cashing outlets

Which of the following deposit-type institutions serve as financial intermediaries?

Commercial banks Credit unions Savings and loans

_____ is a process that calculates interest based on previously earned interest.

Compounding

This type of card is a plastic access card used in computerized banking transactions.

Debit card

What is not typically a basic concern of a financial services customer?

Does the bank offer tax preparation services?

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.

False

A Savings Bond that has an interest rate based on two components is a(n):

I bond

Janie has a joint account with her mother with a balance of $753,000. Based on $250,000 of Federal Deposit Insurance Corporation coverage, what amount of Janie's savings would not be covered by deposit insurance?

Janie's portion of joint account = 0.50 × $753,000 = $376,500 Uninsured portion of Janie's account = Janie's portion of joint account − FDIC coverage amount = $376,500 − $250,000 = $126,500

_____ is the attribute of savings accounts that allows you to withdraw money on short notice without a loss of principal or fees. This is taken directly from the text.

Liquidity

Which of the following are not proper actions to take if you are a victim of identity theft?

Locate the person who stole your identity. Leave the area until the problem is resolved. Ask your friend to help you find the thief.

Which of the following services do savings and loans offer?

Mortgages Savings accounts

Monthly fee, $3.50; processing fee, 50 cents per check; checks written, an average of 15 a month.

Net annual cost = 12 × [(Average number of checks per month × Cost per check) + Monthly fee] = 12 × [(15 × $0.50) + $3.50] = $132

Which of the following are considered demand deposits?

Payment accounts Checking accounts

What types of financial institutions have federal deposit insurance?

Savings and loans Credit unions Commercial banks

When planning for retirement, inflation:

Should be considered since income received earlier in retirement will buy more than the same amount received later in retirement due to the rising prices of goods and services.

Some of the basic concerns of a financial services customer when comparing financial services include which of the following?

Some of the basic concerns of a financial services customer when comparing financial services include which of the following?

With a 35 percent marginal tax rate, would a tax-free yield of 6.2 percent or a taxable yield of 7.8 percent give you a better return on your savings?

Tax-free yield of 6.2 percent.

Which of the following is not required to be disclosed by the Truth and Savings Act?

The inflation rate

What is the main function of a finance company?

To make loans to consumers and small businesses

What is the main function of a mortgage company?

To provide loans to purchase homes

Which of the following is a service not offered by savings and loans?

Trip planning services

A current shortage of cash can be overcome by liquidating savings or borrowing.

True

Which of the following is true regarding credit cards versus debit cards?

With credit cards, you are borrowing money but you are spending your own money with debit cards.

Another name for an asset management account is:

a cash management account

A certified check is a personal check with:

a guaranteed payment.

A regular savings account usually does not have:

a high rate of interest. overdraft protection. a high balance requirement.

Share draft accounts at a credit union:

are interest bearing until a minimum balance is maintained.

EE bonds are exempt from state and local taxes, but federal income tax is typically due:

at redemption

A signature card is the document that helps the bank determine who are the ______ on the account.

authorized persons

A specific stop-payment order given to a bank is designed to:

avoid paying a specific check that is lost or stolen.

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

credit

With the APY method, it is ______ to compare rates.

easy

The biggest advantage of using APY is:

easy to compare rates

A _____ is your signature on the back of the check.

endorsement

Credit alternatives are only for people of limited resources.

false

Benefits of U.S. savings bonds include:

government guarantee. low minimum deposit. exemption from state and local taxes.

There is a trade-off between liquidity and:

higher return

A _____ CD has earnings based on the performance of the stock market.

index

The two parts of interest on an I bond are a(n):

inflation rate that changes semiannually. fixed rate of interest for the life of the bond.

A trust is a legal agreement that:

is created by one party for benefit of another. enables management of assets. provides control of assets.

Common mistakes made when managing current cash needs include:

lacking sufficient liquid assets to pay current bills. leaving funds in low-interest accounts too long. using savings for current expenses. overspending.

