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Personal Finance Practice Questions

Terms in this set (54)

Which of the following investments is LEAST risky?
certificate of deposit
By owning a variety of investments such as certificates of deposit, mutual funds, stocks, and bonds, an investor is said to have?
diversification
After researching various investments and after speaking to an investment representative, what is the next (and probably most important) step in the process of considering which stock or mutual fund to buy?
reviewing the prospectus
What does a person have to do in order to become a Certified Financial Planner (CFP)?
take classes and pass an exam over financial planning
If banks increase the interest rate they pay on savings accounts from 3% to 6% what would likely occur?
people will deposit more money into their savings accounts
What is the advantage of doing an automatic payroll deduction of money directly from your paycheck into your savings account?
the person will have money set aside in an emergency fund to deal with unexpected expenses
Which of the following investments is the riskiest?
individual stock
What do you call the money charged by a stock broker for buying and selling stock on your behalf?
commission
How can a peson accumulate the largest amount of money over a lifetime?
save early and often by paying yourself first
What is a way in which you can pay yourself first?
have a direct payroll deduction set up to move money directly from your paycheck into a savings or investment account
What can you do if you are rejected for a loan and the lender tells you the reason is that you have items on your credit report that indicate you will NOT repay the loan?
obtain a copy of your credit report and contact the company that provided the credit agency with the negative information to fix the problem
Which of the following most accurately describes what happens when you use a credit card?
the credit card company (a bank) gives you a short term loan
Why do lenders and insurance companies look at your credit report?
they want to know if you have paid your bills on time in the past
What do businesses typically do to make up for theft of merchandise by employees/customers, fraud, errors, etc.?
raise prices to cover these losses
If you pay only the minimum monthly payment due on a credit card purchase of $1000, what will happen?
you will end up paying significantly more than $1000 because of interest charges
Where does the Truth in Lending Act require credit card companies to show the costs of credit (transfer fees, over the limit fees, etc.) in an easy to read format on applications and solicitations?
Schumer Disclosure Box
How could you make the argument that racking up credit card debt is the opposite of investing money?
when you invest, you earn money (hopefully), but when you use credit cards, you pay someone else money (interest)
What are steps you can take to prevent yourself from becoming the victim of identity theft?
use a paper shredder to destroy important financial information such as social security numbers, credit card numbers, and bank account numbers
Which federal act (law) protects people who apply for credit from being discriminated against because of sex or race?
Equal Credit Opportunity Act
What is something you give up (opportunity cost) when you take a job?
the ability to spend time with friends and family
What is a smart thing to do when you receive money for a special occasion such as a birthday or graduation from high school?
look at the options for what you can do with the money, weigh pros and cons of these options, make a well informed decision of what to do with the money
Which of the following best defines inflation?
an increase in the cost of goods/services over time
Which of the follwoing individuals would most likely need to have life insurance (this is determined by looking at whether others are depending on this person to provide for them financially)?
someone who is the ONLY "breadwinner" (person bringing money in) for a family (including a husband, a wife, and two children)
How does the Federal Reserve affect the average person (consumer)?
they raise or lower interest rates that affect how much the average person pays for home loans, car loans, etc.
If someone stops making payments on a car loan and the car ends up getting repossessed, what would likely happen to that person?
that person would have to pay higher interest rates on future loans OR would possibly NOT qualify for loans at all
What organization guarantees the safety of bank deposits in member banks for up to $250,000 per account?
Federal Deposit Insurance Corporation (FDIC)
Which of the following is a major tax advantage of owning a home as opposed to renting?
being able to deduct the interest paid on your home loan AND real estate property taxes paid when you file your income tax return
Under what circumstances would you consider cancelling collision and comprehensive ("full coverage") auto insurance on your car (and only keeping liability coverage)?
if the value of the car is too low to justify paying for full coverage
Which of the following would be considered a fixed expense?
monthly car payment
What is the advantage of having certain bills (like a car or mortgage payment) automatically deducted from your bank account?
it is more convenient for you because you do not have to write and mail a check AND pay for postage
Which of the following is the best definition of gross (or total) pay?
salary/wages before deductions are subtracted away
If you lose your job, what should you and your employment counselor look at in deciding which career field provides the best job opportunities for you?
the "transferrable" skills you have that you can take with you to a new job (such as computer, communication, math skills, etc.)
