60 Questions
What distinguishes credit unions from other depository institutions?
They serve members who have a common affiliation
Which financial institutions provide mortgage and personal loans to individuals?
Savings institutions
What is the function of commercial banks?
Accept deposits and provide commercial and personal loans
What type of financial institution guarantees the full amount of deposits made by individuals?
UAE central bank
Which financial institution would be most likely to provide funds for starting a small business?
Commercial bank
What is a common affiliation requirement for membership in credit unions?
Employment at a certain company
What is a rational strategy for someone with limited income due to a bad economy?
Focus on safe investments with lower returns
Which scenario would allow for taking some investment risk?
When needing funds after the investment matures
What is the term structure of interest rates based on?
Risk-free debt securities with varying maturities
Where can one find graphs illustrating shifts in the yield curve as mentioned in the text?
Wall Street Journal
What is the beginning balance of the bank statement in the example provided?
$1,500
How do financial institutions typically gain funds for providing loans?
Accepting deposits and providing loans
How much were the total deposits made in the example?
$1,000
What should someone do if they may require their invested funds soon?
Focus on safe investments with lower returns
What was the total amount of checks that have cleared in the example?
$900
Which transaction caused a decrease in the bank balance?
Bank fees
What is the term used to describe the time from when a check is written until the account balance is reduced?
Check float
How do electronic checking systems help deter fraud according to the text?
By revealing account balances to payees
What does the risk premium represent in the context of this text?
The additional return beyond the risk-free rate that investors receive for taking on more risk
Why do individuals with a poor credit history pay higher loan rates according to the text?
To compensate for the risk associated with lending to them
What impact does a weak economy have on the risk premium, as stated in the text?
It results in firms having to pay a higher risk premium to sell securities
What is the flawed reasoning mentioned in the text regarding some investors' attraction to risky investments?
They seek risky investments to make up for limited income
Why do firms issuing securities need to pay a higher risk premium during weak economic conditions?
To overcome investor reluctance and fear of bankruptcy
How does the risk premium relate to investments during a weak economy, based on the text?
It increases as compensation for accepting more risk
Why do financial institutions charge a higher interest rate on loans compared to the rate offered on deposits?
To make a profit on the spread between deposit and loan rates.
What is one way financial institutions obtain funds to provide loans?
By accepting deposits from individuals.
Why do investors play a role in providing credit to financial markets?
By depositing funds in financial institutions.
What is the primary function of monetary policy carried out by the Central Bank?
To control the money supply in the economy.
How do open market operations affect the money supply?
They affect the money supply by buying and selling Treasury securities.
What motivates financial institutions to provide loans?
To stimulate economic growth.
What is one of the key decisions for building a financial plan, as mentioned in the text?
How much to save every month or every year
What does Stephanie Spratt use time value concepts to help her devise?
A savings plan that fits her budget
What is one goal for a savings plan according to the text?
Calculate the savings accumulated by various future points in time
What is the expected annual rate of return used in the analysis provided in the text?
6% or 7%
How much would be accumulated over 20 years with an assumed annual return of 6% according to the analysis?
$183,930
What is the primary reason for determining how much one needs to save each year for retirement?
To ensure a comfortable living upon retirement
What is the key difference between an annuity due and an ordinary annuity?
The frequency of cash flow payments
Which factor is multiplied by the periodic savings level to determine how savings will accumulate over time in an annuity?
Future value interest factor for an annuity (FVIFA)
In the context of the text, what does the term 'timelines' refer to?
Diagrams showing payments received or paid over time
What is the primary difference between an annuity and a financial calculator when calculating future values?
Complexity of formulas used
How is the 'future value interest factor for an annuity (FVIFA)' calculated?
$(1 + i)^n$
In the context of an ordinary annuity, when do the equal cash flows occur?
At the end of each period
If you invested $5,000 for 20 years at the same 4% interest rate, how much would your money be worth according to the information provided?
$8,000
What is the impact of a higher interest rate on the future value of an investment as mentioned in the text?
The future value increases
How is the Present Value of money (PV) defined in the text?
The amount currently invested
What is the impact on the Future Value Interest Factor (FVIF) as the number of years of investment increases?
FVIF increases
Based on the content provided, what would happen to your money if you invested $5,000 for five years and the interest rate was 9% instead of 4%?
It increases to $7,050
What happens to the future value of an investment if the period of time for investment increases?
The future value increases
What is the future value interest factor (FVIF) used for in finance?
Determining how savings will accumulate over time
How is compounding defined in the context of finance?
The process of earning interest on interest
In finance, what does an annuity refer to?
A series of equal cash flow payments at regular intervals
What information is required to determine the future value of a sum of money deposited today?
The amount deposited, interest rate, and investment duration
How can the future value of an amount be calculated according to the text?
Using a future value table or a financial calculator
What does compounding involve in finance?
Earning interest on both the principal and previously earned interest
What annual return rate is assumed when estimating Stephanie's savings for a goal of $200,000 in 20 years?
6%
If Stephanie saves $5,000 a year, how much should she accumulate in 5 years assuming an annual return of 6%?
$28,185
How much more savings could Stephanie accumulate in 10 years if her annual return increases from 6% to 7%?
$15,000
Which savings goal requires the highest annual savings amount according to the information provided?
$600,000 in 30 years
What impact does an increase in annual return from 6% to 7% have on Stephanie's estimated savings?
It increases
How does Stephanie's ability to accumulate savings change when comparing an annual return of 6% to 7%?
It increases substantially
This quiz covers the concept of risk premium in relation to interest rates on deposits and loans. Learn about earning additional return beyond the risk-free rate and how financial institutions set loan rates. Understand why individuals with poor credit history may face higher interest rates.
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