Chapter 5 Personal Finance

True or false: One criterion for choosing a saving plan is the interest rate.

True

A regular savings account usually does not have:

a high balance requirement difficulty in withdrawal a high rate of interest

A regular savings account usually offers:

a low or no minimum balance requirement

Share draft accounts at a credit union:

are interest bearing

When comparing savings accounts rates of return, you should choose one that:

beats the rate of inflation

Another name for an asset management account is:

cash management account

time deposits do not include:

checking accounts

actions vyou might take when you encounter difficulties with a banking app include:

contact customer service for the bank app make sure that you are using the correct username and password update app and phone software

Overdraft protection is designed to:

cover underfunded checks

Using savings for _______ living expenses is one of the mistakes people make when managing current cash needs. This is a one-word answer.

current

Financial services include all of the following except:

debt counseling

__________ deposits include checking accounts and other payment methods. This is a one-word answer.

demand or checkable

a _______ ticket or slip is used to add funds to a bank account. This is a one-word answer.

deposit

True or false: Pawn shops are only used during economic downturns.

false

Achieving your financial goals and carrying out your daily activities require many ____________ services.

financial

A money order:

guarantees payment

Financial services will usually not be affected by:

historically lowest consumer prices

Common choices for making payments include all of the following except:

installment loans

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

insurance companies

criteria for selection of a savings plan include:

interest rate liquidity convenience safety

Asset management accounts are commonly offered by ______

investment companies

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

investment companies

financial services include:

investments borrowing payment services insurance savings financial planning

________ is the attribute of savings accounts that allows you to withdraw money on short notice without a loss of principal or fees.

liquidity

a _________ fund is an account used for savings offered by investment companies

money market

_______ bonds are not a type of federal savings bond.

municipal

Common payment choices do not include ______.

municipal bonds corporate bonds

The rate of return _______ is the percentage increase in the value of savings as a result of interest earned.

return/interest/yield

saving funds for future use is necessary for financial _________

safety

demand deposits are not ______

savings accounts

a money market fund is a ______

savings instrument

A ________ draft account is an interest-bearing checking account at a credit union. This is a one-word answer.

share

online payments do NOT include:

smart cards

drawbacks on money market accounts include:

some institutions paying for low balances high minimum balance required

The rate of return is

the percentage increase in the value of an account.

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

their balance

Which of the following attributes is not important when selecting a financial institution?

there is a state or national charter for the institution

What is the purpose of liquidity?

to allow you to withdraw money on short notice

What is the main function of a finance company?

to make loans to consumers and small businesses

What are the services that finance companies typically do not offer?

to provide frequent access to cash machines to provide checking accounts with unlimited withdrawals to probife savings accounts with high interest rates

What is the main function of a mortgage company?

to provide loans to purchase homes

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

true

What would be the net annual cost of the following checking accounts? (a) Monthly fee, $3.90; processing fee, $0.25 cents per check; checks written, an average of 25 a month (b) Interest earnings of 4 percent with a $500 minimum balance; average monthly balance, $800; monthly service charge of $15 for falling below the minimum balance, which occurs three times a year (no interest earned in these months).

(a)Net annual cost = (Monthly fee × 12) + (Fee per check × Number of checks per month × 12) = ($3.90 × 12) + ($0.25 × 25 × 12) = $121.80 (b)Net annual cost = Service charges − Interest earnings = ($15 × 3) - (0.04 × $800 × 9 / 12) = $21

If a person has ATM fees each month of $16 for 8 years, what would be the total cost of those banking fees?

1536 (16*8*12)

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

commercial banks credit unions savings and loans associations

What types of financial institutions have federal deposit insurance through FDIC?

commercial banks savings and loans

Some things to consider when selecting your financial institution include:

online banking fees and charges convenience services offered

A payday loan company charges 8.75 percent interest for a two-week period. What is the annual interest rate?

227.5% (8.75*(52/2))

A certificate of deposit will often result in a penalty for withdrawing funds before the maturity date. If the penalty involves two months of interest, what would be the amount for early withdrawal on a CD worth $36,000 at 8 percent?

480 (36000*0.08*(2/21))

What amount would you have if you deposited $4,500 a year for 30 years at 9 percent (compounded annually)?

613386 ((4500*136.308)) -- fv of an annuity

What would be the annual percentage yield for a savings account that earned $32.50 in interest on $500 over the past 365 days?

APY = 100 (Interest / Principal) = 100 ($32.50 / $500)= 6.50%

The savings alternative that offers more liquidity is:

money market accounts

Fraud charges on a debit card should be reported within _________ days of receiving your statement to protect your right not to be charged for the transaction.

60

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

6% ((1-0.25)(0.08))

With a 28 percent marginal tax rate, would a tax-free yield of 5 percent or a taxable yield of 7.5 percent give you a better return on your savings?

After-tax yield = Pretax yield × (1 - Tax rate) = 7.5% × (1 - 0.28)= 5.4% the taxable yield yields 5.4% which is preferable to the tax-free yield of 5%

What is the annual opportunity cost of a checking account that requires a $900minimum balance to avoid service charges? Assume an interest rate of 3 percent.

Annual opportunity cost = Minimum balance × Interest rate = $900 × 0.03 = $27

Based on the following information, determine the true balance in your checking account. Balance in your checkbook=$429 Interest earned on the account=$7 Balance on bank statement=577 Total of outstanding checks=219 Service charge and other fees=16 Deposits in transit=62

Checking Account Balance =Current checkbook balance - Service charge + Interest earned = 429- 16 + 7= 344 Current bank statement balance + Deposits in transit - Outstanding checks =577+ 62 - 219= 344

______ bonds are types of federal savings bond

EE and I

The savings alternative that offers less liquidity is:

certificates of deposit

use a credit card to:

delay the payment or a purchase build a credit history with wise buying buy online or for major pruchases earn more generous rewards points for spending

common mistakes made when managing current cash needs include:

lacking sufficient funds using savings for current expenses overspending

use a debit card to:

limit your spending to available money avoid bills that will be paid in the future avoid interest payment or an annual fee obtain better protection if you process a transaction as a credit card

A common trade-off (opportunity cost) for financial services includes having to keep money in accounts longer to obtain higher interest rates. This leads to reduced Blank______.

liquidity

By comparing financial institutions, a customer can:

lower bank fees minimize ATM fees

A savings plan that requires a certain amount of money to be left for a specified amount of time is NOT a:

money market account stock option passbook savings account

High-cost financial services typically do not include:

mutual savings banks credit unions

The interest rates charged by pawnshops are regulated by ____________

the state

You are in the 25% tax bracket, the before-tax savings rate of return is 12%, the after-tax yield on the savings account is:

9% ((1-0.25)(0.12)

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

True

True or false: The rate of return you earn on your savings account should be compared with the inflation rate.

True

Which of the following exists primarily to provide loans to purchase homes?

mortgage companies

True or false: Achieving your financial goals and carrying out your daily activities require various financial services.

True