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a. True b. False
2. A transaction account allows transactions to occur at any time and in any number.
a. True b. False
3. Basic checking accounts always pay interest on the balance deposited in the account.
a. True b. False
4. Banks may require up to a seven-day notice from a depositor who wants to withdraw money from a time
deposit.
a. True b. False
5. You cannot get your money from a certificate of deposit before the maturity date.
a. True b. False
7. Compound interest uses the same principal amount every time it is calculated.
a. True b. False
8. Money doesn’t just mean currency, but also checks, ledger transfers, and even credit.
a. True b. False
9. In the United States, the government plays the greatest role in determining how money is moving.
a. True b. False
10. Banks are free to change governing documents, but they must give customers written notice of changes.
a. True b. False
11. A joint tenancy checking account allows each owner to make deposits and withdrawals independently.
a. True b. False
13. What term best describes companies obtaining financing directly from capital markets (without
using banks for financing)?
a. rate chasers c. Check 21
b. interbank transactions d. disintermediation of funds
14. Which of the following is NOT a time deposit?
a. savings account c. money market account
b. checking account d. certificate of deposit
15. Which of the following accounts are you LEAST likely to encounter at a modern bank?
a. checking account c. money market account
b. certificate of deposit d. passbook savings account
17. Adding interest to the principal and paying interest on the new total is called paying ……….
a. compound interest. c. semiannual interest.
b. simple interest. d. total interest.
18. For the purposes of computing interest compounded daily, a year is generally considered to be ……
a. 336 days. c. 365 days.
b. 360 days. d. 366 days.
20. Which of the following governing documents list interest rates in effect at the time for various types of
accounts?
a. disclosure statements c. fee schedules
b. account rules d. deposit rate schedules
21. A check that is dated six months or more before it is presented for payment or deposit is called a(n)………
a. stale check. c. bounced check.
b. postdated check. d. overdraft check.
22. This Federal Reserve regulation requires banks to maintain adequate reserves for the funds they have on
deposit.
a. Regulation C c. Regulation D
b. Regulation CC d. Regulation DD
23. Basic checking accounts offer a few simple services for minimal cost.
24. All deposits to cover transactions that make automatic withdrawals or transfers to pay bills without
writing checks are called checkable deposits.
25. A statement savings account provides a monthly or quarterly report detailing all account activity.
26. A passbook savings account provides a ledger of activity that a teller updates when a customer
makes deposits or withdrawals.
27. The date on which a certificate of deposit is paid is called the maturity date.
28. A(n) share certificate is equivalent to a certificate of deposit, except it is offered by a credit union
rather than a bank.
30. Compound interest adds interest to the principal and pays interest on the new total.
31. Banks make and receive deposits to each other in interbank transactions.
32. Consumers who perpetually move their funds among various accounts to obtain the highest interest
rates at any point in time are called rate chasers.
33. A joint checking account has two or more owners, each of whom has equal and independent access
to it.
34. Natasha’s checking account charges a basic monthly fee of $5. It allows her to write ten checks each
month for free; it charges her $2 for every additional check she writes. The account also charges
Natasha $1 each time she uses an ATM machine. What total fees did Natasha pay in April if she wrote 17
checks and used the ATM machine six times? $25
35. Theo wrote 132 checks last year. How many checks did he write every month, on average? 11
36. Calculate the simple interest earned on a savings account in nine months that begins with a deposit of
$500 and pays 3 percent interest. $11.25
37. Augie’s savings account pays simple interest. He began with a deposit of $2,000; at the end of one year, he
had earned $80 in interest. Find the interest rate on the account. 4%
38. Keri’s savings account pays simple interest at a rate of 4.5 percent. After nine months, the account had
earned $202.50 in interest. Find the principal. $6,000
39. Calculate the simple interest earned on a savings account in six months that begins with a deposit of
$5,000 and pays 6 percent interest. $150
41. How do the total funds in transaction accounts affect the money supply?
The total funds in transaction accounts affect the money supply because of their high liquidity.
