Interest Rates on Deposits and Loans - Part 2
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Questions and Answers

What distinguishes credit unions from other depository institutions?

  • They offer the highest interest rates on deposits
  • They primarily invest in real estate
  • They are for-profit institutions
  • They serve members who have a common affiliation (correct)

    • Which financial institutions provide mortgage and personal loans to individuals?

  • Commercial banks
  • Savings institutions (correct)
  • Credit unions
  • UAE central bank

    • What is the function of commercial banks?

  • Accept deposits and invest in the stock market
  • Accept deposits and provide mortgage loans
  • Provide only commercial loans to businesses
  • Accept deposits and provide commercial and personal loans (correct)

    • What type of financial institution guarantees the full amount of deposits made by individuals?

    <p>UAE central bank</p> Signup and view all the answers

    Which financial institution would be most likely to provide funds for starting a small business?

    <p>Commercial bank</p> Signup and view all the answers

    What is a common affiliation requirement for membership in credit unions?

    <p>Employment at a certain company</p> Signup and view all the answers

    What is a rational strategy for someone with limited income due to a bad economy?

    <p>Focus on safe investments with lower returns</p> Signup and view all the answers

    Which scenario would allow for taking some investment risk?

    <p>When needing funds after the investment matures</p> Signup and view all the answers

    What is the term structure of interest rates based on?

    <p>Risk-free debt securities with varying maturities</p> Signup and view all the answers

    Where can one find graphs illustrating shifts in the yield curve as mentioned in the text?

    <p>Wall Street Journal</p> Signup and view all the answers

    What is the beginning balance of the bank statement in the example provided?

    <p>$1,500</p> Signup and view all the answers

    How do financial institutions typically gain funds for providing loans?

    <p>Accepting deposits and providing loans</p> Signup and view all the answers

    How much were the total deposits made in the example?

    <p>$1,000</p> Signup and view all the answers

    What should someone do if they may require their invested funds soon?

    <p>Focus on safe investments with lower returns</p> Signup and view all the answers

    What was the total amount of checks that have cleared in the example?

    <p>$900</p> Signup and view all the answers

    Which transaction caused a decrease in the bank balance?

    <p>Bank fees</p> Signup and view all the answers

    What is the term used to describe the time from when a check is written until the account balance is reduced?

    <p>Check float</p> Signup and view all the answers

    How do electronic checking systems help deter fraud according to the text?

    <p>By revealing account balances to payees</p> Signup and view all the answers

    What does the risk premium represent in the context of this text?

    <p>The additional return beyond the risk-free rate that investors receive for taking on more risk</p> Signup and view all the answers

    Why do individuals with a poor credit history pay higher loan rates according to the text?

    <p>To compensate for the risk associated with lending to them</p> Signup and view all the answers

    What impact does a weak economy have on the risk premium, as stated in the text?

    <p>It results in firms having to pay a higher risk premium to sell securities</p> Signup and view all the answers

    What is the flawed reasoning mentioned in the text regarding some investors' attraction to risky investments?

    <p>They seek risky investments to make up for limited income</p> Signup and view all the answers

    Why do firms issuing securities need to pay a higher risk premium during weak economic conditions?

    <p>To overcome investor reluctance and fear of bankruptcy</p> Signup and view all the answers

    How does the risk premium relate to investments during a weak economy, based on the text?

    <p>It increases as compensation for accepting more risk</p> Signup and view all the answers

    Why do financial institutions charge a higher interest rate on loans compared to the rate offered on deposits?

    <p>To make a profit on the spread between deposit and loan rates.</p> Signup and view all the answers

    What is one way financial institutions obtain funds to provide loans?

    <p>By accepting deposits from individuals.</p> Signup and view all the answers

    Why do investors play a role in providing credit to financial markets?

    <p>By depositing funds in financial institutions.</p> Signup and view all the answers

    What is the primary function of monetary policy carried out by the Central Bank?

    <p>To control the money supply in the economy.</p> Signup and view all the answers

    How do open market operations affect the money supply?

    <p>They affect the money supply by buying and selling Treasury securities.</p> Signup and view all the answers

    What motivates financial institutions to provide loans?

