Question 1

You have $5,000 in a 36 month Certificate of Deposit that has an APR of 3.75%.If inflation averages 4.25% during these 36 months,what is the real return on your CD?

Accepted Answer

The real return on the CD is calculated by subtracting the inflation rate from the APR. In this case, the real return is 3.75% - 4.25% = -0.50%. This means that the purchasing power of the money invested in the CD will actually decrease over the 36 month period due to inflation.

Question 2

With online banking and EFT,many people don't really need checks anymore.If you seldom need a paper check for transactions,what option is available to you that may be cheaper than maintaining a checking account?

Accepted Answer

Both cashier's checks and money orders are good alternatives to traditional checks for those who seldom need to make paper transactions. Cashier's checks are issued by banks and guaranteed by the bank's funds, while money orders can be purchased at various locations, such as post offices and grocery stores. Both options provide a secure form of payment without the need for a personal checking account.

Question 3

You are examining two different MMMFs.Fund A is tax-exempt and pays 7%.Fund B is taxable and pays 9.5%.You live in a state that imposes no income taxes and you are in the 25% federal tax bracket.Which of these two alternatives is better?

Accepted Answer

Since you live in a state with no income tax, you will not benefit from the tax-exempt status of Fund A. Therefore, you will need to compare the after-tax returns of both funds.

Since Fund B pays a higher pre-tax return of 9.5%, it will still provide a higher after-tax return than Fund A even after accounting for the 25% federal tax.

To calculate the after-tax return of Fund B:

After-tax return = Pre-tax return x (1 - Federal tax rate)
After-tax return = 9.5% x (1 - 0.25)
After-tax return = 7.125%

Since the after-tax return of Fund B (7.125%) is higher than the tax-exempt Fund A (7%), Fund B is the better choice.

Question 4

Overdraft protection is an automatic loan made to your checking account whenever your account does not contain enough cash to cover the checks that you have written against it.

Accepted Answer

Overdraft protection works by automatically loaning funds to cover checks when there is not enough money in the account.

Question 5

Please choose the method to use when calculating the after-tax return.

Accepted Answer

The method for calculating after-tax return is to subtract the amount of taxes paid from the total return. The formula for after-tax return is: After-Tax Return = Total Return - Taxes. The taxes paid are equal to the marginal tax rate multiplied by the taxable return. The nontaxable return is not subject to taxes, so it should be added to the after-tax return. Therefore, the correct formula is: After-Tax Return = Taxable Return x (1 - Marginal Tax Rate) + Nontaxable Return. The formula in choice D matches this format.

Question 6

What is the importance of the APY?

Accepted Answer

The answer of What is the importance of the APY?...

Question 7

You are considering the purchase of one of two different investments.Investment A is tax exempt and pays 6%.Investment B is taxable and pays 8.33%.You live in a state that imposes no income taxes and are in a 28% federal tax bracket and want to earn the highest after tax return possible.Which of the following is true? (round to two decimal places)

Accepted Answer

The answer of You are considering the purchase of one...

Question 8

A money order is typically less liquid than a personal check.

Accepted Answer

A money order is generally considered more liquid than a personal check because it is prepaid and guaranteed, making it readily accepted and easier to cash or deposit.

Question 9

You are considering an MMMF.The fund is taxable and pays 8.5% interest.If your top federal tax bracket is 25% and you live in a state that doesn't impose income taxes,what after-tax return would you realize from this investment?

Accepted Answer

The after-tax return can be calculated by taking the interest rate and subtracting the tax impact. With a 25% federal tax rate on an 8.5% interest rate, the calculation is 8.5% * (1 - 0.25) = 6.375%, which rounds to 6.38%.

Question 10

When you use your debit card or ATM card,you should enter the transaction into your check register.

Accepted Answer

It is important to keep track of all transactions made with your debit card or ATM card to ensure you have enough money in your account and to avoid overdraft fees. Entering the transaction amount into your check register immediately after making the purchase will help you keep an accurate balance.

Question 11

You are examining two different MMMFs.Fund A is tax-exempt and pays 5%.Fund B is taxable and pays 6%.You live in a state that imposes no income taxes and are in a 28% federal tax bracket.At what tax rate would the two funds have identical yields?

Accepted Answer

The answer of You are examining two different MMMFs.Fund A...

Question 12

A traveler's check is a personal check that has been certified as being good by the financial institution on which it is drawn.

Accepted Answer

A traveler's check is a preprinted, fixed-amount check designed to allow the person signing it to make an unconditional payment to someone else as a result of having paid the issuer for that privilege. It is not a personal check certified by a financial institution.

Question 13

What is the FDIC?

Accepted Answer

The FDIC is the Federal Deposit Insurance Corporation, which is a U.S. government agency that provides deposit insurance to protect bank customers in case of a bank failure.

Question 14

For a consumer who does not have a checking account a prepaid debit card is a means of paying for goods and services.

Accepted Answer

A prepaid debit card can be loaded with funds and used to make purchases like a regular debit card, making it a viable payment option for those who do not have a traditional checking account.

Question 15

Your bank may offer a line of credit,a credit card,or a link to your savings account to cover transactions when you overdraw your account.

Accepted Answer

This statement is true. Many banks offer these options for customers who may accidentally overdraw their accounts.

Question 16

Suppose that you go to a bank at which you have no account,give the bank cash,and in return obtain a check drawn against that bank which you will use to pay someone else.This is called a

Accepted Answer

A cashier's check is a check drawn against the bank's funds, not against your own account. This means that the bank is guaranteeing the check will be honored, as the money is held in their own accounts. This makes it a safer option for paying someone else, as there is no risk of the check bouncing due to insufficient funds in your own account. Certified checks are similar but are drawn against funds from the customer's account, while traveler's checks are typically used for travel expenses and are pre-printed with fixed denominations. Therefore, the best option for the scenario provided is a cashier's check.

Question 17

Many banks offer free checking accounts.What may be the opportunity costs associated with free checking?

Accepted Answer

With free checking accounts, banks often have low interest rates or high minimum balance requirements in order to compensate for the lack of fees. Additionally, some free checking accounts may not offer overdraft protection, which could result in fees for the customer if they accidentally overdraw their account. Therefore, the opportunity costs associated with free checking accounts include low interest rates and potentially high minimum balance requirements, making option D the best choice.

Question 18

Why is it important to convert interest rates into the APY on different accounts and with different banks?

Accepted Answer

It is important to convert interest rates into the APY on different accounts and with different banks because the same advertised rate will vary with different compounding periods. This allows for a more accurate comparison of the actual earnings potential of different accounts.

Question 19

What is the name for an automatic loan made to your checking account whenever your account does not contain enough cash to cover the checks that you have written against it?

Accepted Answer

The name for an automatic loan made to your checking account whenever your account does not contain enough cash to cover the checks that you have written against it is overdraft protection. Option A, C, and D are not the correct names for this service. Option E does not provide a correct answer at all.

Question 20

If you only use your debit card and ATM card and rarely write paper checks,overdraft protection is still a good thing to have.

Accepted Answer

Even if you rarely use paper checks, there may be times when you accidentally overdraw your account through debit card transactions or ATM withdrawals. Overdraft protection can help you avoid costly fees and declined transactions.

Quiz 5: Cash or Liquid Asset Management