Focus on Personal Finance 7th Edition by Jack R. Kapoor. Complete 14 Chapters. TEST BANK

Chapter 1 (1) 1) If inflation is expected to be 8.40 percent, how long will it take for prices to double?

A) 18.57 years B) 8.57 years C) 12.57 years D) 6.57 years E) 7.57 years

2) If a $10,000 investment earns interest of $1,200 in 1 year, what is its rate of return?

A) 77 percent B) 57 percent C) 12 percent D) 100 percent E) 24 percent

3) If a $10,000 investment earns a 5 percent annual return, what should its value be after 1 year?

A) $10,050 B) $5,100 C) $5,000 D) $10,000 E) $10,500

4) If a $10,000 investment earns a 7 percent annual return, what should its value be after 4

years? Use Exhibit 1-A. A) $14,700 B) $10,035 C) $13,110 D) $12,800 E) $10,700

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5) If Melinda Miller estimates that her $400 weekly grocery bill will increase at an annual

inflation rate of 3 percent, what should her weekly grocery bill be in 2 years? Use Exhibit 1A. A) $80.00 B) $120.00 C) $424.40 D) $526.40 E) $433.50

6) If you deposit $500 into a certificate of deposit earning 4.8 percent, what would be your

earnings after 12 months?

A) $26.50 B) $500.00 C) $24.00 D) $548.00 E) $21.50

7) Randy Hill wants to retire in 25 years with $1,000,000. If he can earn 10 percent per year on

his investments, how much does he need to deposit each year to reach his goal? Use Exhibit 1-B. (Round your answer to the nearest dollar.)

A) $10,168 B) $20,000 C) $40,000 D) $9,835 E) None of these choices are correct.

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Answer Key Test name: ch 1 (1) 1) 2) 3) 4) 5) 6) 7)

B C E C C C A

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Chapter 1 (2) 1) A formalized report that summarizes your current financial situation, analyzes your financial

needs, and recommends future financial activities is a(n): A) Insurance prospectus.

B) Financial plan.

C) Budget.

D) Investment forecast.

E) Bank Statement.

2) The major function of personal financial planning is to: A) Reduce taxes.

B) Increase savings.

C) Achieve personal economic satisfaction.

D) Improve your credit rating.

E) Obtain adequate insurance protection.

3) An advantage of effective personal financial planning is: A) The use of low-interest savings.

B) Increased impulse spending.

C) Increased control of financial affairs.

D) More credit card debt.

E) Less monitoring of investments.

4) The stages in the family situation and financial needs of an adult is called the: A) Financial planning process.

B) Budgeting procedure.

C) Personal economic cycle.

D) Adult life cycle.

E) Tax planning process.

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5) Jim Johnson was laid off from his job two months ago. He just received an offer for a

position that pays 3/4 the salary of his old job. Why should he set up a financial plan?

A) To increase the effectiveness of obtaining, using, and protecting his financial resources B) To decrease control of his financial affairs regarding debt C) To accept the loss of freedom from financial worries due to his new position D) To learn how to manage depending more on others E) To find out why he was laid off

6) The consumer price index measures: A) The prices of a fixed basket of goods and services in the United States.

B) The prices of goods and services in rural areas across the globe.

C) The average change in prices of a fixed basket of goods and services of urban

consumers in the United States.

D) The change in prices of a fixed basket of goods and services globally.

E) The increase in prices for retail sales in the United States over a three-year period.

7) The actual cost of living increase for a household will be: A) Greater than the inflation rate as reported by the CPI since the index excludes the

product or service with the highest inflation rate for the past 12 months.

B) Lower than the inflation rate as reported by the CPI since the index excludes the product or service with the lowest inflation rate for the past 12 months.

C) Equal to the inflation rate as reported by the CPI since it includes all products and services whether or not the prices have changed in the past 12 months.

D) Either greater than or less than the inflation rate as reported by the CPI depending on the household's cost of necessities purchased.

E) Zero since the CPI does not measure consumer price changes.

8) The Rule of 72 is: A) A tool to determine the number of years until retirement for an employee.

B) Used to estimate how fast prices will double using a given annual inflation rate.

C) The legal code for requiring companies to provide a match on retirement savings.

D) Used to calculate interest rates for savings.

E) The number of steps required to complete a financial plan.

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9) Who is less likely to be harmed by inflation?

A) Retired people B) Lenders C) Borrowers D) Fixed-income consumers E) Financial regulators

10) Increased consumer saving and investing is likely to be accompanied by: A) Lower union wages.

B) Higher interest rates.

C) Lower production costs.

D) Lower interest rates.

E) Higher inflation.

11) An investor should expect to receive a risk premium for: A) Higher interest rates.

B) Lower consumer prices.

C) Higher uncertainty about getting his/her money back.

D) Reduced credit ratings.

E) Expected lower inflation.

12) Which of the following would increase the interest rate for a loan?

A) Poor credit rating B) Higher down payment C) Expected lower inflation D) Lower consumer prices E) Short time to maturity

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13) Patrick Guitman recently graduated from college with $20,000 in student loans and $5,000 in

credit card debt. He usually makes minimum payments on his debt and he has been late with three payments in the last year. He wants to buy a new car but was told that his interest rate on a loan would be very high. What is the most likely reason this might be so?

A) General interest rates are very low.

B) His credit rating is below average due to missed payments.

C) He already has a student loan outstanding.

D) Recent graduates are not allowed to have more than $25,000 in debt outstanding.

E) Interest rates must be tied to the CPI.

14) Attempts to increase income through employment are part of the _____________ component

of financial planning.

A) obtaining B) planning C) saving D) borrowing E) spending

15) The 'borrowing' component in a financial plan relates to: A) Acquiring adequate insurance coverage.

B) Investing for long-term growth.

C) Setting up a budget.

D) Obtaining financial resources from employment, investments or ownership.

E) Maintaining control over credit-buying habits.

16) The problem of bankruptcy is associated with overuse and misuse of credit in the

______________ component of financial planning.

A) sharing B) saving C) obtaining D) borrowing E) protecting

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17) The saving component of financial planning focuses on long-term security and includes: A) A regular savings plan for emergencies.

B) A current will.

C) Bankruptcy counseling.

D) A realistic budget for your current financial situation.

E) Minimizing transportation expenses through careful planning.

18) Which of the following short-term goals is stated most clearly using the SMART approach?

A) A. Within the next 6 months, buy a car for less than $15,000.

B) B. Retire in 10 years at age 65 with $2,000,000 in my 401(k) account.

C) C. Purchase a house with a mortgage no greater than $150,000 within 5 years.

D) D. Set up an emergency fund.

E) E. Invest $50 per month for the next 12 years for my nephew's college fund.

19) Which of the following long-term goals is stated most clearly using the SMART approach?

A) A. Buy a car for less than $15,000 within 6 months.

B) B. Retire in 10 years at age 65.

C) C. Purchase a house with a mortgage no greater than $150,000 within 5 years.

D) D. Set up an emergency fund.

E) E. Invest $50 per month for the next 12 years for my nephew's college fund.

20) Which of the following intermediate goals is stated most clearly using the SMART

approach?

A) A. Buy a car for less than $15,000 within 6 months.

B) B. Retire in 10 years at age 65 with $2,000,000 in my 401(k) account.

C) C. Purchase a house within the next 5 years with a mortgage no greater than $150,000.

D) D. Set up an emergency fund.

E) E. Invest $50 per month for the next 12 years for my nephew's college fund.

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21) Which of the following goals contains elements for implementation and measurement?

A) Put money into an investment fund.

B) Reduce credit card debt.

C) Save funds for an annual vacation.

D) Save $100 a month to create a $2,400 emergency fund in 2 years.

E) Spend less each month.

22) The goal of investing $50 per month for the next 12 years for your nephew's college fund is

a(n) __________ goal.

A) short-term B) intermediate C) long-term D) intangible E) durable

23) Many Americans have money problems because of: A) Poor planning and weak money management habits.

B) Too many clearly defined goals.

C) Proper use of credit.

D) Insufficient advertising to make effective decisions.

E) Controlled spending.

24) Susan Smith has a goal of saving $25 per month for a TV. Considering the SMART

approach, Susan’s goal lacks: A) Measurable terms.

B) A realistic perspective.

C) An action orientation.

D) A specific objective.

E) A time frame.

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25) Which of the following is correct?

A) A car purchase is a consumable-product goal.

B) Entertainment is a durable-product goal.

C) Appliances and sporting equipment are intangible-purchase goals.

D) Leisure and education are durable-product goals.

E) Food and clothing are consumable-product goals.

26) _________ goals relate to infrequently purchased, expensive tangible items.

A) Short-term B) Intangible-purchase C) Durable-product D) Consumable-products E) Intermediate

27) To develop financial goals, one should: A) Set several general goals for the short-term.

B) Only set long-term goals after short-term goals have been accomplished.

C) Focus on intermediate goals first.

D) Identify specific, realistic goals that are measurable along with a time frame and an

action plan.

E) Not worry about whether or not the goals can be achieved based on one's income and life situation.

28) The goal of purchasing a long-term care insurance policy would be most appropriate for: A) A young couple without children.

B) A single parent with a preschool daughter.

C) An unmarried couple without children.

D) An older single person with children.

E) A young single individual.

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29) Opportunity cost refers to: A) Money needed for major consumer purchases.

B) What you give up by making a choice.

C) The amount paid for taxes when a purchase is made.

D) Current interest rates.

E) Evaluating different alternatives for financial decisions.

30) Robert Brown is interested in attending a concert next weekend. Unfortunately, he is

scheduled to work. If he finds a substitute for his shift so he can attend the concert, what kind of cost is he incurring?

A) Personal opportunity cost relating to health B) Personal opportunity cost relating to time C) Personal opportunity cost relating to abilities D) Personal opportunity cost relating to knowledge E) Unexpected personal opportunity cost

31) Which of the following is an example of a financial opportunity cost?

A) Renting an apartment near school B) Forgoing wages to attend school C) Organizing income tax records D) Purchasing automobile insurance E) Using a personal computer for financial planning

32) An example of a personal opportunity cost would be: A) Interest lost by using savings to make a purchase.

B) Higher earnings achieved on savings that must be kept on deposit a minimum of six

months.

C) Wages lost due to continuing as a full-time student.

D) Time spent comparing several brands of personal computers.

E) Having to pay a tax penalty due to not having enough withheld from your monthly salary.

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33) Which of the following best describes the concept of the time value of money?

A) Personal opportunity costs such as time lost on an activity B) Financial decisions that require borrowing funds from a financial institution C) Changes in interest rates due to changes in the supply and demand for money in our

economy D) Increases in amounts of money as a result of interest earned E) Changes to demographic trends in our society

34) If I can invest a dollar today and earn interest on it, then it should be worth _________ in the

future.

A) B) C) D) E)

less the same more either less or the same either the same or more

35) To calculate the time value of money, we need to consider all of the following except the: A) Amount of the savings.

B) Annual interest rate.

C) Length of time the money is on deposit.

D) Type of investment.

E) Principal.

36) Future value computations are often referred to as: A) Discounting.

B) Presenting.

C) Compounding.

D) Simple interest.

E) Annuities.

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37) Present value computations are also referred to as: A) Discounting.

B) Forecasting.

C) Compounding.

D) Simple interest.

E) Annuities.

38) Steve Wilson wants to deposit $150 per month into an account earning 4 percent for the next

3 years so he can purchase a used car at that time. What type of computation would he use to determine the amount he will have accumulated for his purchase?

A) Present value of a single amount B) Future value of a single amount C) Simple interest D) Present value of an annuity E) Future value of an annuity

39) Rhonda Miller wants to take out a 4-year loan to purchase a car. What type of computation

would she use to calculate her monthly payments?

A) Present value of a single amount B) Future value of a single amount C) Simple interest D) Present value of an annuity E) Future value of an annuity

40) Tim Taylor received a $500 gift from his grandparents. He wants to invest this money for the

down payment of a house that he plans to purchase in 3 years. What type of computation should he use?

A) Present value of a single amount B) Future value of a single amount C) Simple interest D) Present value of an annuity E) Future value of an annuity

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41) Jennifer Rodriguez plans to attend graduate school in 5 years. She thinks that she will need a

total of $32,000 to pay for school, and she wants to save money each month to reach her goal. What type of computation should she use?

A) Present value of a single amount B) Future value of a single amount C) Simple interest D) Present value of an annuity E) Future value of an annuity

42) Paul Davis wants to deposit a lump sum of money today for a vacation that he plans to take

to Asia after he graduates from graduate school. Which formula should he use to determine the amount of money he will have available for his vacation?

A) Present value of a single amount B) Future value of a single amount C) Simple interest D) Present value of an annuity E) Future value of an annuity

43) The first step of the financial planning process is to: A) Develop financial goals.

B) Implement the financial plan.

C) Determine your current financial situation.

D) Evaluate and revise the financial plan.

E) Create a financial action plan.

44) Making financial decisions related to income involves all of the following except: A) Spending.

B) Saving.

C) Sharing.

D) Taking.

E) Discounting.

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45) Place the following steps for a personal financial plan in the proper order:

1. Review and revise the financial plan 2. Identify alternative courses of action 3. Create and implement your financial action plan 4. Determine your current financial situation 5. Evaluate alternatives 6. Develop your financial goals A) 6, 1, 2, 5, 3, 4.

B) 4, 2, 6, 5, 3, 1.

C) 3, 6, 4, 2, 5, 1.

D) 4, 6, 2, 5, 3, 1.

E) 6, 2, 5, 4, 1, 3.

46) Every decision involves uncertainty, which is referred to as: A) Consequences of choices.

B) Alternative courses of action.

C) Financial goals.

D) Personal values.

E) Evaluating risk.

47) Changes in the cost of money is referred to as ____________ risk.

A) interest rate B) inflation C) income D) personal E) liquidity

48) The rising or falling of prices that causes changes in buying power is referred to as

____________ risk.

A) interest rate B) inflation C) income D) personal E) liquidity

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49) The loss of a job or encountering an illness results in ____________ risk.

A) interest rate B) inflation C) income D) liquidity E) personal

50) The tangible and intangible factors that create a less than desirable situation is referred to as

____________ risk.

A) interest rate B) inflation C) income D) liquidity E) personal

51) The difficulty of converting savings and investments to cash is referred to as ____________

risk.

A) B) C) D) E)

interest rate inflation income personal liquidity

52) Changes in personal, social, and economic factors may require you to: A) Review and revise your financial plan more frequently.

B) Implement your financial action plan.

C) Develop your financial goals.

D) Determine your current financial situation.

E) Create your financial plan of action.

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53) The step in the personal financial planning process that follows immediately after the step

"Create and implement your financial action plan" is: A) Review and revise your financial plan.

B) Identify alternative courses of action.

C) Determine your current financial situation.

D) Evaluate alternatives.

E) Develop your financial goals.

54) Using the services of financial institutions or financial specialists (such as insurance agents,

certified financial planners or investment advisers) to seek relevant information is done in which step in the financial planning process?

A) Develop your financial goals.

B) Review and revise your financial plan.

C) Determine your current financial situation.

D) Evaluate your alternatives.

E) Brainstorm a wishlist of goals.

55) If inflation is expected to be 8 percent, how long will it take for prices to double?

A) 6 years B) 7 years C) 9 years D) 12 years E) 18 years

56) If a $10,000 investment earns interest of $500 in 1 year, what is its rate of return?

A) 5 percent B) 10 percent C) 50 percent D) 75 percent E) 100 percent

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57) If a $10,000 investment earns a 4 percent annual return, what should its value be after 1 year?

A) $100 B) $400 C) $4,000 D) $10,000 E) $10,400

58) If a $10,000 investment earns a 7 percent annual return, what should its value be after 6

years? Use Exhibit 1-A. A) $10,000 B) $10,700 C) $15,000 D) $15,010 E) $15,100

59) If Melinda Miller estimates that her $100 weekly grocery bill will increase at an annual

inflation rate of 4 percent, what should her weekly grocery bill be in 3 years? Use Exhibit 1A. A) $100.00 B) $130.40 C) $112.50 D) $114.00 E) $121.60

60) If you deposit $500 into a certificate of deposit earning 3 percent, what would be your

earnings after 12 months?

A) $5.00 B) $15.00 C) $25.00 D) $30.00 E) $500.00

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61) Randy Hill wants to retire in 20 years with $1,000,000. If he can earn 10 percent per year on

his investments, how much does he need to deposit each year to reach his goal? Use Exhibit 1-B. (Round your answer to the nearest dollar.)

A) $17,460 B) $18,000 C) $5,727 D) $25,000 E) None of these choices are correct.

62) If you begin saving $2,000 a year at 5 percent (from age 22 to age 30 or 9 years), what will

these funds grow to in this time period?

A) $2,000 B) $11,970 C) $18,000 D) $22,054 E) $30,500

63) If you want $1,000 in 3 years and you earn 4 percent on your savings, how much do you

need to deposit now?

