Banking and Currency Concepts Quiz
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Questions and Answers

What is barter?

  • A market system
  • A type of currency
  • Exchange goods or services for other goods or services without using money (correct)
  • Exchange using currency

What is representative money?

An item such as a token or piece of paper that has no intrinsic value, but can be exchanged on demand for a commodity that does have intrinsic value

What does FDIC stand for?

Federal Deposit Insurance Corporation

Federalists believed a centralized bank was unnecessary.

<p>False (B)</p> Signup and view all the answers

What occurred during the Free Banking Era?

<p>There was no federal bank, and private institutions freely printed and circulated their own currencies.</p> Signup and view all the answers

What were greenbacks?

<p>Paper currency issued by the United States during the American Civil War.</p> Signup and view all the answers

What is a mortgage?

<p>The charging of real or personal property by a debtor to a creditor as security for a debt.</p> Signup and view all the answers

What are liquid assets?

<p>Assets that are easy to sell or convert into cash without loss in value.</p> Signup and view all the answers

What is a bank run?

<p>A situation where a large number of customers withdraw deposits simultaneously due to concerns about the bank's solvency.</p> Signup and view all the answers

What is fiat money?

<p>Money where the government controls the money supply, not backed by a physical commodity like gold.</p> Signup and view all the answers

What caused the Savings and Loan crisis?

<p>The failure of 1,043 out of 3,234 savings and loan associations in the U.S. from 1986 to 1995.</p> Signup and view all the answers

What is near money?

<p>Savings accounts and money market funds.</p> Signup and view all the answers

Why is representative money more useful than commodity money?

<p>It can be used for other things besides currency. (A), It exists in unlimited supply. (B), It is portable, durable, divisible, and acceptable. (C), It has value because the government decrees it as acceptable. (D)</p> Signup and view all the answers

What is the gold standard?

<p>A system by which the value of a currency was defined in terms of gold.</p> Signup and view all the answers

What is fractional reserve banking?

<p>A banking system in which only a fraction of bank deposits are backed by actual cash available for withdrawal.</p> Signup and view all the answers

What is principal in a loan?

<p>The money used to pay down the balance of the loan.</p> Signup and view all the answers

What is interest?

<p>The charge paid to the lender for borrowing money.</p> Signup and view all the answers

What are financial intermediaries?

<p>Institutions like banks and credit unions that act as middlemen between lenders and borrowers.</p> Signup and view all the answers

What is the coupon rate of bonds?

<p>The rate the bond issuer pays the holder.</p> Signup and view all the answers

How do savings bonds differ from other bonds?

<p>Buyers do not receive periodic interest for a lower price.</p> Signup and view all the answers

What is a municipal bond?

<p>A debt security issued by a state or local government.</p> Signup and view all the answers

Money market funds are insured by FDIC.

<p>False (B)</p> Signup and view all the answers

What does equity refer to in economics?

<p>The concept or idea of fairness, particularly in taxation or welfare economics.</p> Signup and view all the answers

What are mutual funds?

<p>An investment program funded by shareholders that trades in diversified holdings.</p> Signup and view all the answers

Treasury bills pay state tax.

<p>False (B)</p> Signup and view all the answers

Low risk bonds usually have high return rates.

<p>False (B)</p> Signup and view all the answers

High risk bonds guarantee high returns.

<p>False (B)</p> Signup and view all the answers

What is an entrepreneur?

<p>A person who organizes and operates a business, taking on greater than normal financial risks.</p> Signup and view all the answers

What does liquidity mean?

<p>The availability of liquid assets to a market or company.</p> Signup and view all the answers

What is an example of a coupon rate?

<p>If you own a $1,000 bond with a coupon rate of 4%, you will receive $40 a year until maturity.</p> Signup and view all the answers

What is currency?

<p>A system of money in general use in a particular country.</p> Signup and view all the answers

What is commodity money?

<p>Money whose value comes from a commodity of which it is made.</p> Signup and view all the answers

What does default mean?