42. What is the basic formula for calculating simple interest?
The basic formula for calculating simple interest is Principal × Rate × Time.
46. Describe the benefits of an express checking account. What are some disadvantages?
Benefits of an express checking account include unlimited check writing, low minimum balance requirements,
and low or no monthly fees. However, such accounts often charge high teller fees.
47. Compare and contrast savings accounts and money market deposit accounts.
Savings accounts are among the safest places to put money. Liquidity is high, but interest income is relatively
low. A money market deposit account offers a higher rate of interest than a savings account, but it will typically
require a higher initial deposit to open. In addition, minimum balances to avoid fees are also higher, and
liquidity is not as great as with a savings account.
49. Describe how the Federal Reserve can put more money into the economy through its open market
operations.
The Fed buys U.S. government securities on the open market. The Fed buys these securities by creating new
money, which the sellers of the securities deposit in financial institutions. Thus, deposits flow from the Fed’s
pool of new money directly into bank accounts, providing banks more money to lend. The money supply
expands as a result of the multiplier effect.
50. Name three things a bank must do to meet the requirements of Federal Reserve Regulation CC.
To meet the requirements of Regulation CC, a bank must (1) provide consumers who have transaction
accounts, such as a checking account, with disclosures stating when their funds will be available for
withdrawal; (2) post a notice of the bank’s availability policy pertaining to consumer accounts; and (3) include
a notice of funds availability on the front of all preprinted deposit slips.
1. Personal loans do not require the borrower to state a specific purpose for the funds.
a. True b. False
3. Balance sheets for all banks are private documents seen only by bank management.
a. True b. False
4. The three general categories of loans are consumer loans, commercial loans, and mortgage loans.
a. True b. False
5. Subprime rates are higher-than-normal interest rates offered to a less-than-perfect credit applicant.
a. True b. False
6. If a credit applicant has opened many new accounts recently, that is probably a sign that the
applicant is very creditworthy.
a. True b. False
7. Paying off a loan early saves the consumer no money if the sum-of-digits method has been used to compute
finance charges.
a. True b. False
9. High consumer debt is good for banks, because banks make most of their money from the interest paid on
loans.
a. True b. False
10. The term moral hazard means that consumers with poor moral character are a high credit risk.
a. True b. False
11. Keeping large amounts of currency on hand as protection against possible increases in
customers’demand for withdrawals reduces a bank’s ability to make profits from loans.
a. True b. False
12. A lending policy is a written statement of the guidelines and standards a bank must follow in making credit
decisions.
a. True b. False
17. Which of the following shows the steps of the credit-approval process in proper order?
a. underwriting, application, documentation, processing, closing, funding
b. documentation, application, underwriting, closing, processing, funding
c. application, processing, documentation, underwriting, closing, funding
d. application, documentation, processing, underwriting, closing, funding
18. Which of the following elements of the FICO credit-scoring system carries the most weight?
a. types of credit c. length of credit history
b. payment history d. new credit
19. This finance charge method takes the total finance charge, divides it by the number of months in the
loan term, and assigns a higher ratio of interest to the early payments.
a. previous balance method c. sum-of-digits method
b. average daily balance method d. adjusted balance method
20. Documentation of most credit problems stays in a consumer’s file for at least
a. six months. c. five years.
b. one year. d. seven years.
21. The concept that the borrowers who are most willing to accept a high interest rate are the same
borrowers who are most likely to default on their loans is called
a. moral hazard. c. adverse selection.
b. captive borrowers. d. asset transformation.
22. The risk that a bank will have to sell its assets at a loss to meet its cash demands is called
a. credit risk. c. liquidity risk.
b. market risk. d. security risk.
23. A(n) installment loan is a loan for which the amount of the payments, the rate of interest, and the
number of payments are fixed.
25. When banks refuse to provide a loan, or when they lend less than the customer requested, they are
engaging in credit rationing .