A) $885 B) $889 C) $1,000 D) $1,030 E) $1,040

64) Personal financial planning is the process of managing your money to achieve personal

economic satisfaction. ⊚ true ⊚ false

65) A financial plan is an informal report that analyzes past financial decisions. ⊚ true ⊚ false

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66) A financial plan can only be created using a money management software package. ⊚ true ⊚ false

67) Financial plans are only created by financial planners. ⊚ true ⊚ false

68) The life situation of a household includes a combination of personal factors such as age,

income, household size, and personal beliefs. ⊚ true ⊚ false

69) The financial activities for a young, single person will probably be the same as those for an

older couple with no dependent children at home. ⊚ true ⊚ false

70) Inflation is most harmful to people with incomes that are expected to increase. ⊚ true ⊚ false

71) Inflation is a rise in the general level of prices and it reduces the buying power of the dollar. ⊚ true ⊚ false

72) When prices are increasing at a rate of 4 percent, the cost of products will double in about 18

years. ⊚ true ⊚ false

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73) As borrowing by consumers and businesses increases, interest rates are likely to decrease. ⊚ true ⊚ false

74) Planned spending through budgeting is part of the "investing" component of financial

planning activities. ⊚ true ⊚ false

75) Retirement planning includes thinking about your housing situation, recreational activities,

and possible volunteer or part-time work. ⊚ true ⊚ false

76) Short-term goals are usually achieved within the next year or so. ⊚ true ⊚ false

77) Intermediate goals are usually achieved within the next year or so. ⊚ true ⊚ false

78) Purchasing an appliance is an example of a consumable-product goal. ⊚ true ⊚ false

79) Purchasing a car is an example of a durable-product goal. ⊚ true ⊚ false

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80) Opportunity costs refer to money already spent. ⊚ true ⊚ false

81) Personal opportunity costs refer to resources, such as time, health, and energy that are given

up when a choice is made. ⊚ true ⊚ false

82) Interest earned is calculated by multiplying the principal times the time value of money. ⊚ true ⊚ false

83) Risks associated with many financial decisions are easy to identify and evaluate. ⊚ true ⊚ false

84) $500 on deposit at 6 percent for 6 months would earn $20. ⊚ true ⊚ false

85) There are only three methods of calculating time value of money. ⊚ true ⊚ false

86) There are only three possible courses of action when developing alternatives for decision

making. ⊚ true ⊚ false

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87) Financial plans are created by individuals as well as by financial planners or by using a

money management software package. ⊚ true ⊚ false

88) Inflation is most harmful to people with fixed incomes. ⊚ true ⊚ false

89) An opportunity cost is what a person gives up when a choice is made. ⊚ true ⊚ false

90) Short-term goals are usually achieved within three years. ⊚ true ⊚ false

91) Risks associated with many financial decisions are difficult to identify and evaluate. ⊚ true ⊚ false

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Answer Key Test name: ch 1 (2) 1) B 2) C 3) C 4) D 5) A 6) C 7) D 8) B 9) C 10) D 11) C 12) A 13) B 14) A 15) E 16) D 17) A 18) A 19) E 20) C 21) D 22) C 23) A 24) E 25) E 26) C 27) D 28) D 29) B 30) B 31) B 32) D 33) D 34) C 35) D 36) C 37) A

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38) E 39) D 40) B 41) E 42) B 43) C 44) D 45) D 46) E 47) A 48) B 49) C 50) E 51) E 52) A 53) A 54) D 55) C 56) A 57) E 58) D 59) C 60) B 61) A 62) D 63) B 64) TRUE 65) FALSE 66) FALSE 67) FALSE 68) TRUE 69) FALSE 70) FALSE 71) TRUE 72) TRUE 73) FALSE 74) FALSE 75) TRUE 76) TRUE 77) FALSE

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78) FALSE 79) TRUE 80) FALSE 81) TRUE 82) FALSE 83) FALSE 84) FALSE 85) FALSE 86) FALSE 87) TRUE 88) TRUE 89) TRUE 90) FALSE 91) TRUE

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Chapter 2 (1) 1) Which of the following situations describes a person who could be insolvent?

A) Assets $56,200; annual expenses $60,800 B) Assets $78,200; net worth $22,800 C) Liabilities $45,200; net worth $6,800 D) Assets $40,200; liabilities $45,800 E) Annual cash inflows $45,200; liabilities $50,800

2) A family with $65,000 in assets and $39,000 of liabilities would have a net worth of: A) $13,000.

B) $26,000.

C) $39,000.

D) $65,000.

E) $104,000.

3) Given the following information, calculate the net worth:

Assets = $6,400 Cash inflows = $6,050 Cash outflows = $3,400 Liabilities = $2,550 A) $350 B) $850 C) $2,650 D) $2,550 E) $3,850

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4) Given the following information, calculate the debt ratio percentage:(Round your answer to

2 decimal places.)

Liabilities = $37,500 Liquid assets = $7,500 Monthly credit payments = $1,450 Monthly savings = $1,150 Net worth = $92,000 Take-home pay = $3,600 Gross income = $7,400 Monthly expenses = $4,640 A) 40.76% B) 2.59% C) 1.62% D) 40.28% E) 15.54%

5) Given the following information, calculate the current ratio:(Round your answer to 2

decimal places.)

Liquid assets = $6,700 Monthly credit payments = $1,250 Monthly savings = $1,030 Net worth = $86,000 Current liabilities = $2,500 Take-home pay = $3,200 Gross income = $6,200 Monthly expenses = $3,840 A) 38.95 B) 2.68 C) 1.74 D) 39.06 E) 16.61

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6) Given the following information, calculate the liquidity ratio:(Round your answer to 2

decimal places.)

Liabilities = $36,500 Liquid assets = $7,300 Monthly credit payments = $1,400 Monthly savings = $1,120 Net worth = $90,500 Current liabilities = $2,800 Take-home pay = $3,500 Gross income = $7,100 Monthly expenses = $4,440 A) 40.33 B) 2.61 C) 1.64 D) 40.00 E) 15.77

7) Given the following information, calculate the debt-payments ratio:(Round your answer to

2 decimal places.)

Liabilities = $30,500 Liquid assets = $6,100 Monthly credit payments = $1,100 Monthly savings = $940 Net worth = $81,500 Current liabilities = $2,200 Take-home pay = $2,900 Gross income = $5,300 Monthly expenses = $3,240 A) 37.42% B) 2.77% C) 1.88% D) 37.93% E) 17.74%

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8) Given the following information, calculate the savings ratio:(Round your answer to 2

decimal places.)

Liabilities = $41,500 Liquid assets = $8,300 Monthly credit payments = $1,650 Monthly savings = $420 Net worth = $98,000 Current liabilities = $3,300 Take-home pay = $4,000 Gross income = $8,600 Monthly expenses = $5,440 A) 42.35% B) 2.52% C) 1.53% D) 41.25% E) 4.88%

9) Rebecca Wilson budgeted $404 for a new wardrobe in June. She actually spent $451. What is

her budget variance?

A) $47 surplus B) $451 deficit C) $855 deficit D) $47 deficit E) $404 surplus

10) Rebecca Wilson budgeted $1,271 for housing and utilities in July. She actually spent $1,193.

What is her budget variance?

A) $1,193 deficit B) $78 deficit C) $39 deficit D) $78 surplus E) $1,193 surplus

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Answer Key Test name: ch 2 (1) 1) D 2) B 3) E 4) A 5) B 6) C 7) D 8) E 9) D 10) D

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Chapter 2 (2) 1) Money management refers to: A) Preparing personal financial statements.

B) Day-to-day financial activities.

C) Trade-offs that occur with financial decisions.

D) Storing financial records for easy access.

E) Spending money on current living expenses.

2) Which of the following is a component of money management?

A) Storing and maintaining personal financial records and documents B) Creating a balance sheet C) Creating and implementing a plan for spending and saving D) Creating a cash flow statement E) All of these choices are components of money management.

3) A home file should be used to keep: A) All financial documents and records.

B) Financial records for current needs.

C) Documents that require maximum security.

D) Obsolete financial documents.

E) Records that are difficult to replace.

4) Which of the following financial documents would most likely be stored in a safe deposit

box or fireproof home safe?

A) W-2 forms B) Personal financial statements C) Warranties D) Marriage certificates E) Bank statements

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5) Which of the following is most correct?

A) A current budget belongs in your safe deposit box.

B) A warranty belongs in a safe deposit box.

C) Adoption papers belong in a home file.

D) A death certificate should be kept in a home file.

E) Tax records belong in a home file.

6) Which of the following is most correct?

A) Rare coins and stamps belong in a safe deposit box.

B) A marriage certificate should be kept in a home file.

C) W-2s for tax records belong in a safe deposit box.

D) A current budget belongs in your safe deposit box.

E) Adoption papers belong in a home file.

7) Common stock and bond brokerage statements are an example of a(n) ____________ record.

A) investment B) insurance C) estate planning D) tax E) consumer purchase

8) The number of personal financial records a household has to organize may seem

overwhelming. How long should you keep copies of your tax returns?

A) Until you receive your refund B) Until the end of the current year C) Three years D) Seven years E) Permanently

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9) The number of personal financial records a household has to organize may seem

overwhelming. How long should you keep documents relating to the purchase and sale of real estate?

A) Until the mortgage is paid off B) Until you move out of the house C) Three years D) Seven years E) Indefinitely

10) How long should you keep documents relating to investments?

A) No need to since the broker probably has a copy B) As long as you own these items C) Seven years D) Ten years E) Permanently

11) How long should you keep your most current will?

A) No need to since your lawyer probably has a photocopy B) One year C) Three years D) Seven years E) Permanently

12) The main purpose of a personal financial statements is to: A) Report your current financial position.

B) Measure your progress toward financial goals.

C) Maintain information about your financial activities.

D) Provide data for preparing tax forms or applying for credit.

E) Achieve all of the choices.

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13) Which of the following are two personal financial statements that you create yourself?

A) Budget and credit card statements B) Balance sheet and cash flow statement C) Checkbook and budget D) Tax return and mortgage application E) Bank statement and a balance sheet

14) A personal balance sheet reports: A) Amounts budgeted for spending.

B) Income and expenses for a period of time.

C) Earnings on savings and investments.

D) Items owned, amounts owed, and net worth.

E) Family financial goals.

15) The current financial position of an individual or family is best presented in the form of a: A) Budget.

B) Cash flow statement.

C) Balance sheet.

D) Bank statement.

E) Time value of money report.

16) Another name for a statement of financial position is a: A) Balance sheet.

B) Bank statement.

C) Budget.

D) Cash flow statement.

E) Time value of money report.

17) The statement that includes liquid assets, real estate, personal possessions, and investment

assets is known as a: A) Personal balance sheet.

B) Bank statement.

C) Budget.

D) Cash flow statement.

E) Time value of money report.

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18) Items that you own that have a monetary value are referred to as: A) Liabilities.

B) Variable expenses.

C) Net worth.

D) Income.

E) Assets.

19) Which of the following is a liquid asset?

A) Savings/money market accounts B) Cash surrender value of life insurance C) Checking account balance D) Money market accounts E) All of these are liquid assets.

20) When creating a personal balance sheet, which of the following is a real estate asset?

A) Cash value of life insurance B) Vacation property C) Possessions in your home D) Investments for financing children’s educations E) Retirement accounts

21) When creating a personal balance sheet, which of the following is considered to be a personal

possession asset?

A) A five-year-old television set B) A home C) Cash in a checking account D) Retirement accounts E) Vacation property

22) When creating a personal balance sheet, which of the following is an investment asset?

A) Cash surrender value of life insurance B) Checking account C) Personal possessions in your home D) Retirement account such as a 401k E) Vacation property

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23) When creating a personal balance sheet, which of the following is a current liability?

A) Checking account B) 30-year mortgage C) Educational loan D) Five-year home equity loan E) Medical bill

24) The amount you would have left if all assets were sold and all debts were paid in full is

called your: A) Net assets.

B) Net worth.

C) Total liabilities.

D) Total income.

E) Budgeted expenses.

25) The equation to calculate net worth is: A) Assets − Cash outflows = Net worth.

B) Cash inflows − Liabilities = Net worth.

C) Cash inflows − Cash outflows = Net worth.

D) Assets − Liabilities = Net worth.

E) Cash inflows + Liabilities = Net worth.

26) The inability to pay debts when they are due because liabilities far exceed the value of assets

is called: A) Liabilities.

B) Insolvency.

C) Net worth.

D) Cash flow.

E) Liquid assets.

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

A) Assets $56,000; annual expenses $60,000 B) Assets $78,000; net worth $22,000 C) Liabilities $45,000; net worth $6,000 D) Assets $40,000; liabilities $55,000 E) Annual cash inflows $45,000; liabilities $50,000

28) All of the following are ways that households can increase their net worth except: A) Increase their savings.

B) Reduce spending.

C) Increase value of investments.

D) Decrease their debt ratio.

E) Increase their debt ratio.

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

A) Decrease saving by $50 per month.

B) Increase the amount borrowed for major purchases.

C) Decrease amount owed on credit cards.

D) Invest in possessions whose values do not increase.

E) Increase spending by $5 per day.

30) Which of the following is a cash inflow?

A) Payment for rent B) Purchase of groceries C) Payment for loan D) Income from employment E) Payment for medical expenses

31) Which of the following appears as a cash outflow on a cash flow statement?

A) Liquid assets B) Variable expenses C) Net worth D) Personal possessions E) Real estate assets

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32) Which of the following appears as a cash outflow on a cash flow statement?

A) Home value B) Loan payment C) Net worth D) Balance of mortgage E) Cash value of life insurance

33) Financial experts recommend monthly savings of ____ of gross income.

A) 0% B) 5-10% C) 20% D) 25-35% E) 50%

34) Financial experts recommend a debt/payments ratio of less than ____ of take-home pay.

A) 0% B) 5-10% C) 20% D) 25-35% E) 50%

35) A current ratio of 2 means: A) 2% from each paycheck is available for savings.

B) The minimum payment for a credit card is 2% of the balance.

C) Two months of living expenses are available in case of emergency.

D) Net worth is twice the amount of debt.

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

36) A debt ratio of 0.5 indicates: A) The balance on the mortgage equals 50 percent of the value of the home.

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

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

D) For every dollar of take-home pay, monthly credit payments equal $0.50.

E) For every dollar of assets, monthly credit payments equal $0.50.

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37) Which of the following ratios shows the relationship between debt and net worth?

A) Debt ratio B) Current ratio C) Household ratio D) Debt-payments ratio E) Savings ratio

38) Which of the following ratios indicates that liquid assets are available to pay current

liabilities for a household?

A) Debt ratio B) Current ratio C) Liquidity ratio D) Debt-payments ratio E) Savings ratio

39) Which of the following ratios indicates the number of months in which living expenses can

be paid if an emergency arises?

A) Debt ratio B) Current ratio C) Liquidity ratio D) Debt-payments ratio E) Savings ratio

40) 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)?

A) Debt ratio B) Current ratio C) Liquidity ratio D) Debt-payments ratio E) Savings ratio

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41) Which of the following ratios shows the relationship between gross income and money

saved?

A) B) C) D) E)

Debt ratio Current ratio Liquidity ratio Debt-payments ratio Savings ratio

42) All of the following are sources of income except: A) Interest earned on savings.

B) Commissions.

C) Dividends.

D) Salary.

E) Social Security taxes.

43) Which of the following is a deduction to determine take-home pay?

A) Interest earned on savings B) Commissions C) Dividends D) Housing, food and other living expenses E) Social Security taxes

44) Disposable income equals: A) Gross income.

B) The amount a person or household has to spend.

C) Money left over after paying for housing, food, and other necessities.

D) Social Security taxes.

E) The amount being saved each month.

45) Discretionary income equals: A) Gross income.

B) Take-home pay.

C) The amount being saved each month.

D) Money left over after paying for housing, food, and other necessities.

E) Social Security taxes.

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46) The money left over after paying for housing, food, and other necessities is called: A) Monthly savings.

B) Discretionary income.

C) Disposable income.

D) Gross income.

E) Take-home pay.

47) Take-home pay is also called: A) Monthly savings.

B) Discretionary income.

C) Net pay.

D) Gross income.

E) Deductions.

48) An example of a variable expense is a(n): A) Mortgage or rent payment.

B) Installment loan payment.

C) Monthly train ticket for commuting to work.

D) Monthly allocation for life insurance.

E) Electric bill.

49) All of the following are fixed expenses except: A) A mortgage or rent payment.

B) An installment loan payment.

C) A monthly train ticket for commuting to work.

D) A monthly allocation for life insurance.

E) Utilities.

50) An example of fixed expenses are: A) Medical expenses.

B) Gift expenditures.

C) Utilities costs.

D) Home rental payments.

E) Recreation expenses.

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51) Which of the following is NOT a main purpose of a budget?

A) It helps you to live within your income.

B) It allows you to spend your money without financial worry.

C) It helps you reach your financial goals.

D) It helps you to prepare for financial emergencies.

E) It enables you to develop wise financial management habits.

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

A) You should include in income the bonuses and gifts you expect to receive.

B) It is easier to create a budget if your earnings vary by season.

C) Common financial problems can be maximized through budgeting.

D) Numbers in the budget are estimates.

E) You should overestimate your income for next year.

53) When creating a budget, it is important to: A) Save the amount you have left at the end of the month.

B) Set aside savings after your variable expenses are paid.

C) Save an amount no more than 3 percent of your annual income in an emergency fund.

D) Spend the amount of money you have budgeted in each category.

E) "Pay yourself first" by setting aside savings before other expenses are budgeted.

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

called the: A) Budget variance.

B) Cash outflow.

C) Income.

D) Cash inflow.

E) Variable expense.

55) A budget deficit results when a person's or family's: A) Actual spending is less than planned spending.

B) Assets exceed liabilities.

C) Actual spending equals planned spending.

D) Actual spending exceeds planned spending.

E) Net worth decreases.

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56) After having established a spending plan, it is important to: A) File the budget in a safe deposit box.

B) Compare it to the previous budget.

C) Keep track of your actual income and expenses.

D) Pay attention only to expenses that are more than 10 percent of your salary.

E) Disregard most of it since budgets are just estimates.

57) When household budgets must be cut, which of the following categories would be most

difficult to cut?

