Personal Finance Exam

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Final Exam

Money management refers to

Day-to-day financial activities.

Which of the following is NOT a component of money management?

All are components of money management.

The number of personal financial records a household has to organize may seem overwhelming. How long should you keep copies of your tax returns?

Seven years

How long should you keep your most current will?

Permanently.

Another name for a statement of financial position is a

Balance sheet.

Which of the following is NOT a liquid asset?

Retirement investments

Which of the following situations describes a person who could be insolvent?

Assets $40,000; liabilities $45,000

Which of the following will increase the net worth of a household?

Decrease spending by $5 per day

Which of the following appears on a cash flow statement?

Payments for variable expenses

Financial experts recommend a monthly savings ratio of at least ____ of gross income.

5-10%

A current ratio of 2 means

$2 of liquid assets are available for every $1 in current liabilities.

A debt ratio of 0.5 indicates

For every dollar of net worth, debt equals $0.50.

Which of the following ratios indicates the number of months in which living expenses can be paid if an emergency arises?

Liquidity ratio

Which of the following ratios indicates the amount of a person's earnings that goes for payments for credit cards, auto loans, and other debt (except mortgage)?

Debt payments ratio

All of the following are sources of income except

Social Security taxes

Disposable income equals

Take-Home pay

When creating a budget, which of the following statements is true?

Numbers in the budget are estimates.

The difference between the amount budgeted and the actual amount received or spent is called the

Variance.

Given the following information, calculate the debt ratio percentage:

Liabilities = $24,500
Liquid assets = $4,900
Monthly credit payments = $800
Monthly savings = $760
Net worth = $72,500
Current liabilities = $1,600
Take-home pay = $2,300
Gross income = $3,500
Monthly expenses = $-2,040

-33.79

Given the following information, calculate the liquidity ratio:

Liabilities = $-24,500
Liquid assets = $-4,900
Monthly credit payments = $-800
Monthly savings = $-760
Net worth = $-72,500
Current liabilities = $-1,600
Take-home pay = $-2,300
Gross income = $-3,500
Monthly expenses = $-2,040

2.40

A tax due on the purchase of gasoline is called a

Excise tax.

This tax is a major financial planning factor for most people because it is sometimes imposed at the federal, state, and local levels.

Income tax

You may be required to make estimated tax payments if

You own a business.

When calculating federal income taxes, what increases "income"?

Alimony

Income that is taxed at a later date is

Tax-deferred Income

Individuals can deduct expenses only in excess of 7.5% of adjusted gross income for

Medical and dental expenses.

How long are you required to keep tax documentation?

3 years.

When Paul completes his taxes, he can include all of the following as exemptions except

His 20-year-old son who is working full-time and living in an apartment.

Tanya is a single low-income working parent, and Fred is a single high-income working parent. Because of her status, Tanya, but not Fred, may be eligible for the

Earned income credit.

Which of the following is NOT a tax credit?

Domestic tax credit

At the end of the year, Yvonne received a form from her bank that reported income from her savings. That form is called a

1099.

Penny knows that she needs to file her federal income taxes, but she is unable to do so by April 15. What form does she need to complete to obtain an automatic six-month extension?

4868

The major sections of Form 1040 include all of the following:

Signature.
Tax credits.
Adjustments to income (AGI).
Filing status and exemptions.

An IRS agent visited Henry's home to verify some information on his tax return. This visit was called a

Field audit.

Connie thinks that her salary and tax rate for next year will be lower than for this year. What step should she take to minimize her taxes in the current year?

Accelerate deductions.

All of the following can reduce your taxes today except investing in

A Roth IRA.

The maximum that an individual can contribute to a Keogh plan each year is

25% of annual income, up to a maximum of $49,000.

An advantage of investing in a 401(k) plan is the

Possibility of receiving an employer match on your contributions.

Sam and Diane are completing their federal income taxes for the year and have identified the amounts listed here. How much can they rightfully deduct?

• AGI: $80,000
• Medical and dental expenses: $9,000
• State income taxes: $3,500
• Mortgage interest: $9,500
• Charitable contributions: $1,000

$17,000.

Using the following table, calculate the taxes for an individual with taxable income of $30,000.