27. A(n) grace period is an amount of time you have to pay a credit card bill in full and avoid any
finance charges.
31. Services provided by banks that generate revenue but that are not included on their balance sheets are
called off-balance sheet activities .
32. Asset transformation refers to using deposits to generate revenue by putting deposits to work via
loans.
34. Suppose you borrow $1,000 and pay the loan back in 12 equal payments of $95.50. What is the finance
charge for this loan? $146
35. Suppose you borrow $5,000 and make 12 equal payments to retire the debt. If the finance charge for
the loan is $400, what will the amount of each monthly payment be? $450
36. Becky has a balance of $2,000 on her credit card. The minimum payment requirement is 4%. How
much is the minimum payment? $80.00
37. Markita has a balance of $3,400 on her credit card. The minimum payment requirement is 5%, and the
card's APR is 17%. If she makes the minimum payment, how much of it will go toward paying the
interest? Round your answer to the nearest hundredth. $48.16
38. Dominic has a balance of $1,460.20 on his credit card. The minimum payment requirement is 6%, and
the card's APR is 18%. If he makes the minimum payment, how much of it will go toward reducing the
balance? Round your answer to the nearest hundredth. $66.31
48. What are the “three Cs” that underwriters use to evaluate loan applications? Briefly define
them.
The “three Cs” are collateral, capacity, and credit reputation. Collateral refers to the security required
for the loan. Capacity refers to the ability to repay the loan, based on income, job history, and amount
currently owed. Credit reputation, or credit history, is a record of how well the applicant has repaid
debt in the past.
49. For a bank, what is liquidity? What are some loan factors that affect a lending bank’s
liquidity?
For a bank, liquidity means having the funds to meet its obligations when required. Loan factors
affecting a lending bank’s liquidity include loan terms (short-term loans produce profit more quickly
than long-term loans), interest rate (higher rates produce more profit), loan type (interest on
consumer loans is usually paid monthly, whereas some business loans are paid only once a year), and
collateral.
5. A full endorsement limits both the transferability and the further negotiability of a check.
a. True b. False
6. It is illegal for a bank to make different check-cashing rules for customers and noncustomers.
a. True b. False
7. The Federal Reserve clears about 90 percent of the checks written in the U.S.
a. True b. False
8. You must pay off your credit card account in full at the end of every month.
a. True b. False
9. Transit numbers are not issued to financial institutions that hold accounts at a Federal Reserve Bank.
a. True b. False
11. Which of the following features of a check indicates who is to receive the funds?
a. the bearer c. the payee
b. the signature d. the memo
17. Which of the following largely eliminated the wide variation of legal regulation from the country’s
payments system?
a. Federal Reserve Act of 1913 c. National Banking Act of 1864
b. Uniform Commercial Code of 1958 d. Expedited Funds Availability Act of 1987
18. Which of the following directly transfers money from a person’s account to the account of a retailer?
a. charge card c. debit card
b. credit card d. cash card
19. The 9-digit number printed on a check that identifies the bank that holds the checking account and is
responsible for payment is called the ……..
a. transit number. c. check number.
b. account number. d. NSF number.
20. Marisol has written a $500 check to Stephen, but she has only $300 in her account and it is
returned unpaid to Stephen. Marisol has written a ………
a. floating check. c. postdated check.
b. promissory note. d. bounced check.
21. A written order or promise to pay a sum of money is called a(n) negotiable instrument.
23. A bill of exchange is a negotiable and unconditional written order addressed by one party to another.
24. A short-term note or draft issued by a corporation or government is called commercial paper.
26. When the same funds are counted in two depository banks, the funds are called float.
27. A(n) charge card allows a consumer to make purchases, but the account must be paid in full at the
end of the month.
28. Smart cards have embedded microchips and use embedded logic to change and store values and
record transactions.
29. Online systems called person-to-person (P2P) payments allow consumers to pay each other directly for
a product.
