A.3 Function, Purpose, and General Structure of Financial Institutions

Question 1

Which of the following best describes the primary function of a commercial bank?

A. To facilitate buying and selling of securities
B. To provide loans and take deposits
C. To provide insurance services
D. To manage mutual funds

Answer 1

B. To provide loans and take deposits

Commercial banks are financial institutions that accept deposits from customers and use those funds to provide loans to other customers.

A.3 Function, purpose, and general structure of financial institutions

Question 2

Which of the following financial institutions is NOT typically considered a depository institution?

A. Commercial bank
B. Credit union
C. Savings and loan association
D. Investment bank

Answer 2

D. Investment bank

Investment banks are not depository institutions, as they do not accept deposits from customers.

A.3 Function, purpose, and general structure of financial institutions

Question 3

Which of the following is NOT a common function of a brokerage firm?

A. Providing investment advice to clients
B. Executing trades on behalf of clients
C. Underwriting new securities offerings
D. Accepting deposits from clients

Answer 3

D. Accepting deposits from clients

Brokerage firms typically do not accept deposits from clients, but they do provide investment advice, execute trades, and underwrite new securities offerings.

A.3 Function, purpose, and general structure of financial institutions

Question 4

Which of the following is NOT a characteristic of a money market mutual fund?

A. High return potential
B. Low risk
C. Short-term investments
D. Liquidity

Answer 4

A. High return potential

Money market mutual funds are generally considered to be low-risk investments that focus on short-term, highly liquid investments such as Treasury bills, certificates of deposit, and commercial paper.

A.3 Function, purpose, and general structure of financial institutions

Question 5

Which of the following is NOT a function of the Federal Reserve System?

A. Regulating the money supply
B. Providing loans to individuals
C. Setting interest rates
D. Clearing checks

Answer 5

B. Providing loans to individuals

The Federal Reserve System is responsible for regulating the money supply, setting interest rates, and clearing checks, but it does not provide loans to individuals.

A.3 Function, purpose, and general structure of financial institutions

Question 6

Which of the following is NOT a type of insurance most insurance companies offer?

A. Life insurance
B. Health insurance
C. Property and casualty insurance
D.Homeowner’s Association Insurance

Answer 6

D. Homeowner’s association insurance.

Most insurance companies offer life insurance, health insurance, and property and casualty insurance, but they typically do not offer homeowner’s association insurance.

A.3 Function, purpose, and general structure of financial institutions

Question 7

Which of the following is not a type of retirement account commonly offered by financial institutions?

A. 401(k)
B. Roth IRA
C. Traditional IRA
D. Money market account

Answer 7

D. Money market account

Money market accounts are not typically considered retirement accounts, as they are not subject to the same tax benefits and restrictions as 401(k)s, Roth IRAs, and traditional IRAs.

A.3 Function, purpose, and general structure of financial institutions

Question 8

Which of the following is NOT a type of bond commonly offered by financial institutions?

A. Corporate bond
B. Municipal bond
C. Treasury bond
D. Savings bond

Answer 8

D. Savings bond

Savings bonds are issued by the U.S. Treasury, not by financial institutions. Corporate bonds, municipal bonds, and Treasury bonds are all commonly offered by financial institutions.

A.3 Function, purpose, and general structure of financial institutions

Question 9

Which of the following is NOT a type of investment commonly offered by financial institutions?

A. Stocks
B. Mutual funds
C. Real estate
D. Cryptocurrency

Answer 9

D. Cryptocurrency

While some financial institutions may offer cryptocurrency investments, it is not a traditional type of investment commonly offered by most financial institutions.

A.3 Function, purpose, and general structure of financial institutions

Question 10

Which of the following is NOT a factor that affects interest rates?

A. Inflation
B. Economic growth
C. Government spending
D. The price of gold

Answer 10

D. The price of gold

While factors such as inflation, economic growth, and government spending can all affect interest rates, the price of gold typically does not have a direct impact on interest rates. Gold prices are influenced by a variety of factors, including supply and demand, geopolitical events, and investor sentiment, but they do not necessarily correlate with changes in interest rates

A.3 Function, purpose, and general structure of financial institutions

Question 11

John wants to borrow $100,000 to purchase a new home. Which of the following types of loans would most likely be the best option for him?

A. Personal loan
B. Auto loan
C. Mortgage loan
D. Student loan

Answer 11

C. Mortgage loan

A mortgage loan is specifically designed for home purchases and typically offers lower interest rates and longer repayment periods than other types of loans.

A.3 Function, purpose, and general structure of financial institutions

Question 12

Sarah is interested in investing in the stock market, but she does not have the time or expertise to research individual stocks. Which of the following investment options would be the best fit for her?

