Banking Financial Products 5 — Questions and Answers
Question 1: Which type of life insurance policy offers both a death benefit and a cash value component that grows at a guaranteed rate?
- Term life insurance
- Whole life insurance (Correct answer)
- Universal life insurance
- Variable life insurance
Correct answer: Whole life insurance
Whole life insurance provides a permanent death benefit and builds cash value that grows at a guaranteed rate set by the insurer.
Question 2: A bank customer is considering a balloon mortgage. What is the defining characteristic of this loan?
- The interest rate adjusts annually
- A large lump-sum payment is due at the end of the loan term (Correct answer)
- Monthly payments increase over time
- The loan has no prepayment penalty
Correct answer: A large lump-sum payment is due at the end of the loan term
A balloon mortgage has relatively low monthly payments during the term but requires a large lump-sum 'balloon' payment when the term ends.
Question 3: What is the primary regulatory purpose of the Truth in Savings Act (TISA) as it applies to deposit products?
- To limit the number of withdrawals from savings accounts
- To require banks to disclose APY and account terms clearly to consumers (Correct answer)
- To set minimum interest rates on savings products
- To insure deposits up to $250,000
Correct answer: To require banks to disclose APY and account terms clearly to consumers
TISA requires financial institutions to clearly disclose the APY, fees, and terms of deposit accounts so consumers can make informed comparisons.
Question 4: A customer purchases a $1,000 face-value bond at a discount for $950. If held to maturity, the extra $50 earned is called:
- Coupon income
- Accretion (Correct answer)
- Capital gain
- Dividend income
Correct answer: Accretion
When a bond purchased at a discount is held to maturity, the gradual increase in value toward face value is called accretion.
Question 5: Which product best suits a customer who wants market-linked growth potential while also having a guaranteed minimum interest rate?
- Variable annuity
- Fixed annuity
- Fixed indexed annuity (Correct answer)
- Immediate annuity
Correct answer: Fixed indexed annuity
A fixed indexed annuity credits interest based on market index performance but guarantees a minimum rate, providing upside potential with downside protection.
Question 6: Under Regulation D (prior to 2020), savings accounts were limited to how many certain types of withdrawals or transfers per month?
- 3
- 6 (Correct answer)
- 10
- 12
Correct answer: 6
Regulation D historically limited savings and money market accounts to six convenient transfers or withdrawals per month; the Federal Reserve suspended this limit in April 2020 though many banks still apply it.
Question 7: A customer's bond portfolio loses value when the issuing company's credit rating is downgraded. This represents which type of risk?
- Interest rate risk
- Liquidity risk
- Credit (default) risk (Correct answer)
- Inflation risk
Correct answer: Credit (default) risk
Credit risk (or default risk) is the risk that the bond issuer's financial condition deteriorates, causing the bond's value to fall or the issuer to default.
Banking Financial Products 5
Which type of life insurance policy offers both a death benefit and a cash value component that grows at a guaranteed rate?