What is compounding interest?

Interest earned on both the principal and previously earned interest

What does "balancing a checkbook" mean?

Comparing your recorded transactions with your bank statement

What is one risk of taking on too much debt?

Difficulty making future financial commitments

What is the purpose of FDIC insurance?

To protect depositors’ money up to a certain amount

What is the difference between debit and credit cards?

Debit cards withdraw from a checking account, but credit cards borrow funds

Which financial decision will most likely increase your wealth over time?

Investing in savings and retirement accounts

What is a major difference between savings accounts and checking accounts?

Savings accounts typically earn higher interest than checking accounts

Why is starting to save early beneficial?

It allows for more time for interest to compound

Why do banks charge higher interest rates for higher-risk loans?

To compensate for the increased chance of default

How does compounding frequency affect savings?

More frequent compounding results in greater growth

What is the primary function of financial institutions?

To provide loans and investment opportunities

What is the main purpose of a checking account?

To provide easy access to money for transactions

Why is it important to reconcile a bank statement?

To verify account accuracy and detect fraud

How can you maintain good credit?

Pay bills on time and keep credit card balances low

Why is financial literacy important?

It helps individuals make informed financial decisions

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Unit 2A Test Review

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Questions 20

Answers

1
Which of the following accounts typically has the highest interest rate?
Money Market account
Certificate of Deposit (CD)
Checking account
Savings account
2
Which of the following is NOT a factor in determining creditworthiness?
Capacity
Character
Collateral
Connections
3
What is compounding interest?
Interest earned on both the principal and previously earned interest
A fixed percentage of interest added annually
A type of loan with a fixed repayment schedule
Interest earned on the principal amount only
4
What does "balancing a checkbook" mean?
Comparing your recorded transactions with your bank statement
Depositing money into your account
Checking your bank balance online
Transferring money between accounts
5
What is one risk of taking on too much debt?
Lower monthly payments
Increased credit score
Difficulty making future financial commitments
Guaranteed loan approval
6
What is the purpose of FDIC insurance?
To increase interest rates on savings accounts
To ensure banks make a profit
To protect depositors’ money up to a certain amount
To protect against stock market losses
7
What is the difference between debit and credit cards?
Debit cards use borrowed money, while credit cards use your own money
Debit cards withdraw from a checking account, but credit cards borrow funds
Debit cards require a credit check, while credit cards do not
Debit cards charge interest, while credit cards do not
8
What is an example of open-end credit?
Auto loan
Mortgage
Credit card
Student loan
9
What is one advantage of borrowing from a credit union instead of a bank?
More financial products available
Fewer membership requirements
Higher fees
Lower interest rates on loans
10
Which financial decision will most likely increase your wealth over time?
Paying only the minimum amount due on credit cards
Keeping all money in cash instead of a bank
Investing in savings and retirement accounts
Spending all your earnings immediately
11
What is a major difference between savings accounts and checking accounts?
Checking accounts usually offer higher interest rates
Savings accounts allow unlimited withdrawals
Checking accounts require a minimum deposit
Savings accounts typically earn higher interest than checking accounts
12
Why is starting to save early beneficial?
It allows for more time for interest to compound
Interest rates decrease over time
There is no real advantage to starting early
It requires a smaller initial deposit
13
Why do banks charge higher interest rates for higher-risk loans?
To discourage savings
To make borrowing easier
To compensate for the increased chance of default
To encourage customers to borrow more money
14
How does compounding frequency affect savings?
Compounding frequency does not impact total savings
More frequent compounding results in less growth
Less frequent compounding leads to higher returns
More frequent compounding results in greater growth
15
What is the primary function of financial institutions?
To issue government bonds
To set national interest rates
To collect taxes
To provide loans and investment opportunities
16
What is the main purpose of a checking account?
To provide easy access to money for transactions
To invest in stocks and bonds
To accumulate interest over time
To store money with withdrawal restrictions
17
Why is it important to reconcile a bank statement?
To get a refund on overdraft fees
To increase your credit score
To ensure that deposits earn more interest
To verify account accuracy and detect fraud
18
How can you maintain good credit?
Max out all available credit cards
Close all credit accounts immediately after opening them
Pay bills on time and keep credit card balances low
Apply for multiple new credit cards every month
19
What happens if you miss a loan payment?
Your debt will be erased
Your credit score may decrease
You will receive a reward for early payment
Your interest rate will immediately drop
20
Why is financial literacy important?
It helps individuals make informed financial decisions
It guarantees wealth
It eliminates all financial risks
It prevents all debt

Unit 2A Test Review Flashcards | StudBud