When you file your tax return and you find that you owe a large amount in federal and state income taxes, what can you do in the future to avoid repeating this problem?
increase the amount withheld from your paycheck by completing a new W-4 and giving it to your employer
Which federal government agency provides retirement income to individuals who paid into the system during their working lives?
Social Security Administration
Which of the following transactions involves a capital gain (that would require you to report it as taxable income on your federal and state income tax returns)?
buying stock at $11 a share and selling at $132 a share
Which of the following best describes a good career plan?
follow a logical set of steps for achieving career goals (take a career interest inventory, research various careers, get education and experience in the career you choose, and work your way up the career ladder)
Why might it be a good idea to join the military (army, navy, marines, air force, etc.) if you want to go to college but you do not have the money to pay for it, and you do NOT want to have to take out a student loan?
the military will provide training, work experience, and money for you to pay for your college education
Most personal finance experts say it is a bad idea to take on a lot of debt--how could you argue that taking on student loan debt might be a good thing?
if you go to college and earn a degree you could earn nearly twice as much on average as someone who only has a high school diploma
If your employer comes to you during open enrollment (the time of year when you sign up for the next year's health insurance coverage) and tells you that you will be paying 30% instead of 15% for employer provided health insurance premiums that are automatically deducted from your paycheck, what will happen to your paycheck?
your net pay will decrease because of the additional money you will have to pay for health insurance premiums (fees)
Why is it an advantage to take pretax deductions out of your paycheck for things like daycare expenses, health insurance premiums, and 401k contributions?
all of these decrease your taxable income meaning you have to pay less income tax
The higher your credit (FICO) score the more likely a lender is going to approve you for a loan because:
this means you have been good about paying off debt on time
Penny Pincher has three job offers. The first job pays $8.50 per hour and offers no benefits. The second and third jobs offer $7.50 and $7.25 per hour (respectively) and each of these jobs offers health insurance for full time employees who have been on the job for at least 90 days. If Penny picks the job that offers $8.50 per hour, which of the following best describes why she has made this choice?
Penny is more worried about making the largest possible income and is not concerned about having health insurance.
What happens if the Federal Reserve (our nation's central bank) buys U.S. Treasury Notes/Bills (or other securities) from banks?
The banks will have more money to lend
If an investor can earn 6% interest on an investment, using the rule of 72 (72 divided by the interest rate) how long will it take for the money to double in value?
12 years
Goals can be best defined as:
realistic, specific things you want to do, achieve, plan for, and make happen over both short and long periods of time
The IRS Form W-4 tells an employer:
information that helps them figure out how much income tax to withhold from an employees' paychecks
When you go to work for an employer, you may get additional items other than a paycheck--such as a 401k retirement plan, health insurance, vacation, etc.--these are known as:
employee benefits
What kind of information can you expect to find when you read the "fine print" in the Schumer Disclosure box on a credit card offer you receive in the mail or look up online?
fees charged for cash advances, transfers, going over the credit limit, etc.
Which of the following is the most accurate definition of garnishment of wages?
the process of deducting money from an employee's paycheck as a result of a court order (up to a max of 25% of total income)
When you fill out your tax form and you see that you owe $1000 in Federal Income Tax, what can you do in the future to prevent this from happening again?
Fill out a new W-4 telling your employer to withhold (take out) more income tax from each of your paychecks
If a student is active in school sports and then takes a job requiring 30-40 hours of work per week (every day after school), what is the most likely opportunity cost (thing given up) he/she will have to face?
the opportunity to play school sports
Which deduction from your paycheck is affected by the information you put on the W-4 Form (which you must fill out when you when you start a job)?
Income Tax
What is the most important factor to consider when choosing a financial advisor?
number of years of experience he/she has providing financial advice and the number of years he/she has worked for the same company
If you are earning 7.2% on an investment, how long will it take the investment to double in value? (use the Rule of 72--by taking 72 divided by the % you are earning on your investment)
72 divided by 7.2% = 10 years
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