FINA 260 Exam 1

Which type of bank account typically has a transaction limit?

Savings accounts

Which type of bank account typically does NOT have a transaction limit?

Checking accounts

Which typically earns higher interest: checking or savings?

Savings accounts

What is the main difference in transaction limits between checking and savings accounts?

Savings accounts often have transaction limits, while checking accounts typically do not

Should you typically have to pay fees for a checking or savings account?

No

What should you do to avoid unexpected bank fees?

Read the fine print and be aware of account fees.

What is an inactivity fee?

A fee charged when you don’t use your account for a certain period of time.

What should you watch out for with savings account transactions?

Transaction limits. Going over the limit may result in a fee.

What can happen if you make more than 6 transactions per month from a savings account?

You may be charged a transaction fee.

Do checking accounts typically have transaction fees?

No, checking accounts typically have no transaction fees.

What is another name for online banks?

High-yield savings accounts.

What is a major tradeoff of using an online bank?

There is no physical bank location.

What can be difficult with an online bank because it has no physical location?

Depositing cash.

How do online banks provide access to cash and ATMs?

They partner with other banks and ATMs.

How does Capital One provide access to cash deposits?

Capital One partners with CVS.

What is one limitation of online banks when it comes to depositing cash?

They have limited ways to deposit cash.

How do you typically get customer service with an online bank?

Through a call center.

What is another possible limitation of online banks?

They may not offer all the features of a traditional bank, such as home loans.

What is the main tradeoff of a high-yield savings account through an online bank?

You may earn higher interest, but you give up some convenience and services of a physical bank.

What is inflation?

A general increase in prices and a fall in the purchasing value of money.

How does inflation affect your money over time?

You can buy less with the same amount of money.

What is purchasing power?

How much you can buy with a certain amount of money.

How does inflation affect purchasing power?

Inflation decreases purchasing power because prices increase.

What does “$1 today purchases less in the future” mean?

Because of inflation, the same $1 will buy fewer goods and services in the future.

Give an example of inflation using eggs.

If 12 eggs cost $1 today, they might cost $1.10 five years later.

Why is it important to consider inflation when comparing money from different years?

Because the purchasing power of money changes over time.

What would you need to know to find the equivalent value of money from the 1980s in 2026?

The inflation rate/CPI changes between the 1980s and 2026.

What institution has a massive impact on U.S. interest rates?

The U.S. Federal Reserve (the Fed).

What long-term inflation rate does the Federal Reserve target?

2% inflation.

How can inflation affect your money over the long run?

Inflation can eat into your returns and reduce the value of your money.

Why is inflation important when saving or investing money?

Because inflation can reduce your money’s purchasing power and eat into your returns.

What was the average stock market return from 1926–2025?

12.41%

What was the CAGR of the stock market from 1926–2025?

10.51%

What does CAGR stand for?

Compound Annual Growth Rate.

Why is CAGR more accurate than the average return?

CAGR accounts for compounding and shows the consistent annual rate needed to reach the ending value.

What is the important number to remember for the stock market’s long-term CAGR?

About 10% per year.

What does CD stand for?

Certificate of Deposit.

What is the main trade-off of a CD?

You get higher interest, but you cannot easily access your money for a set period of time.

Can you access your money before a CD’s term is over?

Technically yes, but you will usually pay a fee, often by losing accrued interest.

How do CD interest rates compare to checking and savings accounts?

CDs typically offer higher interest rates.

What is one advantage of a CD over a savings account?

A CD gives you a guaranteed rate of return for the term, while savings account rates can change.

What is the main disadvantage of a CD?

You don’t have immediate access to your cash.

What happens when a CD’s term ends?

You receive the money you originally put in plus the interest you earned.

What can you do with your money once a CD’s term ends?

You can choose what to do with the money, such as withdrawing it or putting it somewhere else.

Are CD interest rates guaranteed to be the same after your CD ends?

No. There is no guarantee that CD rates will be the same when you get your money back.

A $1,000 loan has a 20% annual interest rate, compounded annually. If you make no payments, how long will it take for the amount owed to double?

2–4 years.

How can you estimate how long money takes to double with compound interest?

Use the Rule of 72:
72 ÷ interest rate = approximate years to double.

Using the Rule of 72, how long would it take $1,000 to double at 20% interest?

72 ÷ 20 = 3.6 years, so the answer is 2–4 years.

What happens to a loan balance when interest is compounded and you make no payments?

The interest gets added to the balance, so the amount you owe grows faster over time.

How do you calculate compound interest on a loan?

Each year, calculate the interest on the current balance, then add that interest to the balance. The next year, calculate interest on the new balance.

What is WRONG with doing $1,000 × 20% = $200 and then adding $200 every year?

That treats the interest as the same every year. With compound interest, the interest amount changes because the balance changes each year.