$4,075

Many people make mistakes when managing current cash needs. Which of these is NOT a frequently made mistake?

Budgeting spending

A legal agreement that provides for the management and control of assets by one party for the benefit of another is known as

A trust.

An all-in-one account that provides a complete financial services program for a single fee is known as

A cash management account.

All of the following are nondeposit institutions except

A payday loan company.

Which of the following usually offers money market funds?

An investment company

Billy accepted a job at a company that specializes in providing money for short-term retail lending. Where did he go to work?

A credit card company

Louise got caught in a cash flow trap and needed money quickly. Unfortunately, she didn't shop around and she went to a _____. As a result, her annual percentage rate was higher than 375%!

payday loan facility

A certificate of deposit that has different interest levels based on the stock market performance is called a

Stock-indexed CD.

Wanda bought a certificate of deposit and automatically received a free bike. She purchased a

Promotional CD.

Zach wants to open an account, but he doesn't know which kind is appropriate. He is interested in earning a higher interest rate and knows that he might not be able to write many checks from his account. In addition, he plans to keep at least $1,000 in his account so he can avoid paying a fee. He definitely wants to have federal deposit insurance. What kind of account should he open?

A money market account

The text discusses several types of bonds. Which bond pays interest for 30 years that is exempt from state and local taxes?

Series EE

The text discusses several types of bonds. Which bond is purchased at face value and has two components to the rate of interest earned—a fixed rate as well as a rate that adjusts twice a year for inflation?

Series I

If you want to buy U.S. savings bonds, you may purchase them

Online and through TreasuryDirect.

Earning interest on interest is called

Compounding.

Which of the following is correct about inflation?

In order to increase buying power, you need to earn a rate higher than the rate of inflation.

Patrick is interested in opening a different account that will allow him to write checks, but he doesn't want to maintain a minimum balance. He should open a

Activity account.

Zoe signed the back of her check with the words "for deposit only." She used a

Restrictive endorsement.

Nancy invested $5,000 in a certificate of deposit earning 4% per year. Unfortunately, she needed to withdraw it before the maturity date. If the penalty was two months of interest, what was her total penalty (round to the nearest dollar)?

$33

What is the APY for a one-year $4,000 certificate of deposit with $560 interest?

14%

Opal earned 6% in her savings account. If she is in the 25% tax bracket, what is her after-tax savings rate of return?

4.5%

Which of the following is NOT correct?

Traditional financial guidelines suggest that your home should cost about five times your annual income.

Which of the following is a disadvantage of renting?

Tenants cannot take tax deductions for mortgage interest and property taxes.

Most tenants sign a lease. Which of the following is part of a lease agreement?

The conditions under which the landlord may enter the apartment.

The owner/landlord is known as the

Lessor.

Which of the following expenses is NOT usually recommended or necessary for a tenant?

All of these are recommended or necessary.

Donald wanted to buy a house in the country, so he sought advice from his cousin Evan. Evan explained the advantages and disadvantages of home ownership; however, he had some information incorrect. Which of the following is incorrect?

An advantage is that the down payment required is less than the security deposit for a rental.

Which of the following is a form of housing in which the units are owned by a nonprofit organization?

Cooperative housing

Georgina and Henry are looking at houses. Which of the following is correct?

They should assess the school system in the area they want to live.

When Ingrid was selling her house, she contacted Gabe, her real estate agent, to help her with the sale. Gabe's services included all of the following except

Home appraisal.

Kelly selected a home and submitted an offer to the seller.

The seller may choose to provide a counteroffer.

Opal is a real estate agent who represents the buyer as well as the seller. In some states, the buyers are required to sign a disclosure acknowledging that they are aware that Opal is working as a

Dual agent.

Private mortgage insurance

Must be terminated automatically when the home owner's equity reaches 22% of the property value at the time the loan was initiated.

Quinn applied for a loan. He provided information about his finances and the home he plans to purchase. Results of the mortgage calculation included all of the following except

Expected maintenance costs.

Rebecca paid extra money to reduce her mortgage interest rate. That extra money is called

Points

Ricky has a conventional mortgage. He can monitor his interest and principal payments using _____ information.

amortization

Trenton wants to buy a house but can provide only a 10% down payment. He probably will be required to have

PMI

Ursula wants to have an interest rate that can increase or decrease during the life of her loan. She should look for a

ARM.

