27 Questions
- Banks use their depositors’ money to make money.
What is meant by this statement?
b. Banks loan out money that they have received from depositors at a higher rate of interest than the interest they pay to their depositors.
- Which of the following is an explanation for why
accounts in banks pay different rates of interest at a
given point in time?
b. The bank gives people a higher rate of interest when the person is willing to leave money on deposit with the bank for a longer period of time.
- Which of the following is a true statement about
liquidity?
c. If an account has a high degree of liquidity, it means that the account owner can easily and quickly access the funds in the account
- Which of the following is not a true statement about
checking accounts?
d. Checking accounts are good for a young person to use when saving for a large purchase such as a car.
- The sequence of accounts in order from the most
liquid to the least liquid is
c. checking account, NOW account, savings account, one-year CD
- A person receives gifts for her 18th birthday totaling
$750. She also saved $1,500 from her summer job and
keeps the money at home in a safe place. She wants to
buy a car when she turns 21. She has a parttime job and
plans to work full time next summer and save most of
that money. She has a monthly cell phone bill and a
credit card that she uses for emergencies and then pays
the bill in full each month. Which of the following is the
most financially wise recommendation for her when it
comes to opening bank accounts at this time?
b. She should put $1,500 in a two-year CD, $600 in a checking or NOW account, and keep $150 in cash.
- The difference between a money market account and
other types of checking and savings accounts is that
money market accounts
a. pay a higher rate of interest and require depositors to maintain a larger minimum balance than other types of checking accounts.
- How does the annual percentage yield (APY) help a
person decide whether to put his money in bank A or
bank B if both are offering 24-month CDs at 4.25%
interest?
d. The APY will show the actual interest rate earned as opposed to the stated rate after the frequency of compounding is taken into effect.
- It is said that “time is a person’s best friend when it
comes to planning for retirement.” What does this
statement mean?
b. A young person can take advantage of the benefits of compounding by starting to invest a small amount of money regularly from an early age.
- Person A is age 40 and planning to retire in 25 years.
Person B is age 25 and planning to retire in 40 years.
Both invest $5,000 in an IRA with a guaranteed 10%
annual rate of return on the investment and neither one
adds to the account again. At retirement, person A has
about $53,000 in his account and Person B has about
$230,000 in her account. Why is there such a huge
difference in the value of their IRAs?
d. Person B’s account had longer to benefit from the compounding of interest.
- Which of the following is a true statement about
IRAs?
a. If withdrawals are made from an IRA before the age of 59½, the person has to pay a 10% penalty plus taxes on the amount of money withdrawn.
- What is the major difference between a traditional
IRA and a Roth IRA?
b. Earnings from a Roth IRA are never taxed whereas withdrawals from a traditional IRA are taxed.
- Why are fewer employers offering defined-benefit
retirement plans?
a. As people are living longer in retirement, employers have greater financial risk as they must keep paying the retirees their pensions as long as they live.
- How does a person who is planning to retire in 30
years benefit now from making contributions to her
employer’s retirement plan?
c. Her yearly contributions to the plan are tax deductible; therefore, they reduce the amount of income on which she has to pay taxes.
- Why is an employer-sponsored retirement plan that
includes an employer matching feature considered an
important benefit offered to attract top employees?
b. This benefit is like getting a raise or free money since the employer is giving the person extra money in the form of contributions to the person’s retirement account.
- What does vesting mean?
a. It is the amount of time that an employee has to work before he is fully eligible for an employer’s benefit such as a retirement plan.
- A person earning $50,000 a year contributes 10% of
her income to her retirement plan. As a result, her
employer matches up to 5% of her salary as a
contribution. What will be the total contribution to her
retirement plan account for one year?
c. It will be $7,500
- Which of the following terms is not correctly
matched with its description?
d. Annuities: a financial product that guarantees an employee the same income in retirement as she earned during the last three years that she worked at the company.
- How much interest will you earn on a two-year
$6,000 CD that will pay annual interest of 5%? The first
year’s interest will remain in the CD and also earn
interest during the second year.
• $60001.05=$6300 at the end of the first year. $63001.05=$6615 at the end of the second year. Therefore, your total interest earned is $6615- 6000=$615.
- If your employer matches your retirement
contributions on a dollar-for-dollar basis up to $4,000,
how much will be contributed to your account by the
end of the first year if you take advantage of the entire
match?
• $4,000 + $4,000 = $8,000
- If you put $2,000 a year for three years into an IRA
that earns 3% a year, how much will you have saved at
the end of the third year?
• ($2,000 * (1.03)2 + ($2,000 * 1.03) + $2,000 = $2,121.80 + $2,060 + $2,000 = $6,181.80.
- Anita earned 2% on the $1,200 she had in savings and
3.5% on a one-year $4,000 CD. How much did she earn
in interest during the year?
• ($1,200 * .02) + ($4,000 * .035) = $24 + $140 = $164
- If you withdraw $10,000 from your IRA at age 35 to
buy a car, how much penalty will you pay for this
withdrawal?
• $10,000 * .10 = $1,000 (penalty is 10%)
- How much money will Jerod earn in interest this year
on a $3,000 CD that pays 5% in annual interest
assuming annual compounding?
• $3,000 * .05 = $150
- Assuming Brenda earns annual interest of 6% on her
two-year $5,000 CD, how much will she earn in interest
during the second year? Remember that her first year’s
interest will be added to the original principal and will
earn interest during the second year.
• $5,000 * 1.06 = $5,300 at the end of the first year. She will earn $5,300 * .06 = $318 in interest for the second year.
- If Nathaniel’s employer matches 50% of the first
$2,000 he contributes to his annual retirement account,
how much will he have in his account assuming he takes
full advantage of his employer’s match?
• $2,000 + .50($2,000) = $3,000
- Banks use their depositors’ money to make money. What is meant by
this statement?
b. Banks loan out money that they have received from depositors at a higher rate of interest than the interest they pay to their depositors.
Test your knowledge of banking and personal finance with this quiz covering topics such as banks using depositors' money, different interest rates, liquidity, checking accounts, and financial recommendations for a young adult. See how well you understand these important financial concepts!
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