Personal Finance Chapter 5
Liquid assets allow you to cover unplanned expenses without having to interrupt your long-term investments or liquidate any tangible assets.
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. Select one: True False
True
The National Credit Union Association is a federal agency that insures deposits at credit unions. Select one: True False
True
True or False: 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
True or False: 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
True or False: Credit Unions and Internet-only banks typically offer more attractive interest rates to both borrowers and savers.
True
True or False: For a consumer who does not have a checking account a prepaid debit card is a means of paying for goods and services.
True
True or False: 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
True or False: T-bills are extremely safe investments, having been issued by the federal government.
True
True or False: The National Credit Union Association is a federal agency that insures deposits at credit unions.
True
True or False: The deregulation of the 1980s has allowed brokerage firms to offer traditional banking service, and has also let banks offer services formerly found only at investment companies.
True
True or False: 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
True or False: 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
True or False: When you use your debit card or ATM card, you should enter the transaction into your check register.
True
True or False: With online banking, you are able to access your accounts and conduct business transactions through the Internet, your mobile phone, and devices.
True
True or False: Your bank may offer a line of credit, a credit card, or a link to your savings account to cover transaction when you overdraw your account.
True
Virginia Tech's Hokie Passport is an example of a smart card. Select one: True False
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. Select one: True False
True
For a consumer who does not have a checking account a prepaid debit card is a means of paying for goods and services. Select one: True False
True.
Which of the following is not a common fee arrangement for checking accounts? Select one: a. Monthly fee b. Minimum balance requirement c. Variable interest rates to reflect fee activity d. Charge per check e. Balance-dependent scaled fees
Variable interest rates to reflect fee activity
Financial institutions that provide traditional checking and savings accounts are commonly referred to as: a. deposit-type financial institutions. b. nondeposit-type financial institutions. c. personal depository institutions. d. financial brokerage companies. e. None of these are correct.
a
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 a. cashier's check. b. certified check. c. traveler's check. d. None of these are correct.
a
The Truth in Savings Act of 1993 a. helps investors compare interest rates on investment options. b. requires that all institutions publish only annually compounded APRs. c. ensures that all investments are federally insured. d. All of these are correct.
a
What are short-term notes of debt issued by the federal government commonly called? a. T-Bills b. T-Notes c. T-Bonds d. T-Accounts
a
What is the name for comprehensive financial services packages offered by brokerage firms? a. Asset management accounts b. Comprehensive management accounts c. Platinum management accounts d. Consolidated management accounts
a
You are considering an MMMF. The fund is taxable and pays 8.5% interest. If your top federal tax bracket is 25% and you live in a state that doesn't impose income taxes, what after-tax return would you realize from this investment? a. 6.38% b. 2.13% c. 7.44% d. 8.25%
a
You are examining two different MMMFs. Fund A is tax-exempt and pays 5%. Fund B is taxable and pays 6%. You live in a state that imposes no income taxes and are in a 28% federal tax bracket. At what tax rate would the two funds have identical yields? a. 16.67% b. 17.76% c. 20.23% d. 28.00% e. Cannot determine from the information provided
a
Electronic funds transfer applies to which of the following? Select one: a. Debit cards b. Smart cards c. Direct deposit d. ATM e. All of these are correct answers.
All of these are correct answers.
Brenda White had her bank certify one of her personal checks as being good. Which type of check has been issued? a. Traveler's check b. Certified check c. Cashier's check d. Money order e. Audited check
b
A money order is typically less liquid than a personal check.
False
It is best for college students to wait and begin saving once they are "making more money." Select one: True False
False
True or False: A debit card is the same thing as a smart card.
False
True or False: A money order is typically less liquid than a personal check.
False
True or False: A store-valued card, only used at one store for one purpose, is known as an "open-loop" card.
False
True or False: It is best for college students to wait and begin saving once they are "making more money."
False
True or 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
True or 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
True or False: The APY can never be the same as the APR.
False
What is the FDIC? Select one: a. Federal Deposit Insurance Corporation b. Federal Deposit Insurance Collective c. Federal Depository Insurance Committee d. Federal Department of Insurance and Compensation e. None of these are correct.
Federal Deposit Insurance Corporation
Which of the following financial institutions were originally established to provide mortgage loans to depositors? Select one: a. Commercial banks b. Savings and loan associations c. Internet banks d. Credit unions
Savings and loan associations
Cash and investments that can be easily converted into cash are termed a. capital assets. b. liquid assets. c. illiquid assets. d. depositable assets. e. None of these are correct.
b
Money market mutual funds provide attractive competition for bank deposits because Select one: a. their low fees are affordable for almost anyone. b. they are convenient to purchase and use. c. their short term, higher returns are generally regarded as practically risk-free. d. they are fully insured. e. None of these are correct.
their short term, higher returns are generally regarded as practically risk-free.