Veronica has had a variable-rate mortgage for several years. Unfortunately, the monthly payments have not covered her interest owed. As a result, her home equity is decreasing because of

Negative amortization.

The primary benefit of a home equity loan is

The deductibility of the loan interest on federal taxes.

A reverse mortgage

Provides older home owners with tax-free income in the form of a loan that is repaid when the home is sold or the home owner dies.

Insurance allows someone to

Shift risk.

Barbara left a skateboard on her front steps. Her neighbor tripped on the skateboard and was injured. The skateboard was a

Hazard

Barbara left a skateboard on her front steps. A windstorm swept the skateboard up and through her window. The windstorm was a

Peril

The most common risks are

All of these are common risks:

Personal Risks
Property risks
Liability risks

If you choose to avoid the risk of a traffic accident by not driving to work, you are using

Risk avoidance

If you choose to take responsibility for negative results of a risk, you are using

Risk assumption

Which of the following questions should one ask when developing a risk management plan?

All of these questions should be asked when developing a risk management plan.

The two basic types of risk that people face regarding their personal property are

Physical damage and damage caused by criminal behavior.

Homeowner's insurance covers all of the following except

All are corvered

Homeowner's insurance covers all of the following except

Theft of a diamond necklace valued at $25,000.

Personal property insurance covers

Personal property items up to 55-75% of the insured value of the home.

A policy that supplements your basic personal liability coverage is called a

Umbrella policy.

If you have a loss due to a flood,

You need to have purchased special coverage if you live in an area that has frequent floods in order to be covered.

Which of the following is NOT correct about renter's insurance?

Renter's insurance covers the building and other structures on the site.

Yogi is applying for insurance for his new home. Which of the following is correct?

He should base the amount of insurance on the price to rebuild or repair it.

Cindy was contacted by her home insurance agent to discuss ways to decrease her premium. Which of the following should NOT reduce her premium?

Increasing the amount of coverage.

Motor vehicle coverage typically includes all of the following except

Bodily injury liability of all expenses, no matter the cost, for the most injured.

Paul was driving his kids to a piano lesson in a 2005 minivan. While driving, he was hit by an uninsured motorist. Although Paul and his kids had only minor injuries, their vehicle was totaled. Based on this information, which of the following is correct?

Paul's uninsured motorist's protection should cover medical expenses for Paul and his kids.

Timothy was driving his friend Nick to football practice. While driving, he was hit by a driver who had coverage of 100/300/50. Tim and Nick each suffered some physical injuries. Based on this information, which of the following is correct?

The policy would provide a maximum of $100,000 for each of the injured, and no more than $300,000 for total injuries sustained in the accident.

Which of the following is NOT correct?

The number of small claims you have should not affect your premium.

Which of the following households most likely has the greatest need for life insurance?

Household with children.

About ___ of the U.S. life insurance companies are stock companies.

95%

You want to purchase a life insurance policy that pays a dividend. What kind of policy would you want to purchase?

Participating policy

Jeanne wants to purchase a life insurance policy with guaranteed premiums. What kind of policy would she want to purchase?

Nonparticipating policy

Which of the following is NOT a type of permanent insurance?

Term life

Which of the following is NOT temporary insurance?

Whole Life

If you want to purchase term insurance, you will receive all of the following except

Cash Value

If you have a renewable term policy,

Your premium may increase if you continue it for another term because you will be older.

If you have a multiyear level term policy,

Your premium will be the same for the duration of your policy.

Which of the following is NOT a feature of whole life insurance?

The policy will return all premiums if you survive to the end of the policy.

Of the following, which one is the most positive feature of whole life insurance?

It builds cash value.

Molly is thinking about buying a life insurance policy, but she is not sure about how much she will need in the next few years. She may need to change her coverage as her needs change. Which of the following policies would meet her needs?

Adjustable Life

Pam just started working at XYZ Widget Company and finally wants to get insurance coverage. She does not want to take a medical exam to get coverage because she has some underlying health conditions and is concerned that she might not qualify for a policy. Which of the following life insurance policies should she apply for?

