Question

In: Finance

Which of the following statements is true when you invest in a federally insured bank account?...

Which of the following statements is true when you invest in a federally insured bank account?

a) Given the federal insurance, you are taking no risk

b) Although there is federal insurance, you are faced with liquidity risk

c) Even though there is federal insurance in place, you still face inflation risk

d) Given the federal insurance, you are taking significant business risk

Solutions

Expert Solution

Federal insurance on bank deposit has cap on the liability. This is a specified sum per person per insured bank. Insurance cover is limited to such caps determined from time to time. To extend of this cap, the depositor can rest assured of repayment.

For a depositor, Federal insurance has no relation with business risk.

Federal insurance ensures only repayment of the deposit in nominal amount. It does not take care of inflation. Hence the answer is option c: Even though there is federal insurance in place, you still face inflation risk.

jeff jeffy answered 2 years ago
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