CBP Retail Banking Products 3 — Questions and Answers
Question 1: Which index is most commonly used as the benchmark for adjustable-rate mortgages in the United States after LIBOR was phased out?
- Secured Overnight Financing Rate (SOFR) (Correct answer)
- Federal funds rate
- Prime rate
- Treasury bill rate
Correct answer: Secured Overnight Financing Rate (SOFR)
SOFR replaced LIBOR as the preferred benchmark for ARM pricing and other floating-rate instruments in the U.S. after LIBOR's discontinuation.
Question 2: A customer purchases a $10,000 CD with a 5% annual interest rate, compounded monthly. What concept explains why the effective annual yield exceeds 5%?
- Compounding frequency increases the effective annual rate above the nominal rate (Correct answer)
- The bank applies a penalty that raises total return
- FDIC insurance adds a yield premium
- Monthly fees offset the nominal rate upward
Correct answer: Compounding frequency increases the effective annual rate above the nominal rate
When interest is compounded more frequently than annually, the effective annual rate (EAR) exceeds the stated nominal rate.
Question 3: A 'teaser rate' on a credit card refers to:
- A temporarily low introductory APR that resets to a higher rate after a promotional period (Correct answer)
- A permanent rate offered only to customers with excellent credit
- The penalty rate applied after a missed payment
- The rate charged on cash advances from day one
Correct answer: A temporarily low introductory APR that resets to a higher rate after a promotional period
Teaser rates are artificially low promotional APRs designed to attract new cardholders, expiring after a defined introductory window.
Question 4: Which retail mortgage product is specifically designed to help low-to-moderate income borrowers and requires a minimum down payment of 3.5%?
- FHA loan (Correct answer)
- VA loan
- USDA loan
- Conventional conforming loan
Correct answer: FHA loan
FHA loans are government-backed mortgages allowing down payments as low as 3.5%, making homeownership accessible to lower-income and first-time buyers.
Question 5: When a bank offers a 'rate-lock' on a mortgage application, what risk is the bank managing on behalf of the borrower?
- Interest rate risk — the risk that rates will rise before closing (Correct answer)
- Credit risk — the risk that the borrower's score will fall
- Liquidity risk — the risk that funds won't be available
- Operational risk — the risk of processing errors
Correct answer: Interest rate risk — the risk that rates will rise before closing
A rate-lock guarantees the borrower's mortgage rate will not increase during the lock period, protecting against rising market rates before closing.
Question 6: A customer who has a debit card with a Visa or Mastercard logo can use it as a credit card transaction at point-of-sale. What is the primary difference between the two transaction types?
- Credit transactions require a signature and delay the debit; debit transactions require a PIN and debit immediately (Correct answer)
- Credit transactions are free; debit transactions carry a fee
- Credit transactions are processed offline; debit transactions require internet
- Credit transactions increase borrowing capacity; debit transactions do not
Correct answer: Credit transactions require a signature and delay the debit; debit transactions require a PIN and debit immediately
Running a debit card as 'credit' routes through the card network with signature authorization and a delayed settlement, while 'debit' uses PIN and instant settlement.
Question 7: In the context of retail banking, what is a 'balloon payment' mortgage?
- A mortgage with lower regular payments and a large lump-sum payment due at maturity (Correct answer)
- A mortgage where payments increase each year
- A mortgage with no down payment requirement
- A mortgage where the rate adjusts monthly
Correct answer: A mortgage with lower regular payments and a large lump-sum payment due at maturity
A balloon mortgage has smaller periodic payments calculated on a long amortization but requires full repayment of the remaining principal in one large payment at maturity.
CBP Retail Banking Products 3
Which index is most commonly used as the benchmark for adjustable-rate mortgages in the United States after LIBOR was phased out?