    <p>To stimulate economic growth.</p> Signup and view all the answers

    What is one of the key decisions for building a financial plan, as mentioned in the text?

    <p>How much to save every month or every year</p> Signup and view all the answers

    What does Stephanie Spratt use time value concepts to help her devise?

    <p>A savings plan that fits her budget</p> Signup and view all the answers

    What is one goal for a savings plan according to the text?

    <p>Calculate the savings accumulated by various future points in time</p> Signup and view all the answers

    What is the expected annual rate of return used in the analysis provided in the text?

    <p>6% or 7%</p> Signup and view all the answers

    How much would be accumulated over 20 years with an assumed annual return of 6% according to the analysis?

    <p>$183,930</p> Signup and view all the answers

    What is the primary reason for determining how much one needs to save each year for retirement?

    <p>To ensure a comfortable living upon retirement</p> Signup and view all the answers

    What is the key difference between an annuity due and an ordinary annuity?

    <p>The frequency of cash flow payments</p> Signup and view all the answers

    Which factor is multiplied by the periodic savings level to determine how savings will accumulate over time in an annuity?

    <p>Future value interest factor for an annuity (FVIFA)</p> Signup and view all the answers

    In the context of the text, what does the term 'timelines' refer to?

    <p>Diagrams showing payments received or paid over time</p> Signup and view all the answers

    What is the primary difference between an annuity and a financial calculator when calculating future values?

    <p>Complexity of formulas used</p> Signup and view all the answers

    How is the 'future value interest factor for an annuity (FVIFA)' calculated?

    <p>$(1 + i)^n$</p> Signup and view all the answers

    In the context of an ordinary annuity, when do the equal cash flows occur?

    <p><strong>At the end</strong> of each period</p> Signup and view all the answers

    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?

    <p>$8,000</p> Signup and view all the answers

    What is the impact of a higher interest rate on the future value of an investment as mentioned in the text?

    <p>The future value increases</p> Signup and view all the answers

    How is the Present Value of money (PV) defined in the text?

    <p>The amount currently invested</p> Signup and view all the answers

    What is the impact on the Future Value Interest Factor (FVIF) as the number of years of investment increases?

    <p>FVIF increases</p> Signup and view all the answers

    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%?

    <p>It increases to $7,050</p> Signup and view all the answers

    What happens to the future value of an investment if the period of time for investment increases?

    <p>The future value increases</p> Signup and view all the answers

    What is the future value interest factor (FVIF) used for in finance?

    <p>Determining how savings will accumulate over time</p> Signup and view all the answers

    How is compounding defined in the context of finance?

    <p>The process of earning interest on interest</p> Signup and view all the answers

    In finance, what does an annuity refer to?

    <p>A series of equal cash flow payments at regular intervals</p> Signup and view all the answers

    What information is required to determine the future value of a sum of money deposited today?

    <p>The amount deposited, interest rate, and investment duration</p> Signup and view all the answers

    How can the future value of an amount be calculated according to the text?

    <p>Using a future value table or a financial calculator</p> Signup and view all the answers

    What does compounding involve in finance?

    <p>Earning interest on both the principal and previously earned interest</p> Signup and view all the answers

    What annual return rate is assumed when estimating Stephanie's savings for a goal of $200,000 in 20 years?

    <p>6%</p> Signup and view all the answers

    If Stephanie saves $5,000 a year, how much should she accumulate in 5 years assuming an annual return of 6%?

    <p>$28,185</p> Signup and view all the answers

    How much more savings could Stephanie accumulate in 10 years if her annual return increases from 6% to 7%?

    <p>$15,000</p> Signup and view all the answers

    Which savings goal requires the highest annual savings amount according to the information provided?

    <p>$600,000 in 30 years</p> Signup and view all the answers

    What impact does an increase in annual return from 6% to 7% have on Stephanie's estimated savings?

    <p>It increases</p> Signup and view all the answers

    How does Stephanie's ability to accumulate savings change when comparing an annual return of 6% to 7%?

    <p>It increases substantially</p> Signup and view all the answers

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