Why is it important to convert interest rates into the APY on different accounts and with different banks? Select one: a. Some banks and accounts pay higher advertised rates. b. The same advertised rate will vary with different compounding periods. c. The Truth in Savings Act of 1993 omits this comparison. d. With FDIC Banks it is not necessary to convert interest rates for comparison.
The same advertised rate will vary with different compounding periods.
You are examining two different MMMFs. Fund A is tax-exempt and pays 5%. Fund B is taxable and pays 6%. You live in a state that imposes no income taxes and are in a 28% federal tax bracket. At what tax rate would the two funds have identical yields? Select one: a. 16.67% b. 17.76% c. 20.23% d. 28.00% e. Cannot determine from the information provided
16.67%
You are considering an MMMF. The fund is taxable and pays 8.5% interest. If your top federal tax bracket is 25% and you live in a state that doesn't impose income taxes, what after-tax return would you realize from this investment? Select one: a. 6.38% b. 2.13% c. 7.44% d. 8.25%
6.38%
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? Select one: a. The time value of money b. Taxes affect personal finance decisions. c. Risk and return go hand in hand. d. All of these are important to their situation.
All of these are important to their situation.
Online and mobile banking allows you to do the following Select one: a. access your accounts at any time of day. b. transfer funds between accounts. c. pay bills and receive payments online. d. All of these.
All of these.
When college students start saving early Select one: a. in an account earning interest, they immediately put their money to work. b. by automating their savings, they are less likely to spend money. c. they can take advantage of the time value of money and achieve their financial goals. d. All of these.
All of these.
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? Select one: a. Certified checks b. Cashiers checks c. Money orders d. Both Cashiers checks and Money orders are good options.
Both Cashiers checks and Money orders are good options.
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 about his goal of buying a house in five years? Select one: a. You don't have enough income to consider buying a house. b. You need to develop a savings plan. c. You need to estimate what a down payment would be. d. You should switch to a Savings and Loan Association. e. Both You need to develop a savings plan and You need to estimate what a down payment would be are good answers.
Both You need to develop a savings plan and You need to estimate what a down payment would be are good answers.
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. Christopher has not received an Income Tax refund in 4 years. Is there anything you could recommend to him? Select one: a. No, without dependents there is not much he can do now. b. He should increase his 401(k) contributions to 6% of his salary. c. He should itemize his deductions. d. He should change his W-2 form and claim more deductions. e. All but No, without dependents there is not much he can do now are good recommendations.
He should increase his 401(k) contributions to 6% of his salary.
Pick the advantage of a certificates of deposit from this list of possibilities. Select one: a. The interest paid is compounded daily. b. Early withdrawals after 30 days do not incur a penalty. c. Interest rates are generally higher than typical savings accounts. d. They earn the APY and not the APR.
Interest rates are generally higher than typical savings accounts.
You have $5,000 in a 36 month Certificate of Deposit that has an APR of 3.75%. If inflation averages 4.25% during these 36 months, what is the real return on your CD? Select one: a. 3.75 percent b. 8.0 percent c. Negative .50 percent d. Negative 8.0 percent
Negative .50 percent
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? Select one: a. No, without dependents there is not much he can do now. b. He should increase his 401(k) contributions to 6% of his salary. c. He should itemize his deductions. d. He should change his W-2 form and claim more deductions. e. All but No, without dependents there is not much he can do now are good recommendations
b
Why is it important to convert interest rates into the APY on different accounts and with different banks? a. Some banks and accounts pay higher advertised rates. b. The same advertised rate will vary with different compounding periods. c. The Truth in Savings Act of 1993 omits this comparison. d. With FDIC Banks it is not necessary to convert interest rates for comparison.
b
Brenda White had her bank certify one of her personal checks as being good. Which type of check has been issued? Select one: a. Traveler's check b. Certified check c. Cashier's check d. Money order e. Audited check
b. Certified check
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 would like to have $20,000 for a house down payment seven years from now. How much money would he need to save every quarter in an investment that pays 9% APR compounded quarterly? Select one: a. $2,173.81 b. $171.78 c. $520.51 d. $509.05
c
What is another name for an interest-bearing checking account? a. DIFI b. IBC c. NOW d. CWI
c
When you are considering different investment options and want to maximize your returns, be sure to compare the investments' a. quoted rates. b. APRs. c. APYs. d. None of these
c
You are considering the purchase of one of two different investments. Investment A is tax exempt and pays 6%. Investment B is taxable and pays 8.33%. You live in a state that imposes no income taxes and are in a 28% federal tax bracket and want to earn the highest after tax return possible. Which of the following is true? (round to two decimal places) a. Investment A is preferred. b. Investment B is preferred. c. Investments A and B have identical after tax yields. d. Investments A and B have identical APYs. e. Not enough information has been provided.
c
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 Select one: a. cashier's check. b. certified check. c. traveler's check. d. None of these are correct.
cashier's check.