30. A(n) postdated check is a check that is dated later than the date on which it is actually written.
31. This morning Terran had a balance in his checking account of $208.68. During the day he wrote two
checks: one to his friend George for $23.00 and one to the comic book shop for $13.75. What is his
account balance at the end of the day? $171.93
32. Mrs. Rodriguez had $1,306.35 in her bank account on December 1. On December 3, she deposited her
paycheck of $1,500.00. On December 4, she wrote four checks in the following amounts: $35.65, $204.55,
$216.76, and $23.42. She made an ATM withdrawal of $50 on December 5. What is her account balance the
morning of December 6? $2,275.97
33. This morning Clarissa had a balance in her checking account of $1765.98. She wrote three checks: one to
the baker for $74.68, one to the florist for $54.39, and one to her mother for $500. She also took her $750
paycheck to the bank and deposited half of it into her account; the other half she took as cash. What is her
account balance at the end of the day? $1,511.91
36. Define the term elements of negotiability and list the six elements.
Elements of negotiability are legal requirements all negotiable instruments must meet. Negotiable instruments
must (1) be written, (2) be signed, (3) make an unconditional promise or order to pay, (4) state clearly the
amount to be paid, (5) be payable on demand or at a defined time, and (6) contain words of negotiation.
41. Name and define the four primary types of endorsement. Which is the most commonly used?
A blank endorsement is simply the signature of the holder. A restrictive endorsement limits the use of the
instrument to a means specified by the endorser. A full endorsement transfers the check to another
specified party. A qualified endorsement attempts to limit the liability of the endorser without limiting an
instrument’s further negotiability. The blank endorsement is the most commonly used.
42. What is float? Name three specific ways it can be caused. What effect does float have on the money
supply?
Float is the occurrence of the same funds being counted in two depository banks. Malfunction float is caused by
machine breakdown. Transportation float refers to delays in moving checks from one place to another.
Holdover float occurs when banks are slow in processing transactions. Float distorts the money supply by
making it appear that more money is in circulation than is really the case.
43. What is EFT? Discuss two common forms of EFT. What are the advantages of EFT?
EFT stands for electronic funds transfer. One common form of EFT is direct deposit, in which funds (from an
employer, for example) are sent electronically to the recipient’s bank rather than sending the recipient a check
to cash. Another common form of EFT is automatic payments, in which a bank makes payments to a specified
recipient. Advantages of EFT include safety, accuracy, and immediate use of the funds.
45. What technology enabled Check 21? Describe how this technology achieves costs savings.
Digital imaging technology enabled Check 21. Significant cost savings have been achieved by eliminating
storage, recordkeeping, postage, and labor costs associated with paper checks.
46. What did the Uniform Commercial Code (UCC) largely eliminate?
The UCC largely eliminated the wide variation of legal regulation that could hamper the national payments
system.
47. Explain the Uniform Commercial Code (UCC) rules for a postdated check.
The UCC allows a postdated check as long as the bank customer gives the bank advance notice of the check,
including the check number, account number, amount, date, and to whom the check is payable. If proper notice
were given, the bank, not the customer, would be liable for damages if the check is cashed before the date on
the check.
48. Name and describe the technology used most frequently in the U.S. for contactless payments.
Radio frequency identification (RFID)—also called automatic identification and data capture (AIDC)—uses a
transponder to convey identifying information including the account holder's account or balance information
and the fees being assessed to the account by the business for products or services.
49. What is the difference between electronic check conversion and Check 21?
Whereas Check 21 allows banks to transmit images of a check instead of the actual check, electronic check
conversion allows businesses to use the information on a check to initiate an electronic funds transfer from
your account.
50. Why was the Expedited Funds Availability Act (EFAA) of 1987 passed, and what rules did it direct
the Fed to set?
The EFAA was passed to combat an abuse of the check-payment system practiced by a few banks. It
directed the Federal Reserve to set rules (Federal Reserve Regulation CC) that balanced the needs of
consumers with the need for banks to protect themselves from uncollectible checks.