<p>Failure to fulfill an obligation, especially to repay a loan.</p> Signup and view all the answers

What is the Federal Reserve System?

<p>The central bank of the United States that regulates the monetary and financial system.</p> Signup and view all the answers

What does interest refer to?

<p>The charge for the privilege of borrowing money, expressed as an annual percentage rate.</p> Signup and view all the answers

What is principal in financial terms?

<p>The amount owed in a loan.</p> Signup and view all the answers

What is representative money?

<p>A claim on a commodity, such as gold or silver certificates.</p> Signup and view all the answers

What is a bear market?

<p>A market in which prices are falling, encouraging selling.</p> Signup and view all the answers

What does equity indicate?

<p>The value of shares issued by a company.</p> Signup and view all the answers

What is an investment?

<p>Redirecting funds for later use.</p> Signup and view all the answers

What are financial assets?

<p>Any account of value.</p> Signup and view all the answers

What are pension funds?

<p>Any income received after retirement.</p> Signup and view all the answers

What does diversification mean?

<p>Spreading out investments to reduce risk.</p> Signup and view all the answers

What is a portfolio?

<p>A folder showing a collection of financial assets.</p> Signup and view all the answers

What is a prospectus?

<p>An investment report from a company.</p> Signup and view all the answers

What does return refer to?

<p>Money received above and beyond the initial investment.</p> Signup and view all the answers

What is a Certificate of Deposit (CD)?

<p>An investment vehicle that is safe but incurs a high penalty for liquidity.</p> Signup and view all the answers

What are bonds?

<p>Certificates to loan a company money.</p> Signup and view all the answers

What are the 3 components of bonds?

<p>Coupon Rate (A), Par Value (B), Maturity (D)</p> Signup and view all the answers

What does yield refer to?

<p>The annual rate of return.</p> Signup and view all the answers

What is a discount from par?

<p>Buying a bond below its value and cashing in at full.</p> Signup and view all the answers

Match the following bond ratings with their risk level:

<p>AAA = Best investment-grade AA = High quality B = Speculative D = Risky, high return, cheap</p> Signup and view all the answers

What are the advantages of bonds?

<p>No need to share profits (A), Fixed payment (B)</p> Signup and view all the answers

What are the disadvantages of bonds?

<p>Fixed payment is mandatory (B), No guarantees of return (C)</p> Signup and view all the answers

What are savings bonds?

<p>Bonds that will not default.</p> Signup and view all the answers

What is a treasury bond?

<p>A government bond issued by the U.S. Treasury.</p> Signup and view all the answers

What is a municipal bond?

<p>A security issued by or on behalf of a local authority.</p> Signup and view all the answers

What are corporate bonds?

<p>Investment-grade bonds issued by companies.</p> Signup and view all the answers

What are junk bonds?

<p>High yield, high-risk bonds.</p> Signup and view all the answers

What does SEC stand for?

<p>Securities and Exchange Commission.</p> Signup and view all the answers

What are capital markets?

<p>Any money lent longer than one year.</p> Signup and view all the answers

What are money markets?

<p>Money lent for less than a year.</p> Signup and view all the answers

What are primary markets?

<p>Markets where securities can only be redeemed by the original holder.</p> Signup and view all the answers

What are secondary markets?

<p>Markets where securities can be resold multiple times.</p> Signup and view all the answers

Why should you put your money in the stock market?

<p>To get a higher yield than banks.</p> Signup and view all the answers

What is M1 in the money supply?

<p>Currency + demand deposits + checks.</p> Signup and view all the answers

What is M2 in the money supply?

<p>M1 + certificates of deposits + money market.</p> Signup and view all the answers

Who usually charges the highest rates?

<p>Banks.</p> Signup and view all the answers

What are characteristics of money?

<p>Durability, portability, divisibility.</p> Signup and view all the answers

A debit card is equal to what?

