SIE Knowledge of Capital Markets Question 21: Answer and Explanation

Question: 21

Which of the following statements is true regarding banks?

• A. In times of high interest rates, bank customers chose to put more of their idle liquid assets into mutual funds.
• B. Some banks arranged for brokerage firms to set up business in the banks' offices.
• C. When the FDIC was established, it began assuring depositors that they may withdraw their funds at any time, up to $250,000 per depositor.
• D. FDIC required that banks let their customers know that mutual funds purchased on their premises guaranteed the value of the mutual funds, up to the limit set by the FDIC.

Correct Answer: B

Explanation:

B: Choice B is correct. As mutual funds consistently provided higher returns than the interest earned on Certificates of Deposit (CDs), bank customers were moving liquid funds from CDs to mutual funds. So some banks made arrangements with brokerage firms to assist their banking customers on the bank's own premises. Choice A is incorrect, as low interest rates were the catalyst driving bank customers to increasingly use mutual funds. Choice C is incorrect, because the first limit was $2,500. Later limits were $5,000, $10,000, $15,000, $20,000, $40,000, and $100,000. In 2008, it was raised to $250,000. Choice D is incorrect because banks were strictly required to make quite clear to their customers investing in mutual funds on the bank's premises that those investments were not insured by the FDIC, and all or part of their investment could be lost.