PFIN Final REVIEW Fall 2024

Front

Why might an investor be willing to embrace higher levels of risk?

Back

They desire to grow their money through higher returns.

Answer explanation

Investors embrace risk to achieve higher returns. Spenders seek immediate gratification, savers accumulate savings for security, and avoiders prefer to stay away from financial matters.

Front

What is cognitive bias?

Back

A systematic deviation from rational thinking, leading to illogical judgments and decisions due to mental shortcuts and influences.

Answer explanation

A financial strategy to maximize savings and investments is not related to cognitive bias. Cognitive bias does not have anything to do with an individual's upbringing and their biases, morals, or values. The theory that individuals make decisions to maximize their self-interest is rational choice theory. Cognitive bias is a systematic deviation from rational thinking due to mental shortcuts and influences, leading to illogical judgments and decisions.

Front

If you invest $150 at a 4% annual interest rate, how much will you have after one year?

Back

$156

Answer explanation

$150 is the initial investment amount, not the amount after earning interest. $165 is incorrect; it assumes an interest rate of 10%, not 5%. $171.99 is the future value after three years, not one year.

Front

Which characteristic of money makes it easy to transport and use in transactions wherever you go?

Back

Portability

Answer explanation

Portability allows individuals to carry money easily and make transactions conveniently. Durability ensures money's physical longevity, divisibility allows money to be broken into smaller units, and limited supply controls its availability to maintain value.

Front

What is a major benefit of using a debit card over carrying cash?

Back

Reduces the risk of fraud and theft

Answer explanation

Debit cards offer security as users do not need to carry large amounts of money. They do not offer a credit limit, may involve fees (especially for ATM use), and while widely accepted, they aren’t universally accepted, and they still require appropriate card acceptance technology.

Front

What is a key difference between a debit card and a credit card?

Back

Debit cards deduct money directly from your bank account, while credit cards allow you to make purchases on credit.

Answer explanation

Debit cards deduct money directly from your bank account when you make a purchase, which means you can only spend the money you already have. In contrast, credit cards allow you to make purchases on credit, meaning you borrow money from the card issuer to pay back later. Debit cards typically do not offer rewards like cash back and travel points, which are more commonly associated with credit cards. Credit cards usually require a credit check for approval, whereas debit cards do not.

Front

What is one primary role of banks?

Back

To store and safeguard deposits

Answer explanation

Banks primarily store and safeguard deposits. Printing currency is the responsibility of central banks and government institutions. Providing public welfare is a service provided by government agencies. Banks do issue debit cards, but it is not one of their primary roles.

Front

What is liquidity?

Back

The ability to convert assets into cash quickly

Answer explanation

Liquidity refers to converting assets to cash quickly, not interest on savings, loan-making ability, or the process of writing checks.

Front

What information is found at the bottom left corner of a check?

Back

The routing number

Answer explanation

The routing number identifies the bank and is found at the bottom left corner. The account number and check number follow, and the amount in word form is written elsewhere on the check.

Front

The central bank in the United States, ___________________, is responsible for setting monetary policy, which directly impacts interest rates.

Back

the Federal Reserve

Answer explanation

When the Federal Reserve sets these interest rates, it influences the rates that banks offer on their customers’ deposits, and in turn, the interest they charge their customers for loans. So when the Fed raises its rates, so do banks, and when the Fed lowers their rates, banks then lower their rates as well.