Banking Basics

Ready to test your knowledge? You'll have ten multiple choice questions to answer. Click on each question to reveal the question and multiple choice answers. After you've completed answering all ten questions, click "Grade Me!" at the end of the quiz to see how you did.

Question 1

Which of these compounding methods will grow your savings balance the quickest?

(A) Daily compounding	Correct Incorrect
(B) Monthly compounding	Correct Incorrect
(C) Quarterly compounding	Correct Incorrect
(D) Annual compounding	Correct Incorrect

Compounding is the process of generating income on an asset´s generated earnings. In terms of a standard interest-earning savings account, compounding generates additional interest off of the interest that was previously earned on your savings balance. Savings accounts typically offer compounding periods of daily, monthly, quarterly or annually. Accounts that offer daily compounding will have a higher Annual Percentage Yield, or APY than accounts offering monthly, quarterly, or annual compounding, given the same interest rate, meaning the daily compounding account will yield higher savings.

Question 2

Which of the following will not deduct money from your bank account directly?

(A) An ATM	Correct Incorrect
(B) A credit card	Correct Incorrect
(C) A debit card	Correct Incorrect
(D) A check	Correct Incorrect

ATMs, Debit Cards and Checks all deduct funds directly from the attached account when the transactions. Transactions made with a credit card add to your credit balance when the transaction is processed and do not impact your checking account balance.

Question 3

Money held in a bank or credit union is insured by the:

(A) Federal Deposit Insurance Corporation (FDIC)	Correct Incorrect
(B) National Credit Union Association (NCUA)	Correct Incorrect
(C) Either the FDIC or NCUA, depending on what type of institution your money is in.	Correct Incorrect
(D) Fannie Mae	Correct Incorrect

Bank accounts are insured by the Federal Deposit Insurance Corporation, or FDIC. The standard FDIC insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. The National Credit Union Share Insurance Fund (NCUSIF) is the federal fund created by Congress in 1970 to insure member´s deposits in federally insured credit unions. Administered by the National Credit Union Administration, the fund provides members with at least $250,000 of insurance at a federally insured credit union.

Question 4

When would you choose a money market account over a savings account?

(A) When you would like to occasionally write a check to withdraw funds.	Correct Incorrect
(B) When you'd like to receive a higher annual percentage yield (APY) in exchange for a larger minimum deposit.	Correct Incorrect
(C) You already have a significant amount of money saved.	Correct Incorrect
(D) All of the above.	Correct Incorrect

Money market accounts provide several advantages over standard savings accounts, including the ability to write a limited number of checks from the account on a monthly basis. Money market accounts also typically come with higher minimum balance requirements, which means you have to have an already substantial amount of savings before opening one. But in exchange for that higher savings balance, money market accounts typically offer a higher Annual Percentage Yield, or APY, than standard savings accounts without the same balance requirements.

Question 5

What do the 9 digits in the lower left hand corner of your checks represent?

(A) Your account number.	Correct Incorrect
(B) The check number.	Correct Incorrect
(C) Security code.	Correct Incorrect
(D) The routing number for your bank or credit union.	Correct Incorrect

At the bottom of a check, you will see three groups of numbers. The first group is your routing number, the second is your account number and the third is your check number. A routing number is used to identify the financial institution that is party to the check transaction and indicates where the recipient of the check can go to receive their funds.

Question 6

Which of the following would you not do when implementing a "laddering strategy" for Certificates of Deposits (or Certificate) accounts?

(A) Break your total savings up into smaller, equal amounts.	Correct Incorrect
(B) Place equal amounts into different CDs of varying terms.	Correct Incorrect
(C) When each CD matures,reinvests the proceeds in a new long-term certificate.	Correct Incorrect
(D) Place all of your money in the longest term, highest yield CD you can find.	Correct Incorrect

With a CD ladder, you invest, at different intervals, equal amounts of money in short, medium and long-term CDs. When the first CD comes due, you reinvest the proceeds of that CD in the longest term CD available. You do the same for each CD as it becomes due. At the end of the process, all of your investments will be in long-term, higher yield CDs, but they will all come due at different intervals so that you still have regular access to a portion of your savings.

Question 7

The delay that occurs between the time a check is written and the money is deducted from your account is known as:

(A) Maturity	Correct Incorrect
(B) Float	Correct Incorrect
(C) Overdraft	Correct Incorrect
(D) Amortization	Correct Incorrect

Check float refers to the amount of time it takes between when the check is written and when the money is actually withdrawn from your account. If you write a check to your mortgage company, your mortgage company will credit your account on the date that check is received. But the check still needs to be processed for payment and a withdrawal needs to be made against your account. The time between your payment and the withdrawal is called the float.

Question 8

APY stands for what?

(A) Average Percentage Yield	Correct Incorrect
(B) Annual Percentage Yield	Correct Incorrect
(C) Average Payment Yearly	Correct Incorrect
(D) Average Power Yielded	Correct Incorrect

The "Annual Percentage Yield", or APY is the effective annual rate of return once compounding interest is taken into account. As an example, if you put $1,000 into a non-compounding account at a rate of 1.0%, the account has an APY of 1.0%, or the same as the interest rate. At the end of the year, you would have $1,010 in the account. However, if you put that same $1,000 into a daily compounding account, you would have $1,010.05 at the end of the year and the account would have an APY of 1.005%.

Question 9

The interest rate used as an index in calculating rate changes to adjustable rate mortgages (ARM) and other variable rate short term loans is known as the:

(A) Federal Funds Rate	Correct Incorrect
(B) Margin Rate	Correct Incorrect
(C) Index Rate	Correct Incorrect
(D) Prime Rate	Correct Incorrect

The Prime Rate is probably the most widely used benchmark in setting home equity lines of credit rates, credit card rates and other short term loans. The Prime Rate is the rate that commercial banks charge their most credit-worthy customers. Credit issuers who offer HELOCs, credit cards, etc. seldom, if ever, offer customers the Prime Rate for those loans. But the interest rate they offer is typically set at a number of interest rate points above the Prime Rate. When the Prime Rate changes, lenders will raise their rates proportional to the change in the Prime Rate.

Question 10

Which of the following statements are true regarding Overdraft Protection?

(A) Links your checking account to another account and automatically transfers funds to checking when it doesn't have enough money to cover your transactions.	Correct Incorrect
(B) You typically pay for Overdraft Protection only when you use the service.	Correct Incorrect
(C) You have the right to decline Overdraft Protection and to have any transactions rejected when there are insufficient funds in your account to cover it.	Correct Incorrect
(D) All of the above.	Correct Incorrect

Overdraft protection is a service offered by banks and credit unions that allow account holders to temporarily make purchases or pay bills in amounts that exceed the amount of money they have in those accounts. Often times, overdraft protection accounts are linked to other accounts you might have with that financial institution, such as a savings account. In other cases, the financial institution lends you the money to cover the overdraft. There is typically a fee associated with overdraft protection, when the overdraft occurs. However, consumers typically have the right to decline overdraft protection and to have the financial institution refuse the transaction when there are insufficient funds in the account to cover it.

	Correct	Incorrect
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