Finance Assignment

Assignment 4–Undergraduates Due at end of day on Sunday, March 15

There are 30 multiple-choice questions worth 1 point each and one short essay question worth 5 points. As usual, BL refers to Benson and Loftesness.

1. When a multilateral net settlement system is used for interbank payments, transactions are processed ______. In a gross settlement system, by contrast, transactions are processed ______. (BL, pp. 11 and 115; Kindle, 250, 2341)

A. only by a private clearing house; only by the Federal Reserve B. only by the Federal Reserve; only by a private clearing house C. individually and as they occur; by calculating each bank’s end-of-day balance with a clearinghouse or settlement agent D. by calculating each bank’s end-of-day balance with a clearing house or settlement agent; individually and as they occur

2. Wire transfers are examples of ____ payments. (BL, pp. 10, 116-117; Kindle, 222, 2360)

A. paper-based B. retail C. debit pull D. credit push

3. In the U.S., which of the following are important characteristics of wire transfers, as the term is used in BL? (pp. 116; Kindle, 2349)

1. They are used often for recurring consumer payments such as utility bills. 2. They account for a large fraction of the total number of payments. 3. They are used often for large payments with specific payment dates. 4. They cannot be reversed without the recipient’s agreement.

A. 1 and 2 B. 2 and 3 C. 3 and 4 D. 2, 3, and 4

4. Fedwire is a service of the Federal Reserve and is available to all banks that____. (BL, p. 116; Kindle, 2360)

A. are above a certain size B. are below a certain size C. have reserve accounts with the Fed D. are members of the Federal Reserve System

FIN 5567/369 Keeton Spring 2015

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5. If a sending bank sends a wire transfer payment and the sending company does not have sufficient funds in its account to cover the payment, the sending bank ____. (BL, p. 117; Kindle, 2367-2376)

A. is protected from loss by the Federal Reserve B. is protected from loss by the Federal Deposit Insurance C. can avoid a loss by reversing the transaction D. must collect the funds from the sender or take a loss

6. Wire transfers are ____, which means that the payee and his bank ___ protected from loss due to returns or reversals. (BL, p. 116)

A. final; are B. final; are not C. conditional; are D. conditional; are not

7. In which of the following ways does CHIPS differ from Fedwire as a wire payments provider? (BL, p. 117; Kindle, 2376)

1. Payments are reversible by the sender. 2. CHIPS uses a form of multilateral net settlement that manages settlement risk rather than real- time gross settlement 3. CHIPS is used by only a small number of very large banks. 4. CHIPS is a private-sector entity.

A. 1 and 2 B. 3 and 4 C. 1, 3, and 4 D. 2, 3, and 4

8. The incremental cost to a bank of processing a wire transfer is relatively ___ . According to BL, banks charge customers a fee that ____ this cost because they need to ____. (BL, p. 118; Kindle, 2395-2403)

A. low; is very close to; stay competitive with other banks and payment providers B. low; significantly exceeds; cover the costs of risk management C. high; is below; stay competitive with other banks and payment providers D. high; significantly exceeds; cover the costs of risk management

9. The ACH system was started in the ____ as a way _____. (BL, p. 43; Kindle, 949)

A. 1920s; for consumers to make recurring bill payments B. 1920s; for banks to make large-dollar, immediate payments to each other C. 1970s; to replace paper check transactions with entirely electronic transactions D. 1970s; to clear checks using electronic images in place of paper checks

10. Which of the following are examples of transactions on which banks focused in the early days of ACH? (BL, p. 43; Kindle, 956)

1. High-value one-time payments. 2. High-volume repetitive payments. 3. Social security benefit payments. 4. Payroll

A. 1 only B. 2 only C. 1, 3, and 4 D. 2, 3, and 4

11. An important advantage of ACH as a payment system is that it ____. (BL, p. 44; Kindle, 956)

A. can be used by anyone without a bank account B. is connected to every checking account in the country C. uses real-time settlement D. always takes the form of a credit push

12. When an ACH debit pull is used to make a payment, the _____ is considered the originator

of the transactions; the ______ is considered the receiver; the ____ _______ is the RDFI. (BL, pp. 44-45; Kindle, 966-977)

A. payee; payer; EPN; Federal Reserve B. payee; payer; payee’s bank; the payer’s bank C. payer; payee; payer’s bank; payee’s bank D. payer; payee; payee’s banks; payer’s bank

is the ODFI; and the

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13. When an ACH credit push is used to make a payment, the _____ is considered the originator

of the transactions; the ______ is considered the receiver; the ____ _______ is the RDFI. (BL, pp. 44-45; Kindle, 966-977)

A. payer; payee; EPN; Federal Reserve B. payee; payer; payee’s bank; the payer’s bank C. payer; payee; payer’s bank; payee’s bank D. payer; payee; payee’s bank; payer’s bank;

is the ODFI; and the

14. NACHA is a ____whose primary role in the ACH network is ____. (BL, pp. 43-44)

A. nonprofit association; processing of payments B. nonprofit association; rule-making C. government entity; processing of payments D. government entity; rule-making

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15. The two main ACH operators today include one private-sector operator, which is ____, and one public-sector operator, which is ____. (BL, pp. 57-58; Kindle, 1227)