Group Life

Fred bought life insurance when he was 47, although he told the insurance company that he was 42. He has since died. Which of the following provisions will affect the amount of money his beneficiaries will receive?

Misstatement of age provision

Fred bought life insurance five years ago. He forgot to tell them that he had a heart condition, and, as a result of that condition, he recently died. Which of the following provisions prevents the life insurance company from refusing to pay his beneficiaries because of his original misrepresentation?

Incontestability clause

The policy loan provision means that

The policy owner can borrow any amount up to the cash value of the policy.

Bill is worried about being able to pay his premium if he is totally and permanently disabled before age 60. Which of the following riders should he consider?

Waiver of premium disability benefit

Which of the following is NOT a factor that affects the price a company charges for a life insurance policy?

All of these affect the price.

The settlement option that pays the life insurance proceeds in equal periodic payments for a specified number of years after your death is called

Limited installment payment.

Which of the following statements is incorrect?

An annuity is more advisable for people in poor health than for those who are likely to live longer than average.

Which of the following is not a true statement?

Because investment objectives deal with the future, it is useless to make long-term goals.

A valid short-term investment goal is

Accumulating $3,000 in a savings account over the next 12 months.

All of the following statements are considered to be good advice for a potential investor before starting an personal investment program except

Increase credit purchases and make installment payments in order to increase cash available for investing.

A good rule of thumb is to limit installment payments to ____________ of your net (after-tax) income.

20%

If you invest $4,000 per year over the next 40 years for retirement, which of the following is correct?

A high rate of return will give you the highest total dollar return.

Safe investments include all of the following except

Commodities

As people approach retirement, which of the following holds true for most?

They choose more conservative investments.

When choosing an investment, you should consider risk. The four primary risk components are

Inflation, interest rate, business failure, market.

If your primary investment objective is to receive investment income, which of the following would NOT be appropriate for your portfolio?

"Growth" common stock

Which of the following does not describe a growth company?

The company pays a large dividend.

Which of the following investors would mostly prefer conservative investments to speculative investments?

An unemployed single parent who just received a $300,000 divorce settlement

Which of the following would you expect to earn near 10% per year over the long term?

Stocks

If you need access to your funds in two years or less, which of the following investments would be least appropriate?

Stocks and mutual funds

A discounted security means that the actual purchase price is trading at

Less than the maturity value.

Which of the following statements is false?

Individual investors who purchase U.S. government securities must hold the investments until maturity.

When comparing the interest rates for U.S. government securities, which of the following is correct?

Treasury bills < Treasury notes < Treasury bonds

Which of the following features is a benefit for investors of municipal bonds?

Interest may be tax-exempt at the federal level.

Which of the following statements is true?

Not all convertible bonds are quality investments.

You are considering an investment in a municipal bond that has a yield of 4%. Your tax rate is 25%. What is your taxable equivalent yield?

5.33%

Gwendolyn Francis is interested in buying a bond that pays $70 annually. The current price of the bond is $800. What is her current yield?

8.75%

All of the following statements are correct except

Dividend payments must be approved by the stockholders.

Alberta owns 100 shares of stock of ABC Company, and Bobby owns 200 shares of the same stock. If ABC Company pays a $5 dividend to all stockholders with a record date of Friday, June 15, then

Alberta will receive half as much as Bobby if they owned the stock two business days before the record date.

If you own stock, you may receive income from

All:

Dividends
Dollar Appreciation of stock value
Possible increases in stock price

MNOP Inc. declared a $1.00 dividend with a record date of Thursday, September 15, and a payment date of Thursday, October 20. Cheri wants to purchase stock and receive the dividend. What is the latest date that she needs to have purchased the stock in order to receive the dividend?

September 12

Why does a company split its stock?

The stock is trading at a high price, and the company wants to bring the price in line with a theoretical ideal range.

Which of the following is notcorrect regarding preferred stock?

The yield on preferred stocks is often much higher than the yield on bonds.

A safe investment that generally attracts conservative investors is called a _______ stock.

Blue chip

A stock issued by a corporation that has a capitalization of between $2 billion and $10 billion is called a _______ stock.

Midcap

Which of the following usually offers some free information and charges for more detailed research information you may need to evaluate a stock investment?

Professional advisory services such as Standard & Poor's Financial Information Services

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