Chapter 20 – Money, Financial Institutions, and the Federal Reserve
263. Herb has $20,000 in an interest-bearing time deposit with the Applebottom Bank and
Trust Company. While earning a relatively attractive rate of interest, Herb had to agree to
not withdraw any of the funds until the end of a three-year period. Herb’s investment
represents a(n):
A. passbook savings account.
B. negotiable order of withdrawal (NOW) account.
C. individual deferred earnings account (IDEA).
D. certificate of deposit (CD).
Feedback: A certificate of deposit is a time deposit that pays interest, but requires the
depositor to leave all of the funds deposited until the certificate matures. Maturity dates on
CDs now range from 3 months to several years.
264. Pleased with the service provided by a national brokerage house when he bought and
sold stocks and bonds, Ted would like to have this brokerage firm handle more of his
financial needs. If Ted explores the services offered by such firms in more depth, he will
find that:
A. federal laws prohibit brokerage firms from competing with banks, savings and loan
associations, and credit unions.
B. although brokerage firms can offer some banking services, they typically are less
efficient at providing them than banks, because they specialize in buying and selling
securities.
C. brokerage firms are becoming serious competitors for banks and other depository
institutions by offering high-yield combination savings and checking accounts and money
market accounts, as well as certain types of loans.
D. although brokerage firms offer attractive banking services, federal law prohibits
individual investors from holding both a checking account and a securities account with
the same firm.
Feedback: Brokerage firms are becoming serious competitors for banks by offering high-yield
combination savings and checking accounts and other types of accounts. Brokers can also
make loans to their customers, using the customers’ securities as collateral.
20–90
286. Which of the following can include an embedded radio-frequency antenna that allows
the holder to access secure areas in buildings or buy gas with the swipe of a card?
A. smart cards
B. direct deposit cards
C. e-cards
D. check conversion cards
287. On payday, employers can designate their banks to electronically transfer funds from
the business’ checking account to the employees’ checking account. This represents an
example of a(n):
A. debit card system.
B. check kiting system.
C. electronic check conversion.
D. direct deposit.
Feedback: A direct deposit is part of an electronic funds transfer system where checks are
eliminated.
288.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
Payroll debit cards:
A. are protected if lost or stolen.
B. have limited use because they can only act as a credit card, and the recipient does not
have access to cash.
C. must go through the Federal Reserve’s Automated Clearing House system.
D. can be issued to persons without bank accounts who can use it to pay bills online, or
access cash from an ATM machine.
Feedback: Payroll debit cards are an efficient way for some firms to pay their workers.
Employees can access funds from their pay account immediately, and even use ATM
machines to withdraw cash by using the card.
289. Which of the following explains why Internet banks often offer their customers better
interest rates than traditional banks?
A. Internet banks provide their customers a greater sense of security.
B. Traditional banks charge lower prices for financial services.
C. Internet banks have lower overhead costs.
D. Traditional banks offer the electronic transfer of customer funds.
Feedback: Internet banks, E*Trade Bank, can offer better interest rates and lower fees
because they do not have the costs of physical overhead that brick-and-mortar banks have.
20–95
296. John searched for a new bank prior to filling out his direct deposit form at his new
employer. He noted that Twenty/Four/Seven E-Bank, Inc., offered better interest rates on
savings accounts and money market accounts; and it offered other amenities such as
online banking and funds transfer that many traditional banks offer. What is the most
logical reason that Twenty/Four/Seven can compete for customers by offering higher
interest rates?
A. Twenty/Four/Seven probably cannot compete this way, for long. In order to build its
market share, it is offering this as a one-time promotion.
B. Its bank reserve requirement is less, due to the fact that the assets it is holding are not
as substantial as bigger, traditional banks.
C. Twenty/Four/Seven has no buildings and locations. Due to low overhead, it is able to
share the savings it realizes with its customers.
D. Twenty/Four/Seven pay its employees less than other banks.
Feedback: E-Banks have less overhead expense than traditional, brick and mortar operations.
These cost savings are passed on to customers, who receive higher interest rates and cheaper
fees.
297. Which of the following is a bank service provided to help companies conduct business
in other countries?
A. Transaction letters
B. Certificates of deposit
C. Banker’s depositories
D. Currency exchange
298.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
A __________ represents an agreement by a bank to pay a foreign company a given
amount if certain conditions are met.
A. certificate of deposit
B. banker’s acceptance
C. callable option
D. letter of credit
299. A __________ represents an unconditional agreement by a bank to pay a specified
amount at a particular time.
A. certified trade acceptance
B. banker’s acceptance
C. letter of credit
D. guaranteed funds agreement
300. If the Fed increases interest rates in the U.S. relative to other nations,
A. foreign investors are likely to transfer funds to U.S. investments.
B. foreign investors are likely to reduce their investment in U.S. securities.
C. foreign governments will likely reduce their interest rates further, to remain
complimentary to what the U.S. is doing.
D. foreign investors will see this as a sign of a looming recession and redirect their funds
to time deposits.