A) Vacations B) Lawn services C) Cable D) Charitable donations E) Auto insurance

58) A budget system that involves envelopes, folders, or containers to hold money or slips of

paper is called a(n): A) Mental budget.

B) Physical budget.

C) Written budget.

D) Digital budget.

E) Allocated budget.

59) A budget system that can be kept on notebook paper or accounting paper is called a(n): A) Mental budget.

B) Physical budget.

C) Written budget.

D) Digital budget.

E) Allocated budget.

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60) The document that would tell you what you received and spent over the past month is the: A) Balance sheet.

B) Cash flow statement.

C) Budget.

D) Bank statement.

E) Credit card statement.

61) The document that would be most useful to plan spending and saving to achieve financial

goals is the: A) Balance sheet.

B) Monthly investment brokerage statement.

C) Budget.

D) Bank statement.

E) Credit card statement.

62) The document that would report your current financial position is the: A) Balance sheet.

B) Cash flow statement.

C) Budget.

D) Bank statement.

E) Credit card statement.

63) A family with $100,000 in assets and $60,000 of liabilities would have a net worth of: A) $20,000.

B) $40,000.

C) $60,000.

D) $100,000.

E) $160,000.

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64) Given the following information, calculate the net worth:

Assets = $8,000 Cash inflows = $6,000 Cash outflows = $4,500 Liabilities = $5,000 A) $500 B) $1,500 C) $2,000 D) $3,500 E) $3,000

65) Given the following information, calculate the debt ratio percentage:

Liabilities = $25,000 Liquid assets = $5,000 Monthly credit payments = $800 Monthly savings = $760 Net worth = $75,000 Take-home pay = $2,300 Gross income = $3,500 Monthly expenses = $2,050 A) 33.33% B) 30.00% C) 3.00% D) 3.20% E) 8.20%

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66) Given the following information, calculate the current ratio:

Liquid assets = $5,000 Monthly credit payments = $800 Monthly savings = $760 Net worth = $75,000 Current liabilities = $2,000 Take-home pay = $2,300 Gross income = $3,500 Monthly expenses = $2,050 A) 2.44 B) 2.50 C) 6.25 D) 0.16 E) 0.41

67) Given the following information, calculate the liquidity ratio:

Liabilities = $25,000 Liquid assets = $5,000 Monthly credit payments = $800 Monthly savings = $760 Net worth = $75,000 Current liabilities = $2,600 Take-home pay = $2,300 Gross income = $3,500 Monthly expenses = $2,050 A) 0.16 B) 0.41 C) 2.44 D) 2.50 E) 6.25

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68) Given the following information, calculate the debt-payments ratio:

Liabilities = $25,000 Liquid assets = $5,000 Monthly credit payments = $800 Monthly savings = $760 Net worth = $75,000 Current liabilities = $2,000 Take-home pay = $2,300 Gross income = $3,500 Monthly expenses = $2,050 A) 33.79% B) 3.06% C) 2.40% D) 34.78% E) 21.71%

69) Given the following information, calculate the savings ratio:

Liabilities = $25,000 Liquid assets = $5,000 Monthly credit payments = $800 Monthly savings = $760 Net worth = $75,000 Current liabilities = $2,000 Take-home pay = $2,300 Gross income = $3,500 Monthly expenses = $2,050 A) 33.79% B) 3.06% C) 2.40% D) 34.78% E) 21.71%

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70) Rebecca Wilson budgeted $395 for a new wardrobe in June. She actually spent $425. What is

her budget variance?

A) $25 deficit B) $30 deficit C) $425 deficit D) $25 surplus E) $30 surplus

71) Rebecca Wilson budgeted $1,200 for housing and utilities in July. She actually spent $1,160.

What is her budget variance?

A) $1,160 deficit B) $40 deficit C) $60 deficit D) $40 surplus E) $1,160 surplus

72) Money management refers to day-to-day financial activities necessary to manage current

personal economic resources while working toward long-term financial security. ⊚ true ⊚ false

73) Money management refers to annual financial activities necessary to manage personal

economic resources. ⊚ true ⊚ false

74) An organized system of financial records provides a basis for reducing credit card usage. ⊚ true ⊚ false

75) A budget is a record of how a person or family has spent money. ⊚ true ⊚ false

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76) Some people keep various documents and valuables in safe deposit boxes in banks and other

financial institutions because the safety of the contents of these boxes is absolutely foolproof. ⊚ true ⊚ false

77) In an organized system of financial records, credit card records belong in a safe deposit box. ⊚ true ⊚ false

78) In an organized system of financial records, birth and marriage certificates belong in a safe

deposit box. ⊚ true ⊚ false

79) In an organized system of financial records, medical information belongs in a home file. ⊚ true ⊚ false

80) Financial documents that you may need quick access to should be kept in a safe deposit box. ⊚ true ⊚ false

81) In an organized system of financial records, investment records belong in a home file, home

computer, or online. ⊚ true ⊚ false

82) Copies of tax returns and supporting data should be saved for 10 years. ⊚ true ⊚ false

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83) Birth certificates, wills, and Social Security data should be kept for up to seven years. ⊚ true ⊚ false

84) The two personal financial statements that you create yourself are the personal balance sheet

and a credit card payoff statement. ⊚ true ⊚ false

85) The current financial position of an individual or family is a common starting point for

financial planning. ⊚ true ⊚ false

86) Net worth is the amount owed to others. ⊚ true ⊚ false

87) Current liabilities are the debts you must pay within a short time, usually less than a year. ⊚ true ⊚ false

88) Liquid assets can be easily converted to cash and include money in checking accounts and all

personal possessions. ⊚ true ⊚ false

89) A cash flow statement uses this equation: Assets − Liabilities = Net worth. ⊚ true ⊚ false

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90) A cash flow statement uses this equation: Total cash received during the time period − Cash

outflows during the time period = Cash surplus (or deficit). ⊚ true ⊚ false

91) When completing a cash flow statement, deductions are subtracted from gross salary to

determine take-home pay. ⊚ true ⊚ false

92) When completing a cash flow statement, take-home pay less deductions equals gross salary. ⊚ true ⊚ false

93) Financial advisers suggest that an emergency fund should cover one to two months of living

expenses. ⊚ true ⊚ false

94) When creating a budget, it is important to save the amount you have left at the end of the

month. ⊚ true ⊚ false

95) One method to spend more money is to deduct an amount automatically from your salary in a

direct deposit system. ⊚ true ⊚ false

96) One method to save more money is to write a check each payday and deposit it in a separate

savings account. ⊚ true ⊚ false

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97) Annual investment account statements should be shredded. ⊚ true ⊚ false

98) A mortgage is an amount borrowed to buy a television or other personal possession. ⊚ true ⊚ false

99) If a household has $195,000 of assets and $75,000 of liabilities, then net worth would be

$125,000. ⊚ true ⊚ false

100)

A balance sheet reports what an individual or family owns and owes. ⊚ true ⊚ false

101)

A high debt ratio is best. ⊚ true ⊚ false

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Answer Key Test name: ch 2 (2) 1) B 2) E 3) B 4) D 5) E 6) A 7) A 8) D 9) E 10) B 11) E 12) E 13) B 14) D 15) C 16) A 17) A 18) E 19) E 20) B 21) A 22) D 23) E 24) B 25) D 26) B 27) D 28) E 29) C 30) D 31) B 32) B 33) B 34) C 35) E 36) B 37) A

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38) B 39) C 40) D 41) E 42) E 43) E 44) B 45) D 46) B 47) C 48) E 49) E 50) D 51) B 52) D 53) E 54) A 55) D 56) C 57) E 58) B 59) C 60) B 61) C 62) A 63) B 64) E 65) A 66) B 67) C 68) D 69) E 70) B 71) D 72) TRUE 73) FALSE 74) FALSE 75) FALSE 76) FALSE 77) FALSE

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78) TRUE 79) TRUE 80) FALSE 81) TRUE 82) FALSE 83) FALSE 84) FALSE 85) TRUE 86) FALSE 87) TRUE 88) FALSE 89) FALSE 90) TRUE 91) TRUE 92) FALSE 93) FALSE 94) FALSE 95) FALSE 96) TRUE 97) FALSE 98) FALSE 99) FALSE 100) TRUE 101) FALSE

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Chapter 3 (1) 1) Janet is completing her federal income taxes for the year and has identified the amounts

listed here. How much can she rightfully deduct? (Assume itemized deductions) AGI: $43,500 Medical and dental expenses: $1,250 State income taxes: $1,150 Mortgage interest: $7,600 Qualified charitable contributions: $1,550 A) $3,950 B) $7,600 C) $9,150 D) $10,300 E) $11,550

2) 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? (Assume itemized deductions) AGI: $82,500 Medical and dental expenses: $9,250 State income taxes: $3,750 Mortgage interest: $10,500 Qualified charitable contributions: $1,500 A) $15,750 B) $16,750 C) $25,000 D) $21,250 E) $57,500

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3) Using the following table, calculate the taxes for an individual with taxable income of

$30,800.

10% 12% 22% 24% 32% 35% 37% A) B) C) D) E)

Up to $9,875 $9,876–$40,125 $40,126–$85,525 $85,526–$163,300 $163,301–$207,350 $207,351–$518,400 Over $518,401

$2,697.00 $3,498.50 $12,571.95 $30,800.00 $9,874.95

4) Using the following table, calculate the taxes for an individual with taxable income of

$35,000.

10% 12% 22% 24% 32% 35% 37% A) B) C) D) E)

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Up to $9,875 $9,876–$40,125 $40,126–$85,525 $85,526–$163,300 $163,301–$207,350 $207,351–$518,400 Over $518,401

$1,450.50 $2,479.05 $4,002.50 $5,250.00 $7,029.40

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5) Using the following table, calculate the taxes for an individual with taxable income of

$51,000.

10% 12% 22% 24% 32% 35% 37% A) B) C) D) E)

Up to $9,875 $9,876–$40,125 $40,126–$85,525 $85,526–$163,300 $163,301–$207,350 $207,351–$518,400 Over $518,401

$9,775 $7,010 $23,687 $51,000 $7,346

6) If Jack was in a 25% tax bracket and received a $2,000 tax deduction, by how much would

his taxes be reduced?

A) $50 B) $100 C) $500 D) $1,000 E) $2,000

7) If Diane was in a 25% tax bracket and received a $2,600 tax credit, by how much would her

taxes be reduced?

A) $65.00 B) $130.00 C) $650.00 D) $1,300.00 E) $2,600.00

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8) George Franklin paid taxes of $4,650 on a taxable income of $34,000. What was his average

tax rate?

A) 10.63% B) 13.68% C) 14.12% D) 23.53% E) 26.35%

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Answer Key Test name: ch 3 (1) 1) 2) 3) 4) 5) 6) 7) 8)

D B B C B C E B

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Chapter 3 (2) 1) A worker's primary goal should be to: A) Pay his or her taxes using estimates for income and deductions.

B) Pay no income taxes.

C) Pay the average tax rate for people working in his or her industry.

D) Pay his or her fair share of taxes while taking advantage of appropriate tax benefits.

E) Pay no taxes of any type.

2) Which of the following is NOT a tax that most people pay?

A) Federal taxes on earnings B) Federal taxes on possessions C) Local taxes on property D) State taxes on purchases

3) A tax due on the purchase of gasoline is called a(n): A) Estate tax.

B) Excise tax.

C) Income tax.

D) Real estate property tax.

E) Inheritance tax.

4) A tax imposed on the value of a person's property at the time of death is called a(n): A) Estate tax.

B) Excise tax.

C) Income tax.

D) Real estate property tax.

E) Sales tax.

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5) This tax is a major financial planning factor for most people because it is sometimes imposed

at the federal, state, and local levels.

A) Estate tax B) Excise tax C) Income tax D) Real estate property tax E) Sales tax

6) The tax that is a major source of revenue for local governments is called a(n): A) Estate tax.

B) Gift tax.

C) Income tax.

D) Real estate property tax.

E) Sales tax.

7) Taxes on earnings that fund old age, survivor, and disability insurance benefits are called: A) Estate taxes.

B) Excise taxes.

C) Social Security taxes.

D) Real estate property taxes.

E) Sales taxes.

8) The amount levied on the value of property bequeathed by a deceased person is: A) Inheritance tax.

B) Excise tax.

C) Social Security tax.

D) Real estate property tax.

E) Sales tax.

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9) The maximum amount that an individual can give another in a year without being subject to

estate taxes is: A) Unlimited, since all gifts are taxable.

B) $10,000.

C) $14,000.

D) $15,000.

E) Zero, since no gifts are taxable.

10) You may be required to make estimated tax payments if: A) You receive a paycheck with taxes withheld.

B) You do not have interest income from savings.

C) You have no pension payments.

D) You are an independent contractor.

E) You have no royalties.

11) When calculating federal income taxes, "gross income" includes all of the following except: A) Earned income.

B) Alimony.

C) Investment income.

D) Earned income credit.

E) Passive income.

12) When calculating federal income taxes, what increases "gross income"?

A) Exclusions B) Tax-exempt income C) Tax-deferred income D) Alimony received E) Tax deductions

13) Income that is not subject to tax is called: A) Adjusted gross income.

B) Earned income.

C) Passive income.

D) Tax-deferred income.

E) Tax-exempt income.

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14) Income that is taxed at a later date is: A) Adjusted gross income.

B) Earned income.

C) Exclusions from income.

D) Tax-deferred income.

E) Tax-exempt income.

15) Gross income less adjustments to income equals: A) Adjusted gross income.

B) Earned income.

C) Exclusions from income.

D) Tax-deferred income.

E) Tax-exempt income.

16) Fees, tips, and bonuses are forms of: A) Passive income.

B) Earned income.

C) Exclusions from income.

D) Tax-deferred income.

E) Tax-exempt income.

17) Gross (or total) income includes: A) Exclusions.

B) Tax deductions.

C) Tax-deferred income.

D) Passive income.

E) Tax-exempt income.

18) Joseph needs to complete his income taxes for the year. He has already calculated his

adjusted gross income. What does he need to do next?

A) Add his tax-exempt income.

B) Subtract his itemized deductions.

C) Add his tax credits.

D) Subtract his tax-exempt income.

E) Add his tax exemptions.

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19) Adjustments to income include all of the following except: A) Alimony payments.

B) Contributions to a Keogh retirement plan.

C) Traditional IRA contributions.

D) Charity contributions.

E) Penalties for early withdrawal of savings.

20) As of 2021, taxpayers can only deduct expenses that are greater than 10% of adjusted gross

income for: A) Contributions to charitable organizations.

B) Mortgage interest.

C) Medical and dental expenses.

D) Miscellaneous expenses.

E) Taxes.

21) Athena wants to determine if she should itemize her deductions. She has identified several

possible deductions. Which of the following is NOT a proper itemized deduction?

A) Contributions to charitable organizations B) Mortgage interest C) Medical and dental expenses that exceed 10% of AGI D) Miscellaneous expenses less than 2% of AGI E) State income taxes

22) Shannon is working on her federal income tax form and wants to determine if she should

itemize her deductions. She has identified several possible deductions. Which of the following is an acceptable deduction?

A) $10,000 gift to her cousin B) Credit card interest C) Medical and dental expenses that exceed 10% of AGI D) Miscellaneous expenses that exceed 2% of AGI E) Moving expenses for a new job that is 25 miles from her old home

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23) Fred has been completing his own tax returns for years. The IRS has recently contacted him

with questions about some of his prior returns. How many years back is he responsible for providing documentation?

A) Until he files his returns B) 3 years C) 6 years D) 10 years E) 15 years

24) In 2021, the U.S. federal tax tables included tax rates of: A) 0%, 10%, 20%, 30%, 40%, and 50%.

B) 7%, 15%, 30%, 33%, 38%, and 52%.

C) 0%, 25%, 50%, and 75%.

D) 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

E) 0%, 5%, 20%, 30%, and 50%.

25) The tax based on the total tax due divided by taxable income is called the: A) AMT. B) Average tax rate.

C) Income tax rate.

D) Marginal tax rate.

E) Total tax rate.

26) The tax designed to ensure that those who receive tax breaks also pay their fair share of taxes

is called the: A) AMT. B) Average tax rate.

C) Income tax rate.

D) Marginal tax rate.

E) Total tax rate.

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27) The rate used to calculate the tax due on the next dollar of income is referred to as the: A) AMT. B) Average tax rate.

C) Income tax rate.

D) Marginal tax rate.

E) Total tax rate.

28) 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: A) Alternative minimum tax.

B) Earned-income credit.

C) Itemized deduction credit.

D) Student deduction.

E) Withholding credit.

29) Which of the following is NOT a tax credit?

A) Adoption tax credit B) Domestic tax credit C) Earned-income credit D) Foreign tax credit E) Savers credit

30) Recent tax credits include all of the following except the: A) Earned-income credit.

B) Foreign tax credit.

C) Adoption tax credit.

D) AMT tax credit.

E) Savers credit.

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31) At the end of the year, employees receive a ____ form that reports annual earnings and the

amounts deducted for taxes from their employers.

A) 1040 B) 1099 C) W-2 D) W-4 E) Schedule A

32) At the end of the year, Xavier received a form from his employer that reported annual

earnings and the amounts deducted for taxes. That form is called a: A) 1040.

B) 1099.

C) W-2.

D) W-4.

E) Schedule A.

33) At the end of the year, Yvonne received a form from her bank that reported income from her

savings. That form is called a: A) 1040.

B) 1099.

C) W-2.

D) W-4.

E) Schedule A.

34) At the end of the year, Walter received a form that showed his payments from independent

contracting. That form is called a: A) 1040.

B) 1099.

C) W-2.

D) W-4.