To achieve long-term financial goals, many people trade off _____ for a _____ return.

liquidity higher

A _____ savings bank is owned by depositors and specializes in savings and mortgages.

mutual

Concerns of online banking include:

overspending due to ease of access. security violations. online scams.

Credit alternatives to be used for borrowing if an individual needs more cash than is available include:

personal loans. credit card cash advances.

Ruby is 25 and has a good job at a biotechnology company. She currently has $8,400 in an IRA, an important part of her retirement nest egg. She believes her IRA will grow at an annual rate of 7 percent, and she plans to leave it untouched until she retires at age 65. Ruby estimates that she will need $875,000 in her total retirement nest egg by the time she is 65 in order to have retirement income of $20,000 a year (she expects that Social Security will pay her an additional $15,000 a year).How much money will she have to accumulate in her company's 401(k) plan over the next 40 years in order to reach her retirement income goal?

retirement goal - fv of IRA = 749218

Saving funds for future use is necessary for financial:

safety

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

savings

Indexed CDs have rates that vary with the:

stock market

Financial services will usually not be affected by:

stock prices.

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

true

Time deposits include money in savings accounts and certificates of deposits.

true

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

trust

Redeemed EE bonds can avoid federal taxation if:

used to pay college tuition and fees.

A savings plan that requires a certain amount of money to be left for a specified amount of time is a:

certificate of deposit

Debit cards are different from credit cards because:

you are spending your own money when you use a debit card

Using compounding, how much interest will be earned in the second year of a savings account that has an original balance of $100 and earns 5 percent interest per year?

$5.25

A $500 savings account that earned $25 after a year would have a rate of return, or yield, of ______ percent. (Assume annual compounding.)

5

You are in the 25 percent tax bracket. So, the yield on the savings account is 8 percent, and the after-tax savings rate of return is ______ percent.

6

Which services do finance companies typically not offer?

Frequent access to cash machines Savings accounts with high interest rates Checking accounts with unlimited withdrawals

Which of the following is not a common fee associated with prepaid debit cards?

Initiation fee

What type of financial institution typically does not have federal deposit insurance?

Investment companies

Which of the following is not an example of a type of financial service that is focused on payment services? In other words, which of the following does not involve payment of money on your part?

Regular savings account

Which services do mortgage companies typically not offer?

Savings accounts with high interest rates Frequent access to cash machines Checking accounts with unlimited withdrawals

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

True

Another name for an automated teller machine (ATM) is:

a cash machine

An automatic teller machine (ATM) is also called as a(n) " _____ machine."

cash

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

commercial

Overdraft protection is designed to:

cover underfunded checks

Using savings for paying _____ expenses is one of the mistakes people make when managing current cash needs.

current

Financial services include all of the following except:

debt counseling.

_____ deposits include checking accounts and other payment methods.

demand

Money market accounts are insured by federal deposit insurance, whereas money market mutual ____ are not.

fund

All of the following are deposit institutions that serve as financial intermediaries except:

insurance companies.

Compounding is the process that calculates earnings based on previously earned:

interest

Common mistakes made when managing current cash needs include:

leaving funds in low-interest accounts too long. overspending. lacking sufficient liquid assets to pay current bills. using savings for current expenses.

A drawback of U.S. savings bonds is:

lower rates for early redemption.

A ______ fund is an account used for savings offered by investment companies.

money market

Historically, savings and loans specialized in:

savings accounts and mortgage loans

The Truth in Savings Act requires the following items to be disclosed:

the annual percentage yield (APY). the interest rate. fees on deposit accounts. other terms and conditions of the savings plan.