A. NACHA; The Clearing House (EPN) B. NACHA; the Federal Reserve C. The Clearing House (EPN); NACHA D. The Clearing House (EPN); the Federal Reserve

16. When an ACH payment is cleared by a private-sector operator, the operator calculates the net amounts owed to or due from each bank and submits the total to _____ for settlement. (BL, p. 45; Kindle, 977)

A. NACHA B. the Treasury Department C. the Federal Reserve D. Visa or MasterCard

17. Which of the following statements is true about the speed with which the payee obtains access to funds with ACH payments compared to Fedwire payments? (BL, pp. 45 and 116; Kindle, 2350; Digital Transactions)

A. ACH payments are slower. B. ACH payments are faster. C. Speed is the same. D. ACH payments are sometimes slower and sometimes and faster

18. When a consumer makes recurring monthly payments of her utility bill by providing her bank account information to the utility, the transaction is a ______ and the SEC code is ______. (BL, p. 48; Kindle, 1038)

A. debit pull; WEB debit B. credit push; WEB credit C. debit pull; PPD D. credit push; PPD

19. When a consumer makes a one-time payment of a utility bill by providing her bank account information to the utility over the Internet, the transaction is a ______ and the SEC code is ______. (BL, pp. 48, 51; Kindle, 1031, 1081)

A. credit push; WEB credit B. debit pull; WEB debit C. credit push; TEL D. debit pull; TEL

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20. When a business makes a direct deposit of a paycheck in an employee’s bank account, the transaction is a ____ and the SEC code is ____. (BL, pp. 48; Kindle, 1031)

A. credit push; WEB credit B. credit push; PPD C. debit pull; WEB debit D. debit pull; PPD

21. In ACH check conversions, the payment starts out as ____ and is then converted to ____ for processing. (BL, pp. 49-50; Kindle, 1047-2070)

A. a check; an ACH credit B. a check; an ACH debit C. an ACH credit; a check D. an ACH debit; a check

22. Suppose a fraudster steals your bank account information and uses that information to originate an ACH debit pull from your account, claiming you authorized the transaction over the telephone. If your bank complies with the request and debits your account, you are ____. (BL, p. 51; Kindle, 1070)

A. not entitled to a refund B. entitled to a refund if you notify your bank of the fraudulent transaction C. entitled to a refund if you notify your bank within 60 days of the fraudulent transaction D. entitled to a refund if you notify your bank within 60 days of the bank sending you a bank statement containing the fraudulent transaction

23. When PayPal uses ACH to carry out an eCommerce transaction, the merchant is paid by ____. (BL, p. 52; Kindle, 1086-1095)

A. the consumer originating an ACH credit to the merchant, using account information provided by PayPal B. the merchant originating an ACH debit on the consumer, using account information provided by PayPal

C. the merchant originating an ACH debit on PayPal and the consumer originating an ACH credit to PayPal D. PayPal originating an ACH credit to the merchant and an ACH debit on the consumer

24. ACH payments made under the POS code are ____ transactions in which the originator is a merchant. BL believe that such payments have ____ promise as a method of consumer payment at brick-and-mortar stores. (BL, pp. 52-53; Kindle, 1112-1121)

A. credit-push; little B. debit-pull; little C. credit-push; a great deal of D. debit-pull; a great deal of

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25. WEB credits were authorized by NACHA in 2013 to enable consumers to make ____ payments by ACH credit push (p. 53; Kindle, 1112)

A. P2P B. POS C. online bill payments D. eCommerce

26. The cost to consumers and businesses of using the ACH system to make payments is ____ the cost of using Fedwire. (BL, pp. 54 and 118; Kindle, 1146, 2395-2403)

A. usually the same as B. usually less than C. usually more than D. sometimes less than and sometimes more than

27. ACH payments are ____ credit card payments in that interchange fees are ____. (BL, p. 54; Kindle, 1146)

A. different from; paid by the payer’s bank to the payee’s bank B. different from; not used C. similar to; paid by the payee’s bank to the payer’s bank D. similar to; not used

28. Banks’ total fee revenue from ACH originations is ____ than their total fee revenue from credit card issuance. Fees for high-volume ACH files such as direct deposit of paychecks can be ___per transaction. (BL, pp. 54; Kindle, 1155)

A. slightly less; a few dollars B. considerably less; pennies C. slightly higher; several dollars D. considerably higher; many dollars

29. Suppose a telemarketer instructs its bank to draw funds from a consumer’s account at a different bank using an ACH debit. If the payment has to be reversed because the consumer did not authorize the transaction, the party that will be financially responsible will be ___. (BL, p.p.56-57; Kindle, 1201-1210)

A. the consumer’s bank B. the telemarketer’s bank C. the Federal Reserve D. NACHA

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30. When a business is paid with an ACH credit, the risk of the payer having insufficient funds in his bank account is ____when the business is paid with an ACH debit. (BL, pp. 56-57; Kindle, 1201-1210)

A. the same as B. greater than C. less than D. sometimes greater than and sometimes less than

Essay question (5 points)

This question is based on the Digital Transactions and Stewart articles on the reading list.

Briefly explain what NACHA was trying to achieve with its 2012 and 2014 proposals for changes in ACH settlement. Why did the first proposal fail? How did the second proposal differ? Is it more likely to succeed? Why or why not?

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