Banking Financial Products 3 — Questions and Answers
Question 1: A customer deposits $10,000 in a CD with an annual interest rate of 5% compounded quarterly. What concept describes earning interest on previously earned interest?
- Simple interest
- Compound interest (Correct answer)
- Discount interest
- Add-on interest
Correct answer: Compound interest
Compound interest is interest calculated on both the principal and previously accumulated interest, accelerating growth over time.
Question 2: What is the primary difference between a secured credit card and a standard unsecured credit card?
- Secured cards have higher credit limits
- Secured cards require a cash deposit as collateral (Correct answer)
- Secured cards charge no annual fees
- Secured cards earn more rewards points
Correct answer: Secured cards require a cash deposit as collateral
A secured credit card requires the cardholder to provide a cash deposit that typically equals the credit limit, serving as collateral.
Question 3: Which of the following is true about U.S. Treasury bonds offered through a bank?
- They are subject to state and local income taxes
- Interest is exempt from state and local income taxes (Correct answer)
- They carry credit risk similar to corporate bonds
- They pay interest monthly
Correct answer: Interest is exempt from state and local income taxes
Interest earned on U.S. Treasury bonds is subject to federal income tax but exempt from state and local income taxes.
Question 4: A customer is 55 years old and wants to draw income from their annuity immediately. Which type should they select?
- Deferred annuity
- Immediate annuity (Correct answer)
- Fixed indexed annuity
- Variable deferred annuity
Correct answer: Immediate annuity
An immediate annuity begins making income payments shortly after a lump-sum premium is paid, making it suitable for customers who need income now.
Question 5: What is the main risk associated with a callable CD from the investor's perspective?
- The bank may not return the principal at maturity
- The bank may redeem the CD early, forcing reinvestment at lower rates (Correct answer)
- The CD's interest rate fluctuates with the market
- The investor cannot withdraw funds before maturity
Correct answer: The bank may redeem the CD early, forcing reinvestment at lower rates
A callable CD can be redeemed by the issuing bank before maturity, which often happens when rates fall, exposing investors to reinvestment risk.
Question 6: Which product allows a homeowner to convert home equity into cash without requiring monthly loan payments during the loan term?
- Home equity loan
- Home equity line of credit (HELOC)
- Reverse mortgage (Correct answer)
- Cash-out refinance
Correct answer: Reverse mortgage
A reverse mortgage allows homeowners aged 62+ to access home equity without monthly payments; the loan is repaid when the home is sold or the borrower leaves.
Question 7: A money market account typically differs from a regular savings account in that it:
- Offers FDIC insurance while savings accounts do not
- Often pays higher rates and may allow limited check-writing (Correct answer)
- Has no minimum balance requirements
- Cannot be linked to a checking account
Correct answer: Often pays higher rates and may allow limited check-writing
Money market accounts generally offer higher interest rates than regular savings accounts and often include limited check-writing or debit card privileges.
Banking Financial Products 3
A customer deposits $10,000 in a CD with an annual interest rate of 5% compounded quarterly.
What concept describes earning interest on previously earned interest?