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 Select one: a. demand deposit. b. negotiable order of withdrawal deposit. c. term deposit. d. certificate of deposit. e. None of these are correct.
certificate of deposit.
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? a. Create a budget and set some savings goals. b. Automate a savings plan using EFT. c. Set up an account at a mutual fund company. d. All of these are good recommendations. e. All of these except Set up an account at a mutual fund company are good recommendations.
d
How do you compare cash management alternatives to determine which is best for you? a. Compare returns using comparable interest rates. b. Take into account their tax status. c. Consider their safety or risk. d. All of these are correct.
d
Many banks offer free checking accounts. What may be the opportunity costs associated with free checking? a. Low interest rates b. Overdraft protection c. High minimum balance requirements d. Both Low interest rates and High minimum balance requirements are correct answers.
d
Please choose the method to use when calculating the after-tax return. a. Taxable return (1 + marginal tax rate) -nontaxable return b. Taxable return (marginal tax rate -1) -nontaxable return c. Nontaxable return (1 -marginal tax rate) + taxable return d. Taxable return (1 -marginal tax rate) + nontaxable return e. Nontaxable return (1 + marginal tax rate) -taxable return
d
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. The Johnsons have been thinking about the financial principle -Pay Yourself First. Being very conservative, they might consider having their bank Select one: a. sell them a risky mutual fund. b. send them a monthly reminder to make a deposit in their 401(k). c. do a direct deposit of John's paycheck into their checking account. d. do a direct deposit of some of John's paycheck into a savings fund.
d
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? Select one: a. High interest rate b. Fixed rate of interest c. It is insured. d. Pays money market interest rates e. Lends itself well to automated payroll deduction plan
d
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? Select one: a. The time value of money b. Taxes affect personal finance decisions. c. Risk and return go hand in hand. d. All of these are important to their situation.
d
When college students start saving early a. in an account earning interest, they immediately put their money to work. b. by automating their savings, they are less likely to spend money. c. they can take advantage of the time value of money and achieve their financial goals. d. All of these.
d
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? a. Savings bank b. Commercial bank c. Savings and loan association d. Credit union e. None of these are correct.
d
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? a. Certified checks b. Cashiers checks c. Money orders d. Both Cashiers checks and Money orders are good options.
d
Financial institutions that provide traditional checking and savings accounts are commonly referred to as Select one: a. deposit-type financial institutions. b. nondeposit-type financial institutions. c. personal depository institutions. d. financial brokerage companies. e. None of these are correct.
deposit-type financial institutions.
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. The Johnsons have been thinking about the financial principle -Pay Yourself First. Being very conservative, they might consider having their bank Select one: a. sell them a risky mutual fund. b. send them a monthly reminder to make a deposit in their 401(k). c. do a direct deposit of John's paycheck into their checking account. d. do a direct deposit of some of John's paycheck into a savings fund.
do a direct deposit of some of John's paycheck into a savings fund.
Four banking conveniences are listed below. Which one is not typical? a. Safety deposit boxes b. Online banking services c. Direct deposit d. Overdraft protection e. All of these are typical banking conveniences.
e
Liquid assets or funds are important to a. cover unplanned expenses. b. prevent interrupting your long-term investments. c. prevent overdrafts in checking accounts. d. cover some planned expenses. e. All of these are correct.
e
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? Select one: a. High interest rates b. Check-writing privileges c. Minimal risk d. Convenience-deposits made through payroll deductions e. All of these are correct.
e
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. For John and 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. a. They are insured. b. They may have limited checking privileges. c. They have relatively attractive rates of return. d. They have variable market interest rates. e. All of these are advantages.
e
According to the Keown book, one way to think of liquid assets is as a(n) Select one: a. reservoir, with money moving in as wages are received and moving out as living expenses are paid. b. apple tree farm: pick money off of the money tree whenever you need it. c. garden: plant the seeds and the green is readily available. d. wind current: easy come, easy go.
reservoir, with money moving in as wages are received and moving out as living expenses are paid.
