Banking Financial Products 3

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?

Accepted Answer

Compound interest

Answer

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?

Accepted Answer

Secured cards require a cash deposit as collateral

Answer

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?

Accepted Answer

Interest is exempt from state and local income taxes

Answer

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?

Accepted Answer

Immediate annuity

Answer

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?

Accepted Answer

The bank may redeem the CD early, forcing reinvestment at lower rates

Answer

A callable CD can be redeemed by the issuing bank before maturity, which often happens when rates fall, exposing investors to reinvestment risk.

Banking Practice Test

Banking Practice Test

Banking Financial Products 3