E) Schedule A.

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35) 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?

A) 1040 B) 1099 C) 4868 D) W-2 E) W-4

36) Nancy is married to Jerry and needs to complete her tax form. They both earn about the same

amount of money each year. What filing status would be best for them?

A) Single B) Married, filing a joint return C) Head of household D) Qualifying widow or widower E) Married, filing individually

37) Bob was married to Sandy, and they have a 12-year-old son. Sandy passed away last year.

Bob needs to complete his federal income taxes for the year. What filing status could he use for 2 years after the death of his spouse?

A) Single B) Married, filing a joint return C) Head of household D) Qualifying widow or widower E) Married, filing individually

38) Peter filed his federal income taxes, but he needs to make a correction to his income. Which

form should he use?

A) 1040EZ B) 1040A C) 1040 D) 1040X E) 1040Z

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39) Amanda and Jack are working on their taxes and need to determine which form to file. They

had wages, interest, and dividends. In addition, they bought a house this past year and are thinking of itemizing their deductions. Which form should they use?

A) 1040EZ B) 1040A C) 1040 D) 1040X E) 1040Z

40) The major sections of Form 1040 include all of the following except: A) Filing status and exemptions.

B) Adjustments to income.

C) Tax credits.

D) Signature.

E) All of these are major sections of Form 1040.

41) Individuals can file their federal taxes using all of the following except: A) Tax preparation software to file online.

B) Tax preparation software to print and mail.

C) Electronic filing using Free File Alliance.

D) Delivery in person.

E) All of these can be used.

42) Tax assistance sources include all of the following except: A) IRS publications.

B) IRS phone hotline.

C) The Ernst & Young Tax Guide.

D) The Internet.

E) All of these are tax assistance sources.

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43) According to Tax Service Warnings, who is responsible for supplying accurate and complete

information for completing a tax return?

A) Professional tax preparer B) IRS enrolled agent C) Taxpayer D) Taxpayer's dependents E) Taxpayer's attorney

44) An IRS agent visited Henry's home to verify some information on his tax return. This visit

was called a(n): A) Correspondence audit.

B) Office audit.

C) Home audit.

D) Field audit.

E) Detailed audit.

45) Annie was required to clarify or document minor questions about her tax form by a mail

inquiry. She participated in a(n): A) Correspondence audit.

B) Office audit.

C) Home audit.

D) Field audit.

E) Detailed audit.

46) If Brenda wants to pay her fair share of taxes, no more and no less, she should practice: A) Tax evasion.

B) Tax avoidance.

C) Tax elimination.

D) Tax maximization.

E) Tax acceleration.

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47) 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?

A) Accelerate receipt of income B) Delay deductions C) Practice tax evasion D) Accelerate deductions E) None of these will allow her to minimize her taxes.

48) David thinks that his salary and tax rate for next year will be higher than for this year. What

step should he take minimize taxes for this year and next year?

A) Delay receipt of income B) Delay filing taxes C) Accelerate receipt of income D) Accelerate deductions E) None of these will allow him to minimize his taxes.

49) Which of the following is NOT an action that can reduce your taxes?

A) Owning a home B) Taking out a consumer loan C) Paying certain work expenses such as union dues D) Depositing money into a flexible spending account (FSA) E) Investing in municipal bonds

50) All of the following can reduce your taxes today except investing in: A) Municipal bonds.

B) A tax-deferred annuity.

C) A Section 529 savings plan.

D) A 401(k) plan.

E) A Roth IRA.

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51) Evan is not concerned about immediate tax benefits but instead wants his investment to grow

in value on a tax-free basis. Which of these would be the best for him to invest in today?

A) Municipal bonds B) A tax-deferred annuity C) A Section 529 savings plan D) A 401(k) plan E) A Roth IRA

52) The maximum that an individual can contribute to a Roth IRA for the 2020 year is: A) $1,000.

B) $3,000.

C) $6,000.

D) $10,000.

E) $15,500.

53) The maximum that an individual can contribute to a Coverdell Education Savings Account

each year is: A) $1,000.

B) $2,000.

C) $3,000.

D) $5,000.

E) $15,500.

54) An advantage of investing in a 401(k) plan is the: A) Ability to invest up to 25% of your annual income.

B) Opportunity to save $25,000 per year.

C) Possibility of receiving an employer match on your contributions.

D) Ability to pay taxes on distributions.

E) Ability to withdraw contributions before age 55 without penalty.

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55) Janet is completing her federal income taxes for the year and has identified the amounts

listed here. How much can she rightfully deduct? (Assume itemized deductions) AGI: $42,000 Medical and dental expenses: $1,100 State income taxes: $1,000 Mortgage interest: $7,000 Qualified charitable contributions: $1,250 A) $3,350 B) $7,000 C) $8,250 D) $9,250 E) $10,350

56) 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? (Assume itemized deductions) AGI: $80,000 Medical and dental expenses: $9,000 State income taxes: $3,500 Mortgage interest: $9,500 Qualified charitable contributions: $1,000 A) $14,000 B) $15,000 C) $20,000 D) $23,000 E) $57,000

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57) Using the following table, calculate the taxes for an individual with taxable income of

$20,800.

10% 12% 22% 24% 32% 35% 37% A) B) C) D) E)

Up to $9,875 $9,876–$40,125 $40,126–$85,525 $85,526–$163,300 $163,301–$207,350 $207,351–$518,400 Over $518,401

$850.50 $2,298.50 $5,175 $6,025.50 $20,800

58) Using the following table, calculate the taxes for an individual with taxable income of

$30,000.

10% 12% 22% 24% 32% 35% A) B) C) D) E)

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Up to $9,875 $9,876–$40,125 $40,126–$85,525 $85,526–$163,300 $163,301–$207,350 $207,351–$518,400

$850.50 $2,125 $3,402.50 $4,500 $6,025

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59) Using the following table, calculate the taxes for an individual with taxable income of

$45,000.

10% 12% 22% 24% 32% 35% A) B) C) D) E)

Up to $9,875 $9,876–$40,125 $40,126–$85,525 $85,526–$163,300 $163,301–$207,350 $207,351–$518,400

$6,025.50 $5,690.00 $8,625 $20,900.25 $45,000.

60) If Jack was in a 25% tax bracket and received a $1,000 tax deduction, by how much would

his taxes be reduced?

A) $25 B) $50 C) $250 D) $500 E) $1,000

61) If Diane was in a 25% tax bracket and received a $1,000 tax credit, by how much would her

taxes be reduced?

A) $25 B) $50 C) $250 D) $500 E) $1,000

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62) George Franklin paid taxes of $4,375 on a taxable income of $32,000. What was his average

tax rate?

A) 10% B) 13.7% C) 15% D) 25% E) 28%

63) The types of tax services available that offer professional tax assistance include: A) National Firms (such as H&R Block) B) Enrolled agents C) Accountants D) Attorneys E) All of these choices are correct.

64) The tax credit for dependents under the age of 17 is: A) $1,000.

B) $1,500.

C) $2,000.

D) $2,500.

E) $10,000.

65) “Tax Freedom Day" represents how long the average person works to pay her or his taxes

each year. ⊚ true ⊚ false

66) An example of an excise tax is Social Security. ⊚ true ⊚ false

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67) Individuals are allowed to give money or items of any value to a person without being

subject to estate taxes. ⊚ true ⊚ false

68) Amounts given for tuition payments or medical expenses are not subject to gift taxes. ⊚ true ⊚ false

69) Determining adjusted gross income is the final step in calculating federal income tax. ⊚ true ⊚ false

70) Cash and prizes won on television game shows are subject to both federal and state taxes. ⊚ true ⊚ false

71) Adjusted gross income is increased by the itemized or standard deduction. ⊚ true ⊚ false

72) When Tom calculates his taxable income, he should subtract his tax credits from adjusted

gross income. ⊚ true ⊚ false

73) The itemized deduction allowed for an individual 65 and older is higher than the itemized

deduction for a younger taxpayer. ⊚ true ⊚ false

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74) When Marissa completes her taxes, she can include her qualified dependent children, her

husband, and herself as exemptions. ⊚ true ⊚ false

75) Tax rate schedules list average tax rates. ⊚ true ⊚ false

76) The average tax rate is the tax paid on the next dollar of taxable income. ⊚ true ⊚ false

77) All individuals with taxable income are subject to the AMT calculation. ⊚ true ⊚ false

78) A tax credit has a full dollar effect in lowering taxes. ⊚ true ⊚ false

79) A tax credit reduces the taxable income on which the tax liability is computed. ⊚ true ⊚ false

80) If your tax payments are less than the amount of income tax you owe, you are entitled to a

refund. ⊚ true ⊚ false

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81) Individuals who have high income reported on Form 1099 may be required to pay estimated

tax payments. ⊚ true ⊚ false

82) Federal income tax returns must typically be filed by April 1 of each year. ⊚ true ⊚ false

83) Form 4868 allows a taxpayer to obtain a six-month automatic extension on filing and paying

federal taxes without penalty. ⊚ true ⊚ false

84) All citizens of the United States are required to file a federal income tax return if their

income falls below a certain level. ⊚ true ⊚ false

85) Most states do not require state income taxes. ⊚ true ⊚ false

86) Using tax software typically will not save a taxpayer any time when preparing Form 1040. ⊚ true ⊚ false

87) The IRS has made online filing free for millions of taxpayers through the Free File Alliance. ⊚ true ⊚ false

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88) Tom needs to complete his taxes. He should be able to find a tax preparation service to

complete his simple tax return for as little as $15. ⊚ true ⊚ false

89) One of the most frequent filing errors is signing the return. ⊚ true ⊚ false

90) Some tax disputes have gone to the U.S. Supreme Court. ⊚ true ⊚ false

91) One of the best tax shelters is owning a car. ⊚ true ⊚ false

92) Interest paid on a home equity loan is not deductible. ⊚ true ⊚ false

93) Contributions to a Keogh or 401(k) are tax-exempt. ⊚ true ⊚ false

94) Every taxpayer receives at least the standard deduction, a set amount on which no taxes are

paid. ⊚ true ⊚ false

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95) A taxpayer less than 65 years old can only deduct medical and dental expenses greater than

10% of AGI starting in 2021. ⊚ true ⊚ false

96) For 2020, the seven-rate system for federal income tax ranges from 10% to 37%. ⊚ true ⊚ false

97) A person with taxable income of $40,000 and a total tax bill of $4,200 would have an

average tax rate of 15%. ⊚ true ⊚ false

98) Social Security is an example of a tax on earnings. ⊚ true ⊚ false

99) Individuals are allowed to give money or items valued at $14,000 or less in a year to a person

without being subject to estate taxes. ⊚ true ⊚ false

100)

Adjusted gross income is reduced by the itemized or standard deduction. ⊚ true ⊚ false

101)

Tax rate schedules show marginal tax rates. ⊚ true ⊚ false

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Answer Key Test name: ch 3 (2) 1) D 2) B 3) B 4) A 5) C 6) D 7) C 8) A 9) D 10) D 11) D 12) D 13) E 14) D 15) A 16) B 17) D 18) B 19) D 20) C 21) D 22) C 23) C 24) D 25) B 26) A 27) D 28) B 29) B 30) D 31) C 32) C 33) B 34) B 35) C 36) B 37) D

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38) D 39) C 40) E 41) D 42) E 43) C 44) D 45) A 46) B 47) D 48) C 49) B 50) E 51) E 52) C 53) B 54) C 55) D 56) B 57) B 58) C 59) B 60) C 61) E 62) B 63) E 64) C 65) TRUE 66) FALSE 67) FALSE 68) TRUE 69) FALSE 70) TRUE 71) FALSE 72) FALSE 73) FALSE 74) TRUE 75) FALSE 76) FALSE 77) FALSE

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78) TRUE 79) FALSE 80) FALSE 81) TRUE 82) FALSE 83) FALSE 84) FALSE 85) FALSE 86) FALSE 87) TRUE 88) FALSE 89) FALSE 90) TRUE 91) FALSE 92) FALSE 93) FALSE 94) TRUE 95) TRUE 96) TRUE 97) FALSE 98) TRUE 99) TRUE 100) TRUE 101) TRUE

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Chapter 4 (1) 1) What is the APY for a savings account with a $430 balance that receives $20 interest for the

year? (Round your answer to 2 decimals.)

A) 2.33% B) 4.65% C) 4.80% D) 6.56% E) 8.33%

2) What is the APY for a one-year $5,200 certificate of deposit with $884 interest? (Round

your answer to 2 decimals.)

A) 8.84% B) 8.50% C) 10.78% D) 13.60% E) 17.00%

3) Nicholas earned 14.0 percent in his savings account. If he is in the 28 percent tax bracket,

what is his after-tax savings rate of return? (Round your answer to 2 decimals.)

A) 3.50% B) 5.04% C) 10.08% D) 14.00% E) 28.00%

4) Opal earned 8.5 percent in her savings account. If she is in the 30 percent tax bracket, what is

her after-tax savings rate of return? (Round your answer to 2 decimals.)

A) 2.95% B) 3.00% C) 5.95% D) 8.50% E) 30.00%

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5) Evan had three accounts as listed below. In 2020, how much was his total insurance coverage

by the FDIC? Bank A: $135,000 Bank B: $105,000 Bank C: $335,000 A) $135,000 B) $240,000 C) $335,000 D) $490,000 E) $575,000

6) Gwen had three accounts as listed here. In 2020, how much was her total insurance coverage

by the FDIC? Bank A: $315,000 Bank B: $80,000 Bank C: $315,000 A) $315,000 B) $395,000 C) $580,000 D) $710,000 E) $920,000

7) Given the information here, what should Jason's adjusted checkbook balance be?

Bank balance: Outstanding checks: Deposit in transit: ATM fees: Interest earned: Checkbook balance: A) B) C) D) E)

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$ 360 $ 159 $ 74 $ 32 $ 5 $ 302

$143 $233 $275 $302 $360

2

Answer Key Test name: ch 4 (1) 1) 2) 3) 4) 5) 6) 7)

B E C C D C C

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Chapter 4 (2) 1) Common payment choices for everyday activities include all of the following except: A) Cash.

B) Check.

C) Credit card.

D) Short-term loan.

E) Debit card.

2) Many people make mistakes when managing current cash needs. Which of these is NOT a

frequently made mistake?

A) Using savings or borrowing to pay for current expenses B) Budgeting spending C) Failing to put unneeded funds in an investment plan D) Having insufficient liquid assets to pay current bills E) Overspending due to impulse buying and overusing credit

3) A time deposit is also known as: A) A checking account.

B) A trust.

C) A loan.

D) A savings account.

E) All of these are time deposits.

4) A demand deposit is also known as: A) A checking account.

B) A trust.

C) A loan.

D) A savings account.

E) All of these are demand deposits.

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5) A credit card is a type of: A) Checking account.

B) Trust.

C) Loan/borrowing.

D) Savings account.

E) Cash account.

6) A legal agreement that provides for the management and control of assets by one party for

the benefit of another is known as: A) A checking account.

B) A trust.

C) A loan.

D) A savings account.

E) None of these.

7) Claudette's grandchildren are 7 and 9 years old. When Claudette passed away, her

grandchildren inherited her money. However, the will stipulated that they should not get control of the money until age 25. Which of the following should be set up to provide for the management and control of the funds?

A) A checking account B) A trust C) A loan D) A savings account E) A certificate of deposit

8) Franklin is planning for a purchase of a vehicle in two years. Since he wants to be certain that

his funds are safe (insured), which of the following should he use?

A) A credit card B) A trust C) A loan D) A savings account E) A home mortgage

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9) Investments, insurance, and tax assistance are tools for financial planning and are also known

as: A) B) C) D) E)

Checking accounts.

Trusts.

Loans.

Savings accounts.

Financial services.

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

known as: A) An asset management account.

B) A checking account.

C) A trust.

D) A loan.

E) A savings account.

11) Brenda lost her debit card. When she realized it was gone, her account had $173 in

unauthorized charges. She notified her financial institution within two days. How much is she potentially liable for?

A) $0 B) $25 C) $50 D) $173 E) $500

12) Brandon lost his debit card. When he realized it was gone, his account had $238 in

unauthorized charges. Since he was embarrassed about his loss, he didn't contact his financial institution for 70 days. What is the most that he is liable for?

A) $0 B) $50 C) $188 D) $238 E) $500

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13) ATM stands for: A) Automatic taking machine.

B) Available teller machine.

C) Automatic teller machine.

D) Available token machine.

E) Automatic token machine.

14) Which of the following is NOT a financial publication that can provide information about

financial services and economic conditions?

A) The Wall Street Journal B) The Financial Times C) The Daily Market D) Bloomberg Businessweek E) Forbes

15) When you select a financial services provider, you should ask all of the following questions

except: A) B) C) D) E)

Will I be able to borrow money if I need it?

How can I minimize the cost of checking and payment services?

Where can I get the best return on my savings?

All of these questions should be asked.

None of these questions are needed.

16) When you select a financial services provider, you may find all of the following to be major

factors except: A) Company logo.

B) Convenience.

C) Fee structure and other charges.

D) Personal service.

E) Rates for savings and borrowed funds.

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17) All of the following are deposit institutions except: A) A commercial bank.

B) A credit union.

C) A finance company.

D) A mutual savings bank.

E) A savings and loan association.

18) All of the following are non-deposit institutions except: A) A credit card company.

B) An investment company.

C) A life insurance company.

D) A finance company.

E) A credit union.

19) Which of the following usually offers money market mutual funds?

A) A credit card company B) An investment company C) A life insurance company D) A finance company E) A payday loan company

20) Which of the following primarily provides loans for home purchases?