Overdraft protection is an automatic loan made to checking account customers to cover checks written in excess of:

their balance

A debit or cash card is a plastic access card that activates ATM transactions and may also be used to make purchases.

true

If there is a shortage of cash, you will have two basic choices to cope with the situation: _____ from a savings or _____

withdraw, borrow

If you are in the 25 percent tax bracket and received an after-tax rate of return of 6 percent, the yield on the savings account would therefore be ______ percent.

8

Mutual savings banks are owned by _____

depositors

Evan had three accounts as listed below. In 2020, how much was his total insurance coverage by the FDIC? Bank A: $50,000 Bank B: $10,000 Bank C: $255,000

$310,000

You have $15,000 in your retirement fund that is earning 5.5 percent per year, compounded quarterly. a. How many dollars in withdrawals per month would reduce this nest egg to zero in 20 years?

(Use table) 102

Calculate approximately how much money an older (age 65-74) household with an annual income of $40,000 spends on housing each year.

(annual income * housing percent)/100 =(40000*32.4)/100 = 12960

Nicholas earned 14.0 percent in his savings account. If he is in the 28 percent tax bracket, what is his after-tax savings rate of return?

10.08%

What would be the value of a savings account started with $675, earning 9 percent (compounded annually) after 7 years?

1233.90

What is the APY for a savings account with a $300 balance that receives $17 interest for the year?

17/300= .0566 = 5.7%

What is the APY for a one-year $7,800 certificate of deposit with $1,833 interest?

1833/7800= .235= 23.5%

A certificate of deposit often charges a penalty for withdrawing funds before the maturity date. If the penalty involves three months of interest, what would be the amount for early withdrawal on a CD paying 5 percent and valued at $29,000?

Early withdrawal penalty = Account value × Annual interest rate × (Number of penalty months / 12) = $29,000 × 0.05 × 3/12 = $362.50

Which of the following actions should you take if you are a victim of identity theft?

File a police report. Place a fraud alert on your credit report. Contact the Social Security administration.

Barry and Mary have accumulated over $4.4 million during their 50 years of marriage. They have two children and five grandchildren. How much money can they gift to their children in 2020 without any gift tax liability?

In 2020, you can give up to $15,000 to any one person without incurring any gift tax. Thus, the maximum this married couple can gift to their children without incurring any gift tax is: 15000x #children x # spouses giving gifts 60,000

Interest earnings of 2 percent with a $500 minimum balance; average monthly balance, $900; monthly service charge of $14 for falling below the minimum balance, which occurs five times a year (no interest earned in these months).

Net annual cost = Service charges - Interest earnings = (5 × $14) - (7 / 12)(0.02 × $900) = $59.50

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

Opportunity cost = Required minimum balance × Interest rate = $320 × 0.045 = $14.40

A major concern with prepaid debit cards is which of the following?

The high fees often charged

_____ banks are organized as corporations, with investors contributing the capital for operations.

commercial

A customer has more security in case of fraudulent transactions when a debit card is processed like a(n) _____.

credit card

The main purpose of life insurance is to provide financial security for _____ . (Enter one word per blank.)

dependants

A _____ ticket or slip is used to add funds to a checking account.

deposit

Selection of a savings plan is influenced by:

restrictions and fees. rate of return. safety. liquidity.

A _____ card is the document that records the official signatures of the person or persons authorized to write checks on the account.

signature

Financial institutions consider checks that are older than Blank______ to be "stale."

six months

A credit union is owned by:

the members

Fraud charges should be reported within how many days of receiving your statement to protect your right not to be charged for the transaction?

60

A regular savings account usually offers:

a low or no minimum balance requirement

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

annual

Common payment choices include:

credit cards debit cards cash checks

Money market accounts at commercial banks are insured by ______, whereas money market funds are not.

federal deposit insurance

Life insurance has other uses, including:

savings alternatives providing for dependents investment options

A money market fund is a:

savings instrument

A_____ draft account is an interest-bearing checking account at a credit union.

share

Some tax advantages of EE bonds are that:

there is no federal income tax until redeemed. interest is exempt from state and local taxes.