1. Advise the Sampsons on the maturity to select when investing their savings in a CD for a down payment on a new car. What are the advantages or disadvantages of the relatively short-term maturities versus the longer-term maturities?
2. Advise the Sampsons on the maturity to select when investing their savings for their children’s
education. Describe any advantages or disadvan-tages of the relatively short-term maturities ver-sus the longer-term maturities.
3. If you thought that interest rates were going to rise in the next few months, how might this affect the advice that you give the Sampsons?
True/False:
1. When you have funds to invest, the return that you earn from your investment may be dependent on the level of interest rates in the financial markets at that time.
2. Credit unions are financial institutions that accept de-posits and use the funds to provide commercial (business) loans to entities with a good credit rating.
3. As you write checks, it is typically unimportant to record them in your checkbook.
4. Interest rates on savings accounts offered by cial institutions are exactly the same across the finan-cial institutions.
5. A debit card is used to make purchases that are charged against an existing credit card.
6. A cashier’s check is a check that is written on behalf of a person to a specific payee and will be charged against a financial institution’s account.
7. A traveler’s check is similar to a cashier’s check, ex-cept that no payee is designated on the check.
8. While Web-based banks allow you to keep track of your deposits online, they might not be appropriate for customers who prefer to deposit funds directly at a branch.
9. Web-based financial institutions tend to pay a lower interest rate on deposits than other institutions with physical branches.
10. A certificate of deposit (CD) represents partial owner-ship of a commercial bank.
11. The rate of interest paid on a CD is often referred to as the risk-free interest rate because there is no risk surrounding the rate of return.
12. A one-year bank loan has an interest rate that is below its one-year CD rate.
13. For a relatively high annual interest rate, the aggre-gate supply of funds should be low.
14. The term structure of interest rates refers to the rela-tionship between the maturity of an investment and the interest rate on the investment.
15. Finance companies tend to charge relatively low loan rates because they provide loans to some firms and individuals that are perceived to exhibit higher risk (of defaulting on the loans received).
Multiple Choice:
1. ________________ are not a type of depository institu-tion.
2. Deposits at financial institutions are insured up to ____________ per depositor by the Federal Deposit Insurance Corporation (FDIC).
a. $50,000 b. $80,000 c. $100,000 d. $150,000
3. ____________ are financial institutions that accept deposits and focus on mortgage and personal loans to individuals.
a. Commercial banks b. Securities firms c. Savings institutions d. Investment firms
4. ______________ facilitate the purchase or sale of secu-rities by firms or individuals.
a. Securities firms b. Finance companies c. Insurance companies d. Investment companies
5. Which of the following is not a service offered by financial institutions?
a. checking services b. electronic checking c. personal loans
d. All of the above are services offered by financial institutions.
6. Val Silmer’s last checking account statement showed a balance of $120. This month, he deposited $500, withdrew $600 from ATMs, and wrote checks that have not yet cleared for $140. What is Val’s adjusted bank balance?
a. $20 b. $120 c. $140 d. $120
7. A ____________ is a check written on behalf of a per-son to a specific payee that is charged against a finan-cial institution’s account.
a. tend to pay lower interest rates on deposits than institutions with branches.
b. have higher expenses than institutions with branches.
c. allow you to keep track of your deposits online.
d. all of the above.
9. The ____________ rate may be used as a measure of a risk-free rate.
a. mortgage b. stock c. primary d. CD
10. Currently, a one-year CD rate offers an interest rate of 4.5 percent. Brown Company offers an interest rate of 8.0 percent. Based on this information, the risk premium offered by Brown is
a. 4.5 percent.
b. 8.0 percent.
c. 3.5 percent.
d. 12.5 percent.
11. The ___________ the risk that the lender will not be repaid on a loan provided to you, the ___________ the risk premium that you would have to pay with respect to the prevailing risk-free rate.
a. higher; higher b. lower; higher c. higher; lower
d. Answers (b) and (c) are correct.
12. For a relatively ________ annual interest rate (such as 2 percent), the aggregate demand for funds should be very ________.
a. low; low b. high; high c. low; high
d. Answers (a) and (b) are correct.
IN-TEXT STUDY GUIDE 157
13. Last month, the annualized risk-free interest rate for a three-year maturity was 4.63 percent. If you had financed a computer purchase last month, you would have been charged a risk premium of 4.50 percent.
Based on this information, the interest rate on the loan to purchase the computer is
a. 4.63 percent.
b. 8.00 percent.
c. 4.50 percent.
d. 9.13 percent.
The following information refers to questions 14 through 16.
Olga Sorsa would like to invest $1,500. She is consider-ing two investment alternatives. The first alternative is a Treasury bill that would guarantee her a return of 5 percent over the next year. The second alternative is a corporate bond that will provide a 4 percent return over the next year under unfavorable conditions, or an 8 per-cent return over the next year under favorable condi-tions.
14. What is the accumulated amount after one year if Olga invests in the Treasury bill?
a. $1,500 b. $1,575 c. $75 d. $1,620
15. What is the accumulated amount of the corporate bond after one year under unfavorable conditions?
a. $1,575 b. $1,620 c. $1,560 d. $1,500
16. What is the accumulated amount of the corporate bond after one year under favorable conditions?
a. $1,575 b. $1,620 c. $1,560 d. $1,500
17. The risk premium offered by an investment is ___________ to the degree of risk exhibited by that investment.
a. positively related b. negatively related c. unrelated d. none of the above
18. The relationship between the maturity of an invest-ment and the interest rate on the investinvest-ment is referred to as the
a. equilibrium interest rate.
b. Phillips curve.
c. term structure of interest rates.
d. none of the above
19. The longer the investment horizon chosen, the ___________ the annualized interest rate that can usually be locked in at this time.
a. lower b. more negative c. higher
d. Answers (a) and (b) are correct.
20. _________________ sell shares to individuals and use the proceeds to invest in securities to create mutual funds.
a. Securities firms b. Finance companies c. Insurance companies d. Investment companies
21. The annual interest rate on loans offered to individu-als is often _________ percentage points above the annual interest rate offered on deposits.
a. 1 to 2 b. 2 to 20 c. 3 to 7 d. 5 to 15
Questions 22 through 24 refer to Appendix 5A.
22. Which of the following is not a common factor that causes a shift in the demand for funds?
a. a shift in savings behavior
b. a shift in the government demand for funds c. a shift in the business demand for funds d. All of the above are common factors that cause a
shift in the demand curve.
23. When the Federal Reserve wishes to _________
interest rates, it _________ the amount of funds at commercial banks.
a. reduce; reduces b. increase; increases c. reduce; increases
d. Answers (a) and (b) are correct.
24. If the Federal Reserve buys or sells Treasury securi-ties to affect the money supply, it uses
a. reserves at commercial banks.
b. open market operations.
c. discount rate adjustments.
d. federal funds rate adjustments.