A) A credit card company B) An investment company C) A life insurance company D) A mortgage company E) A payday loan company

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21) When Angela wanted to provide financial security for her dependents, she considered

purchasing a product that would provide income replacement in the event of her untimely death and also provide a savings/investment component while she is alive. Which company would she most likely do business with?

A) A credit card company B) An investment company C) A life insurance company D) A finance company E) A payday loan company

22) Billy accepted a job at a company that specializes in providing money for short-term retail

lending. Where did he go to work?

A) A credit card company B) An investment company C) A life insurance company D) A finance company E) A payday loan company

23) Which of the following will likely provide the most expensive loans?

A) A credit card company B) An investment company C) A life insurance company D) A finance company E) A payday loan company

24) Cathy needs a full range of financial services, including checking, savings, and lending. To

which of the following should she go?

A) A commercial bank B) A check-cashing outlet C) A pawnshop D) A payday loan company E) A rent-to-own center

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25) Which of the following offers a full range of financial services including checking, savings,

lending, and other services?

A) A commercial bank B) A check-cashing outlet C) A pawnshop D) A payday loan company E) A rent-to-own center

26) Which of the following is organized as a corporation with investors (stockholders)

contributing the needed capital to operate?

A) A commercial bank B) A check-cashing outlet C) A pawnshop D) A payday loan facility E) A rent-to-own center

27) Harvey needed some cash quickly, so he received a short-term loan based on the proportional

value of an old ring. Where did he go?

A) A commercial bank B) A check-cashing outlet C) A pawnshop D) A payday loan company E) A rent-to-own center

28) When Imogene brought a necklace to a _______, she received a loan based on its

proportional value.

A) commercial bank B) check-cashing outlet C) pawnshop D) payday loan company E) rent-to-own center

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29) When Jack picked up a personal computer from the _____, he was really leasing it.

A) commercial bank B) check-cashing outlet C) pawnshop D) payday loan company E) rent-to-own center

30) Louise got caught in a cash flow trap and desperately needed money quickly. Unfortunately,

she didn't shop around and she went to a _____. As a result, her annual percentage rate was higher than 780%.

A) commercial bank B) check-cashing outlet C) pawnshop D) payday loan company E) rent-to-own center

31) Why are some financial service operations referred to as financial supermarkets?

A) They offer a combination of services from one source.

B) Customers can receive cash and a receipt.

C) They have many locations, like supermarkets.

D) They are often located in supermarkets or convenience stores.

E) Their prices are similar to those in a supermarket.

32) A drawback of a regular savings account is the: A) Easy access to deposits.

B) Lack of insurance.

C) Low minimum balance.

D) Relatively low rate of return.

E) Ease of withdrawal.

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33) A drawback of a regular savings account is: A) A relatively low rate of return.

B) A minimum required deposit.

C) Not being insured.

D) A possible penalty for early withdrawal.

E) All of these are drawbacks of a regular savings account.

34) Another name for a regular savings account is a: A) Certificate of deposit.

B) Checking account.

C) Money market account.

D) Money market fund.

E) Passbook or statement account.

35) A certificate of deposit that has earnings based on the stock market is called a(n): A) Bump-up CD. B) Callable CD. C) Portfolio CD. D) Promotional CD. E) Indexed CD.

36) Karen wanted a certificate of deposit that would definitely be available the entire length of

time until maturity. She would NOT want to consider a(n): A) Bump-up CD. B) Callable CD. C) Portfolio CD. D) Promotional CD. E) Indexed CD.

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

a(n): A) B) C) D) E)

Bump-up CD. Callable CD. Portfolio CD. Promotional CD. Indexed CD.

38) Marcus bought a certificate of deposit whose interest rate is based on the stock market.

Sometimes, his earnings are higher than other similar CDs, and at other times, his earnings are lower. He purchased a(n): A) Bump-up CD. B) Callable CD. C) Portfolio CD. D) Promotional CD. E) Indexed CD.

39) 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) A certificate of deposit B) An interest-earning checking account C) A money market account D) A money market fund E) A regular savings account

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40) Amber wants to open an account, but she doesn't know which kind is appropriate. She is

interested in earning a higher interest rate and plans to keep at least $1,000 in her account so she can avoid paying a fee. Amber wants to open her account at an investment company and understands that her account will not be covered by federal deposit insurance. What kind of account should she open?

A) A certificate of deposit B) An interest-earning checking account C) A money market account D) A money market fund E) A regular savings account

41) Will wants to open an account with $500 that will allow him easy access to his funds (by

checks, ATMs, or debit card usage) from many locations. He also wants to earn at least a low interest rate and have federal deposit insurance. What kind of account should he open?

A) A certificate of deposit B) An interest-earning checking account C) A money market account D) A money market fund E) A regular savings account

42) The text discusses several types of bonds. Which bond pays interest for 30 years that is

exempt from state and local taxes?

A) Series E B) Series EE C) Series HH D) Series I E) Series Q

43) 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 and an inflation rate that changes twice a year?

A) Series E B) Series EE C) Series HH D) Series I E) Series Q

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44) Justin needs to have access to his money in five months. The best option for his savings is a: A) Series EE bond.

B) Money market account.

C) Five-year certificate of deposit.

D) Series I bond.

E) Six-month certificate of deposit.

45) If you want to buy a relatively large quantity of U.S. savings bonds, you may purchase them

through: A) The state government office.

B) The executive branch.

C) A beneficiary.

D) The local government office.

E) A TreasuryDirect account.

46) Earnings on savings can be measured by the: A) Compounding.

B) Liquidity.

C) Minimum deposit.

D) Rate of return.

E) Safety.

47) Earning interest on previously earned interest is called: A) Compounding.

B) Liquidity.

C) Minimum deposit.

D) Rate of return.

E) Safety.

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48) The Truth in Savings Act requires financial institutions to disclose the _____ on savings

accounts.

A) annual percentage yield (APY) B) compounding C) liquidity D) tax rate E) safety certification

49) Which of the following is correct about inflation?

A) If inflation is 7% and your rate of return in your savings account is 4%, you will

experience an overall gain in buying power.

B) As the inflation rates increases, the interest rates offered to savers decrease.

C) Inflation does not affect interest rates for savings accounts.

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

E) If you earn 5% and inflation is 10%, your buying power will increase.

50) Which of the following refers to the opportunity to withdraw your money on short notice

without incurring a loss in value?

A) Compounding B) Liquidity C) Minimum deposit D) Rate of return E) Safety

51) Which of the following provides deposit insurance for credit unions?

A) FDCU B) FDIC C) NCUA D) SAIF E) None of these

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52) The insurance coverage provided by the FDIC for a savings account is ________ per

depositor per insured financial institution.

A) $50,000 B) $100,000 C) $150,000 D) $250,000 E) $500,000

53) Which of the following is a type of electronic payment?

A) Certified check B) Interest-earning checking account C) Money order D) Smart card E) Traveler's check

54) Jennifer purchased a prepaid card for transit fares and highway tolls. What kind of card did

she purchase?

A) A debit card B) An online payment C) A stored-value card D) A smart card E) Mobile transfer

55) Aidan wants to be able to tap or wave his phone at the point-of-sale terminal sensor to

complete purchases. Which of the following tools should he use?

A) A debit card B) An online payment C) A stored-value card D) A smart card E) A mobile transfer

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56) Quentin wants his retail purchases to be deducted directly from his checking account. Which

of the following tools should he use?

A) A debit card B) A credit card C) A stored-value card D) PayNearMe E) Reward points

57) Patrick is interested in opening a different account that will allow him to write a few checks

each month for a fee per check, but he is unable to maintain a minimum balance. He should open a(n): A) Regular savings account.

B) Activity checking account.

C) Interest-earning checking account.

D) Share draft account.

E) Passbook account.

58) Preston never opened his bank statements, so he was surprised to see that he had incurred a

service charge because his balance went below a required minimum balance. In addition, he did not earn interest for this month. What kind of account does Preston have?

A) A regular savings account B) An activity checking account C) An interest-earning checking account D) A passbook account E) All of these choices are correct.

59) Shelby has an account at a financial institution that will waive the monthly fee if she keeps a

certain amount in savings. What kind of account does she have?

A) A regular checking account B) An activity checking account C) An interest-earning checking account D) A share draft account E) All of these are correct.

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60) Which of the following is NOT correct?

A) Check 21 decreases the processing time for checks.

B) Check 21 allows a substitute check to be an equivalent of the original check.

C) A substitute check is a digital reproduction of the original paper check.

D) Check 21 increases the fees banks can charge for checking accounts.

E) All of the choices are correct.

61) In general, which fees have doubled or tripled in price at some financial institutions for

checking accounts?

A) Overdraft fees.

B) Stop-payment orders.

C) Check printing.

D) None of these fees have increased.

E) All of these fees have increased.

62) Which of the following is correct?

A) Canceled checks are typically returned to customers.

B) Overdraft protection is a loan banks make to their checking account customers who

have large balances.

C) Bank customers typically are provided with online access to view and print checks that have been paid.

D) Overdraft protection is usually more costly than fees charged for checks with insufficient funds.

E) Checking accounts packaged with several services (safe deposit box, traveler’s checks, low-rate loans, etc.) for a single fee usually are a good value.

63) Nora bought a used car and was told that she needed a personal check with guaranteed

payment. She obtained a: A) Certified check.

B) Cashier’s check.

C) Traveler's check.

D) Money order.

E) None of the these.

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64) Kylie went to a post office to obtain a: A) Certified check.

B) Cashier's check.

C) Money order.

D) Personal check.

E) Merchant's check.

65) Logan paid a bill with a special form. He received this form at his financial institution and

had to pay the amount of the check plus a fee. He used a: A) Certified check.

B) Cashier's check.

C) Merchant's check.

D) Personal check.

E) Traveler's check.

66) Anders went to Norway and went shopping. He had to sign his name once when he

purchased this document and a second time at the store. Anders used a: A) Certified check.

B) Cashier's check.

C) Money order.

D) Personal check.

E) Traveler's check.

67) A joint account with Sara and John allows: A) Only John to write checks.

B) Only Sara to write checks.

C) Sara or John to complete a signature card.

D) John and Sara to both write checks on the account.

E) None of these answers is correct.

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68) Chloe signed the back of her check with just her signature. She used a(n): A) Blank endorsement.

B) Restrictive endorsement.

C) Deposit ticket.

D) Special endorsement.

E) Individual account.

69) Zoe signed the back of her check with the words "for deposit only." She used a(n): A) Blank endorsement.

B) Restrictive endorsement.

C) Deposit ticket.

D) Special endorsement.

E) Individual account.

70) Margaret signed the back of her check with the words "pay to the order of Penelope." She

used a(n): A) Blank endorsement.

B) Restrictive endorsement.

C) Deposit ticket.

D) Special endorsement.

E) Individual account.

71) Which of the following is NOT required when writing a check?

A) The amount of check written in words B) The date written C) A driver's license number D) The name of the person or organization receiving payment E) A signature

72) If a check is lost or stolen, you should use a: A) Stop-payment order.

B) Stale check.

C) Bank statement.

D) Blank endorsement.

E) Deposit ticket.

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73) What is the APY for a savings account with a $250 balance that receives $9 interest for the

year?

A) B) C) D) E)

2.5% 3.6% 4.32% 10.4% 20.8%

74) What is the APY for a one-year $4,000 certificate of deposit with $280 interest?

A) 5.8% B) 9% C) 8% D) 11.2% E) 7%

75) Nicholas earned 8 percent in his savings account. If he is in the 28 percent tax bracket, what

is his after-tax savings rate of return?

A) 2.5% B) 3.6% C) 5.76% D) 7.2% E) 28%

76) Opal earned 6 percent in her savings account. If she is in the 25 percent tax bracket, what is

her after-tax savings rate of return?

A) 2% B) 2.5% C) 4.5% D) 7.5% E) 25%

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77) Evan had three accounts as listed below. In 2020, how much was his total insurance coverage

by the FDIC? Bank A: $150,000 Bank B: $50,000 Bank C: $350,000 A) $150,000 B) $200,000 C) $350,000 D) $450,000 E) $550,000

78) Gwen had three accounts as listed here. In 2020, how much was her total insurance coverage

by the FDIC? Bank A: $250,000 Bank B: $50,000 Bank C: $300,000 A) $250,000 B) $300,000 C) $550,000 D) $600,000 E) $825,000

79) Victor read the fine print for a checking account he was thinking about using. The fine print

said, "A minimum balance of $500 is required. If your balance falls below this level, you will be assessed a monthly fee of $10." Since Victor was planning to keep only a $50 balance in his account, how much could he be charged each year?

A) $0.00 B) $10.00 C) $50.00 D) $60.00 E) $120.00

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80) Given the information here, what should Jason's adjusted bank balance be for his bank

reconciliation?

Bank balance: Outstanding checks: Deposit in transit: ATM Fees: Interest earned: Checkbook balance: A) B) C) D) E)

$ 300 $ 129 $ 50 $ 26 $ 5 $ 242

$113 $171 $221 $242 $300

81) Given the information here, what should Jason's adjusted checkbook balance be?

Bank balance: Outstanding checks: Deposit in transit: ATM fees: Interest earned: Checkbook balance: A) B) C) D) E)

$ 600 $ 260 $ 100 $ 50 $ 10 $ 480

$113 $171 $440 $242 $300

82) When Flo says she's "going to the bank," she may be implying that she is visiting a credit

union or stopping at an ATM. ⊚ true ⊚ false

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83) When Ted needs more cash than he has available, his choices include liquidating savings and

borrowing. ⊚ true ⊚ false

84) A savings account is also known as a demand deposit. ⊚ true ⊚ false

85) Web-only banks offer both online transactions and face-to-face transactions. ⊚ true ⊚ false

86) Making transactions using a credit card will immediately reduce your bank balance. ⊚ true ⊚ false

87) The only question you should ask yourself when selecting a financial service provider is

"Where can I get the best return on my savings?" ⊚ true ⊚ false

88) A commercial bank is the same thing as a credit union. ⊚ true ⊚ false

89) A loan from a pawnshop will typically be more expensive than one from a bank. ⊚ true ⊚ false

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90) The best option for borrowing money at a low rate is to use a payday loan organization. ⊚ true ⊚ false

91) If you rent a big-screen television from a rent-to-own center for a week, you will be certain to

own it at the end of the first week. ⊚ true ⊚ false

92) A benefit of investing in a certificate of deposit is the penalty for early withdrawal. ⊚ true ⊚ false

93) A bump-up CD allows an investor to increase the amount invested at various intervals. ⊚ true ⊚ false

94) A callable CD allows investors to "cash in" their investment early. ⊚ true ⊚ false

95) If you think that rates will fall in the future, you should buy a long-term CD to lock in your

rate now. ⊚ true ⊚ false

96) Money market funds are not covered by federal deposit insurance. ⊚ true ⊚ false

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97) I bonds earn interest based on a fixed rate plus an inflation rate. ⊚ true ⊚ false

98) The Truth in Savings Act requires financial institutions to disclose the interest rate on loans. ⊚ true ⊚ false

99) As inflation rates increase, the interest rates offered to savers usually increase. ⊚ true ⊚ false

100)

Liquidity and rate of return refer to the same thing. ⊚ true ⊚ false

101)

The "safety" concern with banks and credit unions refers to the potential loss of money due to investors' bad spending habits. ⊚ true ⊚ false

102)

The FDIC insures a depositor's savings account up to $200,000 per insured financial institution. ⊚ true ⊚ false

103)

Two years ago, Sean deposited money into a savings account and received a toaster as a free gift, which required him to leave his money on deposit for a year. The value of the toaster reduced the amount of interest he earned for the first year. ⊚ true ⊚ false

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104)

Each year, check writing is being used more often. ⊚ true ⊚ false

105)

A school ID that includes prepaid amounts for school lunches is called a debit card. ⊚ true ⊚ false

106)

Due to the 21st Century Act (also called Check 21), the processing time for deposited checks has increased. ⊚ true ⊚ false

107)

Lydia found a check that she was given for her birthday nine months earlier. Her bank should refuse to cash the check. ⊚ true ⊚ false

108)

Reconciling a checking account is not really necessary since the bank statement includes all activity from the bank's perspective. ⊚ true ⊚ false

109)

An asset management account is an all-in-one account that is also called a cash management account. ⊚ true ⊚ false

110)

Financial service activities through your smartphone or tablet include text banking, mobile web banking, and banking apps. ⊚ true ⊚ false

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111)

Smishing is a scam that uses email spam or pop-up messages to deceive you into revealing your credit card number, social security number, passwords, or other private information. ⊚ true ⊚ false

112)

Bank customers may now make withdrawals from ATMs using a smartphone, a cash code, and a PIN. ⊚ true ⊚ false

113)

A $200 savings account that earned $5 after one year would have a rate of return, or yield, of 5 percent. ⊚ true ⊚ false

114)

Commercial banks and credit unions are both financial institutions; however, they are different types of organizations. ⊚ true ⊚ false

115)

A disadvantage of saving in a certificate of deposit is the penalty for early withdrawal. ⊚ true ⊚ false

116)

As inflation rates increase, the interest rates offered to savers usually decrease. ⊚ true ⊚ false

117)

Each year, check writing is being used less often. ⊚ true ⊚ false

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118)

The FDIC insures a depositor's savings account up to $250,000 per insured financial institution. ⊚ true ⊚ false

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Answer Key Test name: ch 4 (2) 1) D 2) B 3) D 4) A 5) C 6) B 7) B 8) D 9) E 10) A 11) C 12) D 13) C 14) C 15) D 16) A 17) C 18) E 19) B 20) D 21) C 22) A 23) E 24) A 25) A 26) A 27) C 28) C 29) E 30) D 31) A 32) D 33) A 34) E 35) E 36) B 37) D

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38) E 39) C 40) D 41) B 42) B 43) D 44) B 45) E 46) D 47) A 48) A 49) D 50) B 51) C 52) D 53) D 54) C 55) E 56) A 57) B 58) C 59) A 60) D 61) E 62) C 63) A 64) C 65) B 66) E 67) D 68) A 69) B 70) D 71) C 72) A 73) B 74) E 75) C 76) C 77) D

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78) C 79) E 80) C 81) C 82) TRUE 83) TRUE 84) FALSE 85) FALSE 86) FALSE 87) FALSE 88) FALSE 89) TRUE 90) FALSE 91) FALSE 92) FALSE 93) FALSE 94) FALSE 95) TRUE 96) TRUE 97) TRUE 98) FALSE 99) TRUE 100) FALSE 101) FALSE 102) FALSE 103) FALSE 104) FALSE 105) FALSE 106) FALSE 107) TRUE 108) FALSE 109) TRUE 110) TRUE 111) FALSE 112) TRUE 113) FALSE 114) TRUE 115) TRUE 116) FALSE 117) TRUE

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118)

TRUE

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Chapter 5 (1) 1) Timothy Carter went out to eat with his girlfriend at a fancy restaurant. When he tried to pay

the bill with his Mastercard credit card, he was told that the restaurant accepted only cash or American Express. His waiter suggested that he use the ATM across the street to withdraw cash using his credit card. Tim did as suggested and didn't pay attention to any fees until he received his credit card statement one month later. He was shocked to see the total fees (3.5 percent cash advance), and his APR was increased to 20.0%. Given the cost of the meal ($225) plus the associated fees, how much did his meal cost him?