What happens to a $1,000 balance at 20% compound interest each year?

Year 1: $1,200
Year 2: $1,440
Year 3: $1,728
Year 4: $2,074

What should you remember when solving a compound interest problem?

Interest is calculated on the current balance, NOT the original amount every year.

What is the difference between an interest rate and APY?

Interest rate does not include compounding. APY includes the effect of compounding throughout the year.

What does the interest rate tell you?

The amount you would earn on your balance without compounding.

What does APY tell you?

The effective amount you earn when compounding is included.

If a savings account has an interest rate of 3.20% and an APY of 3.25%, why is the APY higher?

Because the APY includes compounding.

Which number is more useful for comparing how much you'll actually earn from a savings account: interest rate or APY?

APY, because it includes compounding.

What is a strategic way to organize your income?

Have your income go into a checking account, then use it to fund your savings, retirement accounts, and bills/other expenses.

Why use separate accounts for different purposes?

Organization and a smaller chance of losing everything to fraud involving your debit card.

Why keep most of your money out of your checking account?

If your debit card information is stolen, having less money in checking can mean less money is exposed to fraud.

What annual growth rate should you use for the stock market when estimating returns from 1945–2025?

The actual annual growth rate was 11.61%, but USE 10% for calculations.

What is a stock?

A share of ownership in a company.

What does it mean to own one share of Apple stock?

You own a small portion of Apple.

What is a stock ticker?

A short-hand name used to identify stocks, mutual funds, and other investments.

How long are stock ticker symbols typically?

1–4 letters.

How long are mutual fund ticker symbols?

5 letters.

What is Apple's stock ticker symbol?

AAPL

How do you calculate a company's market cap?

Share price × total shares outstanding = market cap.

What is market capitalization (market cap)?

The total value of a company, calculated by multiplying its share price by its total shares outstanding.

Does a stock’s price automatically tell you how valuable the company is?

No. A stock can have a high or low price without that telling you whether the company’s total value is high or low.

Why doesn’t a stock’s share price alone determine the company’s total value?

Because you also need to know how many shares exist.

What is a good analogy for stock prices and number of shares?

A pizza. A pizza cut into 4 slices and a pizza cut into 8 slices are still one whole pizza. The number of slices doesn’t change the amount of pizza.

What is a mutual fund?

An investment program funded by shareholders that invests in diversified holdings and is professionally managed.

How many stocks can a mutual fund contain?

It can contain only a few stocks or thousands of stocks, depending on the fund.

What is the main idea behind diversification in a mutual fund?

Your money is spread across multiple investments rather than being invested in just one stock.

What are the three main ways mutual funds make money from investors?

Asset management fees (expense ratios), loads (commissions), and 12b-1 fees.

What is an asset management fee, also called an expense ratio?

A percentage of the fund’s assets under management (AUM) that is charged to investors.

How is an expense ratio stated?

As an annual percentage, even though the fee is charged daily on trading days.

If you have $100,000 invested in a fund with a 1% expense ratio, about how much is the annual fee?

$1,000 ($100,000 × 1%).

What are loads?

Commissions charged when buying, selling, or sometimes both.

What are the two types of loads?

Front-end loads and back-end loads.

What should you watch out for with loads?

They can be over 5%, which can take a significant amount of your investment.

What are 12b-1 fees?

Ongoing fees/commissions paid to an advisor and/or used for marketing.

What does AUM stand for?

Assets Under Management — the total amount of money invested in the fund.

What is a stock index?

A measure of the performance of a collection of stocks.

What does “market cap weighted” mean?

The bigger the company, the more weight it has in the index.

What is the S&P 500?

An index of 500 large U.S. companies selected by Standard & Poor’s (S&P).

How is the S&P 500 weighted?

Market cap weighted — larger companies have more influence on the index.

About what percentage of the U.S. stock market by value does the S&P 500 represent?

About 80%.

What is the Dow Jones Industrial Average (DJIA)?

An index based on the average stock prices of 30 companies selected by S&P.

How is the Dow Jones weighted?

Stock-price weighted — stocks with higher share prices have more influence.

What is the NASDAQ Composite Index known for?

Being heavily weighted toward technology companies.

What does the Russell 2000 track?

Small U.S. companies.

Can you technically invest directly in an index?

No. An index is just a measurement.

How can you invest in an index?

Invest in a mutual fund or ETF that tracks the index.

What are some funds that track the S&P 500?

• iShares: IVV

• Vanguard: VOO

• Schwab: SWPPX

• Fidelity: FXAIX

What is active fund management?

Trying to pick the best securities within an index to outperform the index and generate a higher return.

How would an active fund based on the S&P 500 try to outperform the S&P 500?

The fund manager would pick the stocks they think will perform best from within the S&P 500.

What type of investment are most active stock or bond funds?

Most are mutual funds, although some can be ETFs.