Banking Financial Products 4 — Questions and Answers
Question 1: A corporate client wants to invest excess short-term cash with virtually no risk and high liquidity. Which product is most appropriate?
- Long-term corporate bonds
- Treasury bills (T-bills) (Correct answer)
- Common stock mutual funds
- Real estate investment trust (REIT)
Correct answer: Treasury bills (T-bills)
Treasury bills are short-term government securities with maturities under one year, offering safety, liquidity, and backed by the full faith and credit of the U.S. government.
Question 2: What happens to the market value of an existing fixed-rate bond when interest rates rise?
- It increases proportionally
- It decreases (Correct answer)
- It remains unchanged
- It becomes equal to the new bond's rate
Correct answer: It decreases
When interest rates rise, existing fixed-rate bonds become less attractive compared to new higher-yielding bonds, causing their market value to fall.
Question 3: Which feature of a 529 plan makes it a popular college savings tool?
- Contributions are federally tax-deductible in all states
- Earnings grow tax-free when used for qualified education expenses (Correct answer)
- Funds can be withdrawn for any purpose tax-free
- There is no limit on annual contributions
Correct answer: Earnings grow tax-free when used for qualified education expenses
A 529 plan allows investment earnings to grow tax-free and withdrawals for qualified education expenses are also tax-free at the federal level.
Question 4: A bank offers a loan where the interest rate is tied to the prime rate plus a margin. This rate structure is best described as:
- Fixed rate
- Teaser rate
- Variable rate (Correct answer)
- Balloon rate
Correct answer: Variable rate
A variable (floating) rate loan has an interest rate that adjusts based on a benchmark rate such as the prime rate plus a fixed margin.
Question 5: What is the key benefit of a no-penalty CD compared to a traditional CD?
- It always pays a higher interest rate
- It allows early withdrawal without a penalty fee (Correct answer)
- It is not subject to FDIC insurance limits
- It has a shorter maximum term
Correct answer: It allows early withdrawal without a penalty fee
A no-penalty CD allows the holder to withdraw funds before maturity without incurring an early withdrawal penalty, providing more flexibility.
Question 6: Which of the following best describes a mutual fund's Net Asset Value (NAV)?
- The price at which shares are first offered to the public
- The per-share value of the fund calculated by dividing total net assets by shares outstanding (Correct answer)
- The fund's total expense ratio
- The minimum investment required to purchase shares
Correct answer: The per-share value of the fund calculated by dividing total net assets by shares outstanding
NAV is calculated by dividing the total market value of the fund's assets minus liabilities by the number of outstanding shares.
Question 7: A customer wants overdraft protection linked to a savings account rather than a credit line. What is one potential downside of this arrangement?
- The savings account earns no interest
- Overdraft transfers may deplete the savings account balance (Correct answer)
- The bank charges higher fees than a credit line
- This arrangement is not permitted by federal regulations
Correct answer: Overdraft transfers may deplete the savings account balance
When overdraft protection is linked to a savings account, repeated overdrafts can drain the savings balance, eliminating the financial safety net.
Banking Financial Products 4
A corporate client wants to invest excess short-term cash with virtually no risk and high liquidity.
Which product is most appropriate?