A) B) C) D) E)

$236.63 $225.00 $270.00 $7.88 $3.75

2) Acme Home Lending offers home equity loans up to 75 percent of the home value for its

customers. If Sally Johnson has a home valued at $210,000 and a current mortgage of $63,000, how much can she borrow in a home equity loan from Acme?

A) $78,750 B) $94,500 C) $147,000 D) $63,000 E) $157,500

3) If Vince charged $280 on his credit card with 22 percent APR and he paid his balance in full

within the grace period, how much was he required to pay?

A) $83.60 B) $341.60 C) $258.00 D) $280.00 E) $22.00

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4) Rachel Johnson has net monthly income of $3,325. She has a monthly auto loan payment of

$385, a student loan payment of $210, and a credit card minimum payment of $70. What is her debt payments-to-income ratio?

A) 8.42% B) 13.68% C) 21% D) 17.89% E) 20%

5) Timothy Carter has net monthly income of $5,700. He has a monthly auto loan payment of

$825, a student loan payment of $435, a mortgage payment of $1,800, and a credit card minimum payment of $140. What is his debt payments-to-income ratio? (Round your answer to 1 decimal) A) 41.7% B) 24.6% C) 48.5% D) 22.1% E) 56.1%

6) Hannah has liabilities totaling $17,325 (excluding her mortgage of $57,750). Her net worth is

$27,500. What is her debt-to-equity ratio? (Round your answer to 2 decimals) A) 1.29 B) 0.48 C) 0.78 D) 1.00 E) 0.63

7) Peter borrowed $275. He paid $30 interest and a service charge of $13. What is his finance

charge?

A) $318 B) $43 C) $275 D) $13 E) $30

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8) Paul borrowed $360 to be repaid in one year. He paid 10 percent interest and a service charge

of $19. What is his finance charge?

A) $55 B) $36 C) $19 D) $360 E) $415

9) Suppose you borrow $375 for one year and pay a finance charge of $25. If you repay this

loan all at once after one year, what is your average balance?

A) $375 B) $400 C) $25 D) $200 E) $187.5

10) Tanya received a $1,170 loan from the bank for a vacation. The bank is using the simple

interest formula for this one-year, 11.25 percent loan. What is her total interest?

A) $1,181.25 B) $658.13 C) $65.81 D) $131.63 E) $11.25

11) Fredrick received a $1,900 loan from the bank for a new appliance. The bank is using the

simple interest formula for this two-year, 9 percent loan. What is his total interest?

A) $171.00 B) $18.00 C) $342.00 D) $1,918.00 E) $90.00

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12) Becka borrowed $280 from her cousin at the rate of 6.25 percent per year. If the inflation rate

was 1.8 percent that year, what is her cousin's actual rate of return on the loan?

A) 6.25% B) 8.05% C) 10.7% D) 4.45% E) 1.8%

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Answer Key Test name: ch 5 (1) 1) A 2) B 3) D 4) E 5) B 6) E 7) B 8) A 9) A 10) D 11) C 12) D

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Chapter 5 (2) 1) Installment credit, in which the debt is repaid in equal installments over a specified period of

time, exploded on the American scene with the advent of the: A) Airplane.

B) Automobile.

C) Cell phone.

D) Computer.

E) Train.

2) Which of the following is a valid reason for using credit?

A) Purchasing a car so a homemaker can return to work B) Borrowing for a college education C) Purchasing an item that costs less now than it will later D) Paying for a medical emergency E) All of these are valid reasons for borrowing.

3) Which of the following is NOT a valid reason for borrowing?

A) Borrowing for a college education B) Paying for everyday living expenses C) Buying a car so a homemaker can return to work D) Paying for a medical emergency E) All of these are valid reasons for borrowing.

4) Many people expect which of the following?

A) Their ability to make payments to get harder over time B) Their incomes to increase to make it easier to make payments on past credit purchases C) Using credit will increase the amount of money available to spend in the future D) Their interest payments to increase as their credit balances decrease E) All the choices are correct.

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5) Which of the following questions is NOT needed before deciding how and when to make a

major purchase?

A) Do I have the cash I need for the down payment?

B) Does the purchase fit my budget?

C) Could I postpone the purchase?

D) Could I use the credit I need for this purchase in some better way?

E) All of these questions should be considered.

6) When misused, credit can result in: A) Default.

B) Bankruptcy.

C) Loss of creditworthiness.

D) A less satisfying life.

E) All the choices are correct.

7) Which of the following is NOT correct?

A) Using credit permits the purchase of goods even when funds are low.

B) Using credit can decrease the amount of money that will be available to spend in the

future.

C) Using credit offers convenience when shopping on the Internet.

D) Using credit cards typically provides a "float" of up to 10 days.

E) Using credit allows a consumer to shop without carrying a large amount of cash.

8) Which of the following is NOT correct?

A) Using credit is appropriate to pay for medical emergencies.

B) Using credit can increase the amount of money that will be available to spend in the

future.

C) Using credit occurs when you use water or electricity.

D) Using credit cards usually makes returning merchandise without a receipt easier.

E) Using credit allows consumers to enjoy goods and services now and pay later.

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9) A typical grace period offered by many credit card issuers is: A) 0-10 days.

B) 10-20 days.

C) 20-25 days.

D) 30-40 days.

E) 45-60 days.

10) Perhaps the greatest disadvantage of using credit is: A) The temptation to overspend.

B) The convenience offered instead of using cash.

C) The float from using credit.

D) The increase in total purchasing power.

E) The increased satisfaction during present and future income periods.

11) Which of the following can result from a failure to repay a loan?

A) Bankruptcy B) Loss of income or valuable property C) Loss of a good reputation D) Damage to family relationships E) All of the above may result from the failure to repay a loan.

12) Consumer credit: A) Is only a privilege of the affluent.

B) Dates back to colonial times.

C) Has been declining since the 1900s.

D) Is not a major force in our economy.

E) Is currently only used by farmers.

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13) Before buying goods and services on credit, a consumer should consider all of the following

except: A) B) C) D) E)

Whether purchasing now will increase efficiency.

Whether purchasing now will increase productivity.

Whether purchasing now will result in a more satisfying life.

Whether the benefits of purchasing now will outweigh the costs.

Whether the good or service will be worth more because it was purchased with credit instead of cash.

14) Which of the following is an example of closed-end credit?

A) A mortgage loan B) A department store credit card C) Overdraft protection D) Travel and entertainment cards E) All of these are examples of closed-end credit.

15) Which of the following is an example of open-end credit?

A) An automobile loan B) A department store credit card C) An installment loan for purchasing furniture D) A mortgage loan E) Single lump-sum credit

16) A direct loan for personal purposes, home improvements, or vacation expenses is called: A) A credit card.

B) An installment cash credit.

C) A bank line of credit.

D) Open-end credit.

E) Single lump-sum credit.

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17) A loan that must be repaid in total on a specified day, usually within 30 to 90 days, is: A) A credit card.

B) An installment cash credit.

C) A bank line of credit.

D) Open-end credit.

E) Single lump-sum credit.

18) Molly purchased a $1,500 dishwasher from Best Appliances. She will make 12 equal

payments over the next year to pay for it. She is using: A) Closed-end credit.

B) Open-end credit.

C) Revolving check credit.

D) A line of credit.

E) None of these.

19) A line of credit is: A) The equal payments required for one-time loans.

B) The loan amount for installment cash credit.

C) The maximum loan amount for closed-end credit.

D) The maximum dollar amount of credit the lender has made available to a borrower.

E) The monthly payment required for single lump-sum credit.

20) A prearranged loan for a specified amount that a consumer can use by writing a special check

is known as: A) A bank credit card.

B) A revolving check credit.

C) Installment sales credit.

D) Single lump-sum credit.

E) Closed-end credit.

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21) The periodic charge for the use of credit is called: A) A line of credit.

B) A revolving check credit.

C) Interest.

D) A grace period.

E) Principal.

22) Which of the following is often considered to offer the least expensive loans (i.e., loans with

low interest)?

A) Banks B) Finance companies C) Loan companies D) Parents or family members E) Savings and loan associations

23) A cash advance: A) Involves a grace period on most cards.

B) Is less expensive than charging a purchase to your credit card.

C) Has a lower interest rate than on purchases on some cards.

D) Requires you to pay interest every day until you repay the cash advance.

E) Is a loan billed to your bank account.

24) Home equity loans should be used for: A) Buying dinner at a restaurant.

B) Borrowing money for impulse purchases.

C) Major expenses, such as home improvements or education.

D) Getting cash for weekend entertainment.

E) Selling a car.

25) Home equity loans: A) Are based on the original purchase price of a home.

B) Have interest that is tax-deductible.

C) Will cause you to lose your car if the loan is not repaid.

D) Require you to be a member of a credit union.

E) Charge high interest rates ranging from 12 to 25 percent.

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26) If you miss payments on a home equity loan, you can lose your: A) Savings account.

B) Car. C) House.

D) Retirement account.

E) Furnishings.

27) A credit card holder who pays off his balances in full each month is known as: A) An impulsive lender.

B) A convenience user.

C) A home equity holder.

D) A borrower.

E) All of these are correct.

28) Which of the following is NOT associated with credit cards?

A) A grace period B) A finance charge C) An annual fee D) Convenience users and borrowers E) A debit to your checking account

29) Which of the following electronically subtracts money from your savings or checking

account to pay for goods and services?

A) A credit card B) Closed-end credit C) A debit card D) A gift card E) A home equity loan

30) Bankruptcy courts treat gift cards: A) As illegal loans.

B) As bribes.

C) The same way they handle unsecured debt.

D) As a smart choice.

E) The same as debit cards.

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31) Before taking out a loan, you should ask yourself whether you can meet all of your essential

expenses and still afford the monthly loan payments. This can be determined by: A) Adding up basic monthly expenses then adding this total to take-home pay.

B) Asking what you plan to purchase with the loan.

C) Multiplying your take-home pay by 50 percent and subtracting your current loan payments.

D) Adding up basic monthly expenses and subtracting this total from take-home pay, plus figuring out what to give up to make the monthly loan payment.

E) None of the above.

32) Experts suggest that the debt payments-to-income ratio should be a maximum of: A) 15%.

B) 20%.

C) 25%.

D) 50%.

E) 100%.

33) If you have probably reached the upper limit of debt obligations, your debt-to-equity ratio is

about: A) B) C) D) E)

0.

0.2.

0.25.

0.5.

1.

34) When calculating the debt-to-equity ratio, which of the following is NOT included?

A) Credit card balances B) Net worth C) Auto loan balances D) Mortgage balance E) Installment debt

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35) The question "Will you repay the loan?" relates to: A) Character.

B) Capacity.

C) Capital.

D) Collateral.

E) Conditions.

36) The question "What are your assets and net worth?" relates to: A) Character.

B) Capacity.

C) Capital.

D) Collateral.

E) Conditions.

37) The use of property or savings to secure a loan relates to: A) Character.

B) Capacity.

C) Capital.

D) Collateral.

E) Conditions.

38) A loan officer is examining whether or not to offer you a loan today. Specifically, she is

examining your income and debts. Which of the five Cs of credit is the loan officer reviewing?

A) Character B) Capacity C) Capital D) Collateral E) Conditions

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39) The Equal Credit Opportunity Act (ECOA) prohibits a lender from discriminating based on: A) Race.

B) Nationality.

C) Age. D) Sex. E) All of these are prohibited.

40) Which of the following is the best scoring technique used in credit applications for

consumers with limited credit histories?

A) Credit History B) Credit Report C) FICO D) Limited Credit E) VantageScore

41) FICO scores generally range from: A) 100 to 1000.

B) 200 to 700.

C) 300 to 850.

D) 450 to 650.

E) 500 to 1000.

42) Which of the following is NOT a valid credit application question?

A) How much of a loan are you requesting?

B) What is the account number for your checking account?

C) What is the name of the nearest relative not living with you?

D) How many dependents do you have?

E) All of these are valid credit application questions.

43) When evaluating your credit application, a lender may NOT: A) Ask your date of birth.

B) Deny you credit if you receive public assistance.

C) Request a list of the ages of your dependents.

D) Inquire if you ever received credit before from that lender.

E) Ask your marital status.

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44) What step can you take if your credit application is denied?

A) Sue the credit rating agency.

B) File a complaint against the merchant.

C) Ask the reasons why you were denied credit.

D) Reapply for credit once 30 days have passed.

E) Borrowers do not have any rights provided by law.

45) If you are denied credit, you can contact the credit bureau and ask for a copy of your credit

report. The bureau cannot charge a fee for this service as long as you ask to see your files within _____ of notification that your credit application has been denied.

A) 10 days B) 20 days C) 30 days D) 60 days E) 90 days

46) A credit report includes: A) Detailed credit information.

B) Bank statements.

C) All previous employers.

D) Credit card statements.

E) All of these.

47) Which of the following is NOT one of the three major credit bureaus?

A) Experian B) Equifax C) TransUnion D) FICO

48) Credit bureaus get their information from all of the following sources except: A) Banks.

B) Credit card companies.

C) Finance companies.

D) References.

E) Stores.

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49) Which of the following is the only online source authorized to provide you with a free copy

of your credit report annually?

A) www.annualcreditscore.com B) www.freecreditreport.com C) www.onlinecreditreport.com D) www.freecreditscore.com E) www.annualcreditreport.com

50) Credit files can include all of the following except: A) Employer, position, and income.

B) Previous address.

C) Spouse's name, Social Security number, employer, and income.

D) Race or nationality.

E) Checks returned for insufficient funds.

51) Which is NOT true about the Fair Credit Reporting Act? A) It regulates the use of credit reports.

B) It requires deletion of out-of-date information.

C) It places limits on who can obtain your credit report.

D) It places limits on who can obtain a report.

E) It gives borrowers the right to know why they are denied credit.

52) Credit reports can be obtained for all of the following reasons except: A) In response to a court order.

B) In connection with a credit transaction.

C) For underwriting of insurance.

D) Inquiry by a neighbor.

E) For some legitimate business need.

53) Information about a personal bankruptcy may be reported in your credit file for: A) 1 year.

B) 3 years.

C) 7 years.

D) 10 years.

E) Permanently.

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54) If you are denied credit, then: A) You have a legal right to sue the credit bureau.

B) Your parent can purchase a copy of your credit report.

C) You have a legal right to sue the company that denied you credit.

D) The denial will remain in your credit file for 10 years.

E) You are entitled to a free copy of your credit report.

55) The finance charge for credit includes all of the following except: A) Interest costs.

B) Services charges.

C) Credit-related insurance premiums.

D) Appraisal fees.

E) The amount borrowed.

56) The APR is the percentage cost of credit on a(n) ______________ basis.

A) monthly B) quarterly C) semi-annual D) Annual E) life-of-loan

57) If a loan is being paid in installments instead of one lump sum at the end of the loan period,

the actual rate of interest: A) Will be lower than the stated rate.

B) Will be the same as the stated rate.

C) Will be higher than the stated rate.

D) Will be unrelated to the stated rate.

E) Cannot be determined without knowing the length of the loan period.

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58) Sam is comparing the costs of two loans. The principal amount of each loan is $5,000. One is

due in one year, and the other is due in four years. Both have the same stated rate of annual interest. Which of the following is true?

A) The principal paid for the one-year loan will be lower than the principal paid for the four-year loan.

B) The principal paid for the one-year loan will be higher than the principal paid for the four-year loan.

C) The interest charges for the one-year loan will be lower than the interest charges for the four-year loan.

D) The interest charges for the one-year loan will be higher than the interest charges for the four-year loan.

E) The interest charges and principal payments cannot be compared for the two loans.

59) The minimum monthly payment on a credit card is: A) The amount to be paid without paying interest.

B) The interest amount charged for the month.

C) The minimum to be paid to avoid any charges or fees.

D) The smallest amount you can pay and remain a borrower in good standing.

E) The amount needed to pay off the credit card in one year.