<p>Plastic cash.</p> Signup and view all the answers

What are reasons to establish a strong national bank?

<p>Promote international trade, economic growth, and state travel.</p> Signup and view all the answers

What are reasons for distrust of early banks?

<p>Bank runs, wildcat banks, state currency.</p> Signup and view all the answers

What is meant by 'wildcat bank'?

<p>Banks chartered under state law during the Free Banking Era.</p> Signup and view all the answers

Study Notes

Barter and Currency Concepts

  • Barter: Direct exchange of goods or services without using money.
  • Representative Money: Has no intrinsic value but can be exchanged for a commodity like gold or silver.
  • Greenbacks: Paper currency issued during the American Civil War, notable for the green ink on the reverse.
  • Fiat Money: Government-controlled money supply, not backed by a physical commodity.

Banking Systems and Regulations

  • FDIC: Insures bank deposits in the U.S. to maintain public confidence in the financial system.
  • Federal Reserve System: Central bank of the U.S., responsible for regulating the monetary system.
  • Fractional Reserve Banking: Only a portion of bank deposits are backed by actual cash available for withdrawal.

Historical Banking Context

  • Free Banking Era: Period with no federal bank where states and private institutions issued their own currencies, leading to bank failures and worthless bills.
  • Savings and Loan Crisis: Resulted in the failure of over 1,000 savings and loan associations due to poor regulation between 1986-1995.

Investment and Bonds

  • Bonds: A certificate indicating loaning money to a company, with three main components: coupon rate, maturity, and par value.
  • Municipal Bonds: Debt securities from states or local governments, can be general obligation or revenue bonds.
  • Junk Bonds: High-risk, high-yield bonds with returns up to 12%.
  • Corporate Bonds: Investment-grade bonds issued by companies, part of a broader capital markets ecosystem.
  • Treasury Bills: Short-term government bonds exempt from state tax.

Financial Instruments and Market Types

  • Mutual Funds: Investment programs with diversified holdings, managed professionally.
  • Money Market Funds: Provide liquidity but are not insured by the FDIC.
  • Primary Markets: Securities can only be redeemed by their original holders.
  • Secondary Markets: Securities can be resold multiple times.

Risk and Return in Investments

  • Low-Risk Bonds: Typically provide stable returns with lower volatility.
  • High-Risk Bonds: Offer potential for high returns but come with increased risk of loss.
  • Yield: The annual rate of return on an investment, essential for evaluating bond performance.

Economic Principles and Concepts

  • Liquidity: Refers to how easily assets can be converted to cash without loss in value.
  • Equity: Fairness in economics, particularly concerning taxation; horizontal equity treats similar situations alike.
  • Diversification: Spreading out investments to mitigate risk.
  • Principal and Interest: Principal is the amount owed on a loan while interest is the cost paid to borrow that money.

Money Supply and Characteristics

  • M1 and M2 Money Supply: M1 consists of currency, demand deposits, and checks while M2 includes M1 plus savings accounts and money market funds.
  • Characteristics of Money: Durability, portability, divisibility, and stability are essential traits for effective currency.

Historical Trust Issues and Banking

  • Wildcat Banking: Refers to risky banking practices during the Free Banking Era that led to significant distrust in banks.
  • Early Bank Distrust: Resulted from issues like bank runs and unregulated state currencies.

Role of Financial Intermediaries

  • Financial Intermediaries: Entities like banks and credit unions that facilitate lending and borrowing between parties.

General Financial Knowledge

  • Advantages of Bonds: Fixed payment obligations without sharing profits.
  • Disadvantages of Bonds: Continuous payment requirements even during financial losses.
  • Pension Funds: Source of income received post-retirement, such as contributions to a 403B plan.

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Description

Test your knowledge on essential concepts of banking and currency, including barter systems, types of money, and regulatory frameworks. This quiz explores historical contexts and key institutions like the Federal Reserve and FDIC. Challenge yourself and learn about the evolution of money and banking in the U.S.

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