A. Individual stocks
B. Mutual funds
C. Options contracts
D. Futures contracts

Answer 12

B. Mutual funds

Mutual funds are professionally managed investment portfolios that invest in a diversified mix of stocks, bonds, and other assets. They are a good option for investors who want exposure to the stock market but do not want to manage their own portfolio.

A.3 Function, purpose, and general structure of financial institutions

Question 13

Susan is considering opening a savings account. She visits a commercial bank and a credit union. In terms of ownership, what differentiates these two institutions?

A. Commercial banks are owned by shareholders while credit unions are owned by the government
B. Commercial banks are owned by its depositors while credit unions are owned by members
C. Commercial banks are owned by shareholders while credit unions are owned by its members
D. There’s no ownership difference between commercial banks and credit unions

Answer 13

C. Commercial banks are owned by shareholders while credit unions are owned by its members

Commercial banks are for-profit institutions owned by shareholders, while credit unions are not-for-profit institutions that are member-owned and operated.

A.3 Function, purpose, and general structure of financial institutions

Question 14

John has a large sum of money he wants to invest in government bonds. Which financial institution is he likely to directly approach for this?

A. Insurance company
B. Investment bank
C. Central bank
D. Brokerage firm

Answer 14

D. Brokerage firm

Brokerage firms facilitate the purchase and sale of financial securities between a buyer and a seller. John would typically approach a brokerage firm to buy government bonds.

A.3 Function, purpose, and general structure of financial institutions

Question 15

Emma is a budding entrepreneur looking to raise capital to scale her startup. Which financial institution is most suitable for her needs?

A. Commercial bank
B. Savings and loan association
C. Venture capital firm
D. Credit union

Answer 15

C. Venture capital firm

Venture capital firms provide capital to startups with growth potential in exchange for equity or partial ownership.

A.3 Function, purpose, and general structure of financial institutions

Question 16

Mike is shopping for a home mortgage. He’s looking for a financial institution that traditionally specializes in accepting savings deposits and making mortgage and other loans. Where should he go?

A. Investment bank
B. Credit union
C. Savings and loan association
D. Commercial bank

Answer 16

C. Savings and loan association

Savings and loan associations, also known as thrifts, traditionally specialize in savings deposits and providing mortgage and other personal loans.

A.3 Function, purpose, and general structure of financial institutions

Question 17

Rebecca has just won a major lawsuit and is expecting a large sum of money. She is concerned about the safety of her funds. Which entity guarantees the safety of deposits in most banks in the U.S.?

A. Federal Trade Commission (FTC)
B. Securities and Exchange Commission (SEC)
C. Federal Deposit Insurance Corporation (FDIC)
D. Central Bank of the U.S.

Answer 17

C. Federal Deposit Insurance Corporation (FDIC)

The FDIC insures deposits at banks and savings and loan institutions, ensuring the safety of the depositor’s money up to a certain limit.

A.3 Function, purpose, and general structure of financial institutions

Question 18

Amanda is starting a business and needs a loan. She has noticed that interest rates have been fluctuating frequently. Which type of financial institution directly impacts the short-term interest rates in the market?

A. Commercial bank
B. Investment bank
C. Central bank
D. Venture capital firm

Answer 18

C. Central bank

The central bank, such as the Federal Reserve in the U.S., has the authority to influence short-term interest rates by setting policy rates, conducting open market operations, and implementing monetary policy.

A.3 Function, purpose, and general structure of financial institutions

Question 19

Jessica, a CFP® professional, is advising a client on where to park their emergency savings. The client is looking for an institution that offers liquidity, minimal risk, and a small return on their investment. Which type of financial institution should Jessica recommend?

A. A mutual fund company
B. An investment bank
C. A commercial bank
D. A hedge fund

Answer 19

C. A commercial bank

Commercial banks are ideal for parking emergency funds because they provide high liquidity and safety with minimal risk. These banks offer savings accounts, which are insured by the government (such as the FDIC in the U.S.), ensuring that the client’s money is safe and can be accessed easily without significant concerns over fluctuations in value, unlike investment options like mutual funds or hedge funds. This makes them the best option for emergency savings as per the client’s requirements.

A.3 Function, purpose, and general structure of financial institutions

Question 20

Thomas is interested in investing in a portfolio of diversified assets including stocks, bonds, and other securities. He prefers having a professional manage his investments rather than choosing individual stocks himself. Which type of financial institution should Thomas utilize for his investments?

A. A commercial bank
B. A credit union
C. An investment fund
D. A payday lender

Answer 20

C. An investment fund

Investment funds, including mutual funds, index funds, or exchange-traded funds (ETFs), are designed to provide investors with diversified portfolios managed by financial professionals. These funds pool money from many investors to purchase a broad portfolio of securities, which helps reduce risk through diversification. This option is most suitable for Thomas, who seeks professional management and diversified investment,

A.3 Function, purpose, and general structure of financial institutions