60) Which of the following acts sets procedures for promptly correcting billing mistakes,

refusing to make credit card or revolving credit payments on defective goods, and promptly crediting your payments?

A) Experian Act of 1982 B) Fair Credit Reporting Act of 2009 C) Bills and Disputes Act of 1963 D) Equifax Act of 1979 E) Fair Credit Billing Act of 1975

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61) If you think a bill is wrong or you want more information about the bill, then you and your

creditor should follow all of the steps here except: A) You should notify your creditor in writing.

B) You should pay the portion of the bill that is not in question.

C) Your creditor must acknowledge your letter within 30 days.

D) Your creditor must adjust your account or tell you why the bill is correct within two billing cycles.

E) Your creditor must reimburse you for your time spent researching the error.

62) Which of the following is often the first sign of a stolen identity?

A) You receive bills for a credit card account you never opened.

B) You see charges to your account for things you purchased.

C) You receive a phone call from the thief.

D) You receive a duplicate credit card from your credit card company.

E) All of these are typical signs of a stolen identity.

63) If you think your identity has been stolen, which of the following actions does the Federal

Trade Commission recommend you take immediately?

A) Report it to your neighbor B) Call 911 C) Contact your local bank D) File a police report E) Contact your employer

64) Which of the following items should be shredded to protect yourself from identity theft?

A) Magazines B) Papers with personal information C) Envelopes D) Campaign mail E) Newspaper ads

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65) Carrie thought she misplaced her checkbook for a few days. When she found it, she noticed

that two checks, her cash, and her debit card were missing. She immediately thought about the increase in identity theft in her area and decided to take some action. She should take all of the following steps except: A) Stop payment on the missing checks.

B) Cancel her debit card.

C) Get a new debit card with a new personal identification number (PIN).

D) Close her bank account and open a new one.

E) All of these steps are appropriate to take if she suspects identity theft.

66) Who is responsible for a loan repayment?

A) The store granting credit B) The credit card company C) The government D) The cosigner and/or the borrower E) The bank

67) All of the following are consumer credit protection laws except: A) The Truth in Lending and Consumer Leasing Acts.

B) The Equal Credit Opportunity Act. C) The Fair Credit Billing Act. D) The Credit Lawsuit Act. E) The Consumer Credit Reporting Reform Act.

68) If you want to file a complaint against a bank in connection with any of the consumer credit

protection laws, you: A) Must have an account at the bank.

B) Must have at least $100,000 invested in the bank.

C) Must get advice from the Federal Government.

D) Do not need to have an account at the bank.

E) Must have a loan outstanding at the bank.

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69) According to the Fair Credit Billing Act, if a creditor fails to follow the rules that apply to

correcting any billing errors, you have the right to sue for: A) Actual damages.

B) Actual damages plus twice the amount of any finance charges.

C) Punitive damages.

D) Three times the actual damages.

E) Finance charges only.

70) All of the following are warning signs of debt problems except: A) You use savings to pay for necessities such as food and utilities.

B) You receive second and third payment due notices from creditors.

C) You exceed the credit limits on your credit cards.

D) You pay your credit card bills in full each period.

E) The total balance on your credit cards increases every month.

71) The Consumer Credit Counseling Service: A) Aids families with serious debt problems by helping them to manage their money

better and set up a realistic budget.

B) Is a consolidation firm that will manage bills for a percentage of the total payment due.

C) Is a for-profit organization.

D) Is a program to wipe out your debts within two years.

E) Is a program to set up bankruptcy proceedings.

72) Personal bankruptcy can be filed under which section(s) of the U.S. bankruptcy code?

A) Chapter 7 B) Chapter 11 C) Chapter 13 D) Chapters 7 and 13 E) Chapters 11 and 13

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73) Under Chapter 7 of the U.S. bankruptcy code: A) All debts are forgiven.

B) Alimony and child support debts are released.

C) Certain assets receive some protection.

D) Certain debts arising from educational loans are released.

E) Debt arising from driving while intoxicated is forgiven.

74) Following the signing of the Bankruptcy Abuse Prevention and Consumer Protection Act of

2005, a debtor seeking to erase all debts will have to wait ___ year(s) from her last bankruptcy before she can file again.

A) one B) three C) seven D) eight E) ten

75) Rachel Johnson went to the ATM to withdraw $300 cash with her debit card. She

inadvertently pulled out her credit card instead, not realizing the expenses for cash advances.

If her credit card company charges a cash advance fee of 3 percent and interest at 24 percent APR, what are the total fees she will pay for her mistake?

A) $3 B) $6 C) $9 D) $15 E) $24

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76) Timothy Carter went out to eat with his girlfriend at a fancy restaurant. When he tried to pay

the bill with his MasterCard credit card, he was told that the restaurant accepted only cash or American Express. His waiter suggested that he use the ATM across the street to withdraw cash using his credit card. Tim did as suggested and didn't pay attention to any fees until he received his credit card statement one month later. He was shocked to see the total fees (3 percent cash advance), and his APR was increased to 21%. Given the cost of the meal ($125) plus the associated fees, how much did his meal cost him?

A) $132.19 B) $143.75 C) $125.88 D) $130.94 E) $151.25

77) Acme Home Lending offers home equity loans up to 80 percent of the home value for its

customers. If Sally Johnson has a home valued at $200,000 and a current mortgage of $50,000, how much can she borrow in a home equity loan from Acme?

A) $50,000 B) $80,000 C) $110,000 D) $150,000 E) $160,000

78) If Vince charged $200 on his credit card with 18 percent APR and he paid his balance in full

within the grace period, how much was he required to pay?

A) $3.00 B) $18.00 C) $182.00 D) $200.00 E) $236.00

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79) Rachel Johnson has net monthly income of $2,500. She has a monthly auto loan payment of

$275, a student loan payment of $150, and a credit card minimum payment of $50. What is her debt payments-to-income ratio?

A) 8% B) 13% C) 17% D) 19% E) 20%

80) Timothy Carter has net monthly income of $3,800. He has a monthly auto loan payment of

$350, a student loan payment of $150, a mortgage payment of $1,200, and a credit card minimum payment of $45. What is his debt payments-to-income ratio?

A) 13.2% B) 14.3% C) 36.7% D) 42.0% E) 45.9%

81) Hannah has liabilities totaling $30,000 (excluding her mortgage of $100,000). Her net worth

is $45,000. What is her debt-to-equity ratio?

A) 0.45 B) 0.67 C) 0.75 D) 1.00 E) 1.30

82) Peter borrowed $225. He paid $20 interest and a service charge of $3.00. What is his finance

charge?

A) $3.00 B) $20.00 C) $23.00 D) $225.00 E) $248.00

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83) Paul borrowed $200 to be repaid in one year. He paid 10 percent interest and a service charge

of $3.00. What is his finance charge?

A) $3.00 B) $20.00 C) $23.00 D) $200.00 E) $223.00

84) Suppose you borrow $300 for one year and pay a finance charge of $20. If you repay this

loan all at once after one year, what is your average balance?

A) $20 B) $150 C) $160 D) $300 E) $320

85) Tanya received a $1,000 loan from the bank for a vacation. The bank is using the simple

interest formula for this one-year, 9 percent loan. What is her total interest?

A) $9 B) $45 C) $90 D) $450 E) $1,009

86) Fredrick received a $1,400 loan from the bank for a new appliance. The bank is using the

simple interest formula for this two-year, 8 percent loan. What is his total interest?

A) $16 B) $80 C) $112 D) $224 E) $1,416

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87) Becka borrowed $100 from her cousin at the rate of 6 percent per year. If the inflation rate

was 2 percent that year, what is her cousin's actual rate of return on the loan?

A) 2% B) 4% C) 6% D) 8% E) 10%

88) Typically, credit use is not a contributing factor to living beyond your means. ⊚ true ⊚ false

89) You can lend money to micro-entrepreneurs through Kiva.org, a microlending website. ⊚ true ⊚ false

90) The information gathered from your loan application and the credit bureau are factors of your

credit rating. ⊚ true ⊚ false

91) Researchers have discovered a link between credit scores and impatience. ⊚ true ⊚ false

92) Using the simple interest formula, the interest on a $1,000 loan at 5 percent interest for one

year is $55. ⊚ true ⊚ false

93) Consumer credit refers to the use of debit cards for personal needs. ⊚ true ⊚ false

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94) Consumer credit dates back to colonial times where farmers came to use it extensively. ⊚ true ⊚ false

95) Consumer credit may allow businesses to be more efficient or more productive. ⊚ true ⊚ false

96) Economists recognize consumer credit as a major force in the American economy. ⊚ true ⊚ false

97) When used effectively, credit can help a consumer have more and enjoy more. ⊚ true ⊚ false

98) A trade-off of using credit is that it increases the amount of money that will be available to

spend in the future. ⊚ true ⊚ false

99) A disadvantage of using credit is the convenience it offers when making a hotel reservation

or renting a car. ⊚ true ⊚ false

100)

During the grace period, finance charges are assessed at only half the normal rate. ⊚ true ⊚ false

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101)

Credit can indicate stability since lenders consider you a good risk. ⊚ true ⊚ false

102)

Although credit allows immediate satisfaction of needs and desires, a greater advantage is that it increases total purchasing power. ⊚ true ⊚ false

103)

Closed-end credit consists of loans made on a continuous basis with periodic bills for at least partial payment. ⊚ true ⊚ false

104)

Open-end credit consists of loans made on a continuous basis with periodic bills for at least partial payment. ⊚ true ⊚ false

105)

Closed-end credit is used for a specific purpose and involves a specific amount. ⊚ true ⊚ false

106)

Installment sales credit is a loan that allows a consumer to purchase high-priced items, such as large appliances or furniture. ⊚ true ⊚ false

107)

A consumer applies for open-end credit to make a single purchase, such as a large appliance. ⊚ true ⊚ false

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108)

The least expensive loans (loans with low interest) are often provided by parents or other family members. ⊚ true ⊚ false

109)

The most expensive loans are often provided by parents or other family members. ⊚ true ⊚ false

110)

The easiest loans to obtain are also the least expensive. ⊚ true ⊚ false

111)

Interest paid on a credit card is tax-deductible. ⊚ true ⊚ false

112)

A credit card holder who pays the full balance during the grace period each month is actually getting a free loan from the credit card company. ⊚ true ⊚ false

113)

A secured credit card is most appropriate for someone with a strong credit history. ⊚ true ⊚ false

114)

Experts suggest that you spend more than 20 percent of your net (after-tax) income on consumer credit payments. ⊚ true ⊚ false

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115)

The debt-to-equity ratio is calculated by dividing your total liabilities, including your mortgage, by your net worth. ⊚ true ⊚ false

116)

In the five Cs of credit, character refers to the borrower's trustworthiness and stability. ⊚ true ⊚ false

117)

In the five Cs of credit, capacity refers to the borrower's trustworthiness and stability. ⊚ true ⊚ false

118)

In the five Cs of credit, capital refers to the borrower's ability to pay additional debts. ⊚ true ⊚ false

119)

In the five Cs of credit, conditions refer to what will happen if the borrower does not repay the loan. ⊚ true ⊚ false

120)

The Equal Credit Opportunity Act requires that a creditor should not turn you down for credit based on your age as long as you are old enough to sign a legal contract, which is usually allowed at age 16. ⊚ true ⊚ false

121)

FICO scores are used by creditors to predict how likely it is that you will repay a loan. ⊚ true ⊚ false

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122)

FICO is a better score to use than VantageScore for consumers with limited credit histories. ⊚ true ⊚ false

123)

The higher your FICO score, the more risk you pose to creditors. ⊚ true ⊚ false

124)

A credit file can include your spouse's name and Social Security number. ⊚ true ⊚ false

125)

The Fair Credit Reporting Act, enacted in 1971, places limits on who can obtain your credit report. ⊚ true ⊚ false

126)

A personal bankruptcy remains on a credit file for no more than five years. ⊚ true ⊚ false

127)

Most information in your credit file (except bankruptcies) may be reported for only seven years. ⊚ true ⊚ false

128)

You have a legal right to sue a credit bureau if you observe an error in your file. ⊚ true ⊚ false

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129)

The annual percentage rate is lower than the stated rate for loans that are repaid in monthly payments. ⊚ true ⊚ false

130)

The longer the term for a loan at a given interest rate, the greater the amount you must pay in interest charges. ⊚ true ⊚ false

The add-on interest calculation uses this formula: Interest = Principal × Rate of interest × Time. ⊚ true ⊚ false

131)

132)

The amount of interest paid on a bill is not related to the length of the loan. ⊚ true ⊚ false

133)

The Truth in Lending Act requires that open-end creditors explain how they calculate the finance charge. ⊚ true ⊚ false

134)

The expected rate of inflation should not be considered when determining the amount of interest a lender should charge. ⊚ true ⊚ false

135)

The longer it takes for you to pay off a bill, the less interest you pay. ⊚ true ⊚ false

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136)

If you purchase something with a credit card, the finance charges you pay on an item could end up being more than its worth. ⊚ true ⊚ false

137)

According to law, a creditor may threaten your credit rating while you are negotiating a billing dispute. ⊚ true ⊚ false

138)

According to the Fair Credit Billing Act of 1975, a creditor must adjust the disputed amount in your account or tell you why the bill is correct within 30 days. ⊚ true ⊚ false

139)

According to the Fair Credit Billing Act of 1975, a consumer may tell a credit card company to stop payment for a defective good if the consumer has made a sincere attempt to resolve the problem with the store. ⊚ true ⊚ false

140)

You may not know that your identity has been stolen until you get bills for a credit card account that you never opened. ⊚ true ⊚ false

141)

If you are a cosigner for a loan and the debt is not repaid, that fact will appear on your credit report. ⊚ true ⊚ false

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142)

To protect your credit card, you should keep a record of your credit card number separate from your card. ⊚ true ⊚ false

143)

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it easier for consumers to file Chapter 7 bankruptcy. ⊚ true ⊚ false

144)

Consumer credit refers to the use of credit for personal needs (except a home mortgage). ⊚ true ⊚ false

145)

Although credit allows immediate satisfaction of needs and desires, credit does not increase total purchasing power. ⊚ true ⊚ false

146)

The easiest loans to obtain are also the most expensive. The most expensive loans are provided by finance companies and pawn shops. ⊚ true ⊚ false

147)

Open-end credit consists of loans made on a continuous basis with periodic bills for at least partial payment. ⊚ true ⊚ false

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148)

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it more difficult for consumers to file a Chapter 7 bankruptcy and forces them into a Chapter 13 repayment plan. ⊚ true ⊚ false

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Answer Key Test name: ch 5 (2) 1) B 2) E 3) B 4) B 5) E 6) E 7) D 8) B 9) C 10) A 11) E 12) B 13) E 14) A 15) B 16) B 17) E 18) A 19) D 20) B 21) C 22) D 23) D 24) C 25) B 26) C 27) B 28) E 29) C 30) C 31) D 32) B 33) E 34) D 35) A 36) C 37) D

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38) B 39) E 40) E 41) C 42) E 43) B 44) C 45) D 46) A 47) D 48) D 49) E 50) D 51) E 52) D 53) D 54) E 55) E 56) D 57) C 58) C 59) D 60) E 61) E 62) A 63) D 64) B 65) E 66) D 67) D 68) D 69) B 70) D 71) A 72) D 73) C 74) D 75) D 76) D 77) C

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78) D 79) D 80) B 81) B 82) C 83) C 84) D 85) C 86) D 87) B 88) FALSE 89) TRUE 90) TRUE 91) TRUE 92) FALSE 93) FALSE 94) TRUE 95) FALSE 96) TRUE 97) TRUE 98) FALSE 99) FALSE 100) FALSE 101) TRUE 102) FALSE 103) FALSE 104) TRUE 105) TRUE 106) TRUE 107) FALSE 108) TRUE 109) FALSE 110) FALSE 111) FALSE 112) TRUE 113) FALSE 114) FALSE 115) FALSE 116) TRUE 117) FALSE

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118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130) 131) 132) 133) 134) 135) 136) 137) 138) 139) 140) 141) 142) 143) 144) 145) 146) 147) 148)

FALSE FALSE FALSE TRUE FALSE FALSE TRUE TRUE FALSE TRUE FALSE FALSE TRUE FALSE FALSE TRUE FALSE FALSE TRUE FALSE FALSE TRUE TRUE TRUE TRUE FALSE TRUE TRUE TRUE TRUE TRUE

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Chapter 6 (1) 1) What is the unit price of a 35.2-ounce box of brown sugar that costs $49.28?

A) $1.40 per pound B) $49.28 per pound C) $22.40 per ounce D) $108.416 per pound E) $1.40 per ounce

2) The unit price of a 16-ounce carton of orange juice that costs $16.80 is: A) $16.80 per ounce.

B) $4.20 per ounce.

C) $1.05 per ounce.

D) $2.10 per ounce.

E) $1.00 per ounce.

3) Using the following information, what is the cost to buy a car?

Down payment Monthly loan payment Opportunity cost of down payment Estimated value of vehicle at end of ownership period A) B) C) D) E)

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$5,375 $625 per month for a five-year loan $5,375 × loan period (in years) × 3% interest $6,375

$5,375.00. $31,125.00. $37,500.00. $37,306.25. $42,875.00.

1

4) Using the following information, what is the cost to lease a car? (Assume there are no

charges for damage at the end of the lease.)

Security deposit Monthly lease payment Opportunity cost of security deposit End-of-lease charges A) B) C) D) E)

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$100 $100 per month for a five-year lease $100 × loan period (in years) × 3% interest $300

$6,615. $6,000. $6,315. $6,415. $6,330.

2

Answer Key Test name: ch 6 (1) 1) 2) 3) 4)

E C D C

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Chapter 6 (2) 1) When Jane researched the brands and prices of refrigerators, she was: A) Comparison shopping.

B) Compulsive shopping.

C) Impulse shopping.

D) Trade-off shopping.

E) Warranty shopping.

2) While Paul was shopping for a new chainsaw, he found a great deal on a new drill and

bought it. This is an example of: A) Comparison shopping.

B) Compulsive shopping.

C) Impulse shopping.

D) Trade-off shopping.

E) Warranty shopping.

3) Which of the following is NOT a strategy for wise buying?

A) Buying winter clothes on sale in mid- or late- winter B) Using product comparison websites for comparing brands C) Buying items on impulse D) Carefully considering buying alternatives at various purchase locations E) Using unit pricing to compare products

4) These products are highly advertised and available at many stores.

A) Private-label brands B) Store brands C) National brands D) Regional brands E) Generic items

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5) These products are sold by one chain of stores and are low-cost alternatives to famous-name

products.

A) Counterfeit brands B) Replacement brands C) National brands D) Private-label or store brands E) All of these choices are correct.

6) A standard measurement used to compare the prices of packages of different sizes is: A) Coupons.

B) Open dating.

C) Rebates.

D) Unit pricing.

E) Warranty.

7) This type of promotion immediately reduces the amount a family spends on groceries each

week.

A) B) C) D) E)

Coupons Open dating Rebates Unit pricing Warranty

8) This shopping label is used primarily on perishable products to help the consumer judge

freshness or shelf life.

A) Coupons B) Open dating C) Rebates D) Unit pricing E) Warranty

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9) A partial refund of the price of a product is called a(n): A) Coupon.

B) Open date.

C) Rebate.

D) Unit price.

E) Warranty.

10) This is a written guarantee from the manufacturer that specifies the conditions under which

the product can be returned, replaced, or repaired.

A) Coupon B) Open dating C) Rebate D) Unit pricing E) Warranty

11) Most products come with some guarantee of quality. Which of the following is usually in

writing, created by the seller or manufacturer, and has two forms?

A) "As-is" warranty B) Express warranty C) Full warranty D) Implied warranty E) Limited warranty

12) Most products come with some guarantee of quality. This type of warranty states that a

defective product can be fixed or replaced during a reasonable amount of time.

A) "As-is" warranty B) Express warranty C) Full warranty D) Implied warranty E) Limited warranty

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13) Most products come with some guarantee of quality. This type of warranty covers only

certain aspects of the product, such as parts.

A) "As-is" warranty B) Express warranty C) Full warranty D) Implied warranty E) Limited warranty

14) Most products come with some guarantee of quality. This type of warranty covers the

product's intended use or other basic understandings that are not in writing.

A) "As-is" warranty B) Express warranty C) Full warranty D) Implied warranty E) Limited warranty

15) Steve bought a laptop that was defective. This laptop will be fixed or replaced by the

manufacturer as long as he returns it in a reasonable amount of time. What type of warranty does he have on his laptop?

A) "As-is" warranty B) Express warranty C) Full warranty D) Implied warranty E) Limited warranty

16) Frank bought some mini blinds. Although he did not receive a written warranty, the blinds

should be expected to open and close properly. What kind of warranty does Frank have?

A) "As-is" warranty B) Express warranty C) Full warranty D) Implied warranty E) Limited warranty

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17) Karen bought a mixer. She received a warranty that covers only certain aspects of the

product. If the product fails, she may be required to pay part of the costs for shipping or repairs. Which of the following warranties does she have?

A) "As-is" warranty B) Express warranty C) Full warranty D) Implied warranty E) Limited warranty

18) Mike bought a new car. His new car warranty probably included all of the following except: A) Coverage of basic parts against defects.

B) Corrosion warranty.

C) Extended coverage for air conditioning.

D) Possibility to transfer the warranty to other owners of the car (additional charges may

apply).

E) Power train coverage.

19) A service contract: A) Is better than an extended warranty.

B) Is an agreement to cover repairs during the implied warranty period.

C) Is included automatically with the purchase of a vehicle.

D) Usually does not cover the engine cooling system.

E) Covers the repair costs of a product.

20) The text identifies several phases in the research-based buying process. The correct order of

the phases is: A) Evaluating alternatives, pre-shopping activities, selection and purchase, postpurchase activities.

B) Pre-shopping activities, selection and purchase, evaluating alternatives, postpurchase activities.

C) Pre-shopping activities, evaluating alternatives, selection and purchase, postpurchase activities.

D) Postpurchase activities, evaluating alternatives, pre-shopping activities, selection and purchase.

E) Evaluating alternatives, selection and purchase, pre-shopping activities, postpurchase activities.

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21) Problem identification is part of the ____ phase of the research-based buying process.

A) evaluating alternatives B) postpurchase activities C) pre-shopping activities D) selection and purchase E) All of these choices are correct.

22) Information gathering is part of the ____ phase of the research-based buying process.

A) evaluating alternatives B) postpurchase activities C) pre-shopping activities D) selection and purchase E) ordering activities

23) Comparison of product features is part of the ____ phase of the research-based buying

process.

A) evaluating alternatives B) postpurchase activities C) pre-shopping activities D) selection and purchase E) ordering activities

24) Price analysis is part of the ____ phase of the research-based buying process.

A) evaluating alternatives B) postpurchase activities C) pre-shopping activities D) selection and purchase E) ordering activities

25) Negotiation activities are part of the ____ phase of the research-based buying process.

A) evaluating alternatives B) postpurchase activities C) pre-shopping activities D) selection and purchase E) All of these choices are correct.

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26) Payment alternatives are part of the ____ phase of the research-based buying process.

A) evaluating alternatives B) postpurchase activities C) pre-shopping activities D) selection and purchase E) All of these choices are correct.

27) Properly maintaining and operating the product is part of the ____ phase of the research-

based buying process.

A) evaluating alternatives B) postpurchase activities C) pre-shopping activities D) selection and purchase E) All of these choices are correct.

28) Resolution of any purchase concerns is part of the ____ phase of the research-based buying

process.

A) evaluating alternatives B) postpurchase activities C) pre-shopping activities D) selection and purchase E) ordering activities

29) Which of the following is the best way to state a problem?

A) I need to have a car.

B) I need transportation.

C) I need a motorcycle.

D) I need to have a minivan.

E) I need to have an SUV.

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30) During pre-shopping activities, which of the following sources would be the LEAST helpful

when purchasing a vehicle?

A) Personal contacts to learn about product performance B) Media information that includes purchasing advice C) Independent testing organizations like a Consumers’ Union D) Online reviews E) Your cousin who has never purchased a car

31) While evaluating alternatives, all of the following are appropriate questions you could ask

before making a major purchase except: A) Is it possible to delay the purchase or to do without the item?

B) Should I pay for the item with cash or buy it on credit?

C) Which brands should I consider?

D) How do the price, quality, and service compare at different stores?

E) All of these are questions that should be asked.

32) While evaluating alternatives, comparison shopping will be beneficial for buying all of the

following except: A) A hot dog at the baseball park.

B) Milk and bread that you buy often.

C) A camera.

D) Musical instrument accessories that you purchase online.

E) An expensive television.

33) While evaluating alternatives, comparison shopping will be beneficial for buying: A) Inexpensive items.

B) One-time purchases of low-cost products.

C) Products whose prices are the same at all retailers.

D) Products whose quality is the same at all retailers.

E) Items that can be researched easily with advertisements.

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34) Buying a vehicle can be a challenging process. When researching a vehicle, a consumer may

want to consider all of the following vehicle options except: A) Mechanical devices to improve performance.

B) Convenience options such as air conditioning.

C) Aesthetic features like metallic paint.

D) All of the options may be considered.

E) None of the items listed are important when buying a vehicle.

35) The average used car costs about _______ less than the average new car.

A) $0 B) $1,000 C) $10,000 D) $25,000 E) $50,000

36) The appearance of a used car can be deceptive. When purchasing a used vehicle, it is a good

idea to: A) B) C) D) E)

Take out a loan for the entire cost.

Accept the dealer at his word about the condition of the vehicle.

Have a trained and trusted mechanic of your choice check out the vehicle.

All of these choices are correct.

None of these choices is correct.

37) Which of the following is an advantage of a car lease?

A) A large down payment is required.

B) At the end of the lease, you have no ownership interest in the vehicle.

C) The capitalized cost is usually higher than the list price.

D) Monthly lease payments are usually lower than monthly financing payments.

E) The total cost of a lease may be higher than a purchase.

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38) Which of the following is a disadvantage of a car lease?

A) A large down payment is required.

B) At the end of the lease, you have no ownership interest in the vehicle.

C) The capitalized cost is usually lower than the list price.

D) Monthly lease payments are usually lower than monthly financing payments.

E) You can usually obtain a more expensive vehicle than with an outright purchase.

39) The amount printed on a label with the suggested retail price that is posted on a vehicle is

called the: A) Invoice price.

B) Sticker price.

C) Set price.

D) Capitalized cost.

E) Residual value.

40) The dealer's cost is also known as the: A) Invoice price.

B) Sticker price.

C) Set price.

D) Capitalized cost.

E) Residual value.

41) A no-haggling dealer presents the price of a new car to be accepted or rejected as stated and

is called a(n) ________ dealer.

A) Invoice price B) Sticker price C) Set price D) Capitalized cost E) Residual value

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42) The price of a leased vehicle is known as the: A) Invoice price.

B) Sticker price.

C) Set price.

D) Capitalized cost.

E) Residual value.

43) The expected value of a vehicle at the end of a lease is called the: A) Invoice price.

B) Sticker price.

C) Set price.

D) Capitalized cost.

E) Residual value.

44) Jennifer is thinking about leasing a sports car. She will make monthly payments based on a

money factor and the price of the vehicle, which is called the: A) Invoice price.

B) Sticker price.

C) Set price.

D) Capitalized cost.

E) Residual value.

45) Heidi plans to purchase a pickup truck. The range available for negotiation is the difference

between the sticker price and the: A) Invoice price.

B) Money factor.

C) Set price.

D) Capitalized cost.

E) Residual value.

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46) A vehicle lease has several costs. Which of the following is the price of the vehicle?

A) Capitalized cost B) Money factor C) Payment schedule D) Residual value E) All of these choices are correct.

47) A vehicle lease has several costs. Which of the following is the interest rate used to calculate

the monthly cost?

A) Capitalized cost B) Money factor C) Payment schedule D) Residual value E) All of these choices are correct.

48) A vehicle lease has several costs. Which of the following is the amount paid monthly and the

number of payments?

A) Capitalized cost B) Money factor C) Payment schedule D) Residual value E) Trade-in value

49) A vehicle lease has several costs. Which of the following is the expected value at the end of

the lease?

A) Capitalized cost B) Money factor C) Payment schedule D) Residual value E) Trade-in value

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50) Which of the following are associated with a vehicle lease?

A) Capitalized cost B) Money factor C) Payment schedule D) Residual value E) All of these choices are correct.

51) George has never bought a new car before. Which of the following techniques should he use

to get the best deal?

A) Lowballing B) Highballing C) Leave a deposit to hold the vehicle D) Research the dealer cost and begin negotiations from that point E) Tell the dealer the highest monthly payment he can afford

52) The lowest payment does not necessarily mean the best credit plan. If your car loan is for a

long period of time, you may end up owing more than the car is worth, which is called: A) Low monthly payments.

B) A low-interest loan.

C) Negative equity.

D) Loan preapproval.

E) All of these are potential problems.

53) Which of the following is correct about the lemon law?

A) It applies when a vehicle has been out of service for 60 days.

B) It was enacted in 45 of the 50 states.

C) It requires a refund for the vehicle after the owner has made repeated attempts to

obtain financing.

D) It applies to vehicles that have been serviced four times to correct the same problem or have been out of service for more than 30 days within 12 months of purchase or the first 12,000 miles.

E) It applies to both new and used vehicle purchases.

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54) A variable operating cost for a vehicle is: A) Depreciation.

B) Insurance.

C) Interest on an auto loan.

D) License and registration.

E) Maintenance and repairs.

55) All of the following are fixed operating costs for a vehicle except: A) Depreciation.

B) Insurance.

C) Interest on an auto loan.

D) License and registration.

E) Maintenance and repairs.

56) A fixed operating cost for a vehicle is: A) Depreciation.

B) Gasoline and oil.

C) Maintenance and repairs.

D) Parking.

E) Tires.

57) All of the following are variable operating costs for a vehicle except: A) Depreciation.

B) Gasoline and oil.

C) Maintenance and repairs.

D) Parking.

E) Tires.

58) The largest fixed expense associated with a new automobile is: A) Depreciation.

B) Insurance.

C) Interest on an auto loan.

D) License and registration.

E) Maintenance and repairs.

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59) Which of the following costs will increase directly with the number of miles driven?

A) Depreciation B) Gasoline C) Insurance D) Interest on an auto loan E) License and registration

60) Craig wants to get his old car repaired, but he doesn't want to spend much money. He

probably will NOT want to go to the most expensive repair service. The most expensive option is typically a(n): A) Car dealer.

B) Independent auto repair shop.

C) Mass merchandise retailer.

D) Service station.

E) Specialty shop.

61) Most customer complaints result from the all of the following except: A) Deceptive pricing.

B) Defective products.

C) Long product lives.

D) Low-quality products.

E) Unexpected costs.

62) Paul bought some bad gasoline that damaged the gas tank of his vehicle.

A) He should sue the gas station where he bought his gas.

B) He never should have expected any problems with buying any product, especially gas

for his car.

C) He should provide the gas station with documentation of his purchase and all repair costs.

D) He should assume that the gas station should be able to track his purchase based on video cameras.

E) He should do nothing.

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63) Think about consumer complaints. Which of the following is correct?

A) The first step is to contact the company headquarters.

B) If you don't get satisfaction from the local store, you should take legal action as the

next step.

C) An arbitrator will provide a nonbinding process to settle your differences.

D) If you don't get satisfaction from working with the company headquarters, you may get assistance from a mediator in order to avoid legal action.

E) All of these choices are correct.

64) A process used to settle grievances in a nonbinding process is called a(n): A) Arbitration.

B) County health department.

C) Lawsuit.

D) Mediation.

E) All of these choices are correct.

65) Tamra went to a restaurant and had an unpleasant experience that sent her to the hospital.

The problems at the restaurant should be handled by: A) Arbitration.

B) The county health department.

C) A lawsuit.

D) Mediation.

E) The doctor who treated her.

66) Which of the following is not a legal option for high-income consumers?

A) Class-action lawsuits B) A lawyer C) A legal aid society D) Prepaid legal services E) Small claims court

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67) Sally has a major problem with a product and thinks that many others have had the same

problem. Which of the following may be a way to resolve the problem?

A) A class-action lawsuit B) A lawyer C) A legal aid society D) Prepaid legal services E) Small claims court

68) Steven needs to write a will. His best resource is a(n): A) Class-action lawsuit.

B) Attorney.

C) Mediator.

D) Arbitrator.

E) Small claims court.

69) Adolph has a low income and cannot afford his own attorney. He needs legal assistance and

should make use of a: A) Class-action lawsuit.

B) Lawyer.

C) Legal aid society.

D) Mediator.

E) Small claims court.

70) If you want to pay a set fee to receive unlimited or reduced-fee legal assistance, you should

use a: A) B) C) D) E)

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Class-action lawsuit.

Lawyer.

Mediator.

Prepaid legal service.

Small claims court.

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71) If you have a problem in which the remedy will be between $1,500 and $3,000, the

appropriate tool to use would be a: A) Class-action lawsuit.

B) Lawyer.

C) Legal aid society.

D) Prepaid legal service.

E) Small claims court.

72) What is the unit price of a 32-ounce box of brown sugar that costs $3.20?

A) $0.10 per ounce B) $0.10 per pound C) $1.60 per ounce D) $3.20 per pound E) $6.40 per pound

73) The unit price of a 64-ounce carton of orange juice that costs $3.20 is: A) $0.05 per ounce.

B) $0.10 per ounce.

C) $0.20 per ounce.

D) $1.00 per ounce.

E) $3.20 per ounce.

74) Using the following information, what is the cost to buy a car?

Down payment Monthly loan payment Opportunity cost of down payment Estimated value of vehicle at end of ownership period A) B) C) D) E)

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$3,000 $350 per month for a six-year loan $3,000 × loan period (in years) × 2% interest $4,000

$3,000. $21,200. $24,560. $25,200. $28,200.

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75) Using the following information, what is the cost to lease a car? (Assume there are no

charges for damage at the end of the lease.)

Security deposit Monthly lease payment Opportunity cost of security deposit End-of-lease charges A) B) C) D) E)

$300 $300 per month for a five-year lease 300 × loan period (in years) × 2% interest 500

$18,000 $18,530 $18,560 $18,830 $19,030

76) After two or three years of making loan payments on a new car, the balance owed is greater

than the value of the car which is a situation referred to as upside-down. ⊚ true ⊚ false

77) To extend the life of your vehicle, you should get a tune-up every 10,000 miles. ⊚ true ⊚ false

78) A legal aid society is one of a network of publicly-supported community law offices that

provides legal assistance to people who cannot afford their own attorney. ⊚ true ⊚ false

79) In every state, small claims courts are available to handle legal disputes involving relatively

large amounts of money. ⊚ true ⊚ false

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80) The unit price of a 32-ounce jar of honey that costs $8.32 is $0.13 per ounce. ⊚ true ⊚ false

81) The only way that you can have long-term financial security is to not save all of your current

income. ⊚ true ⊚ false

82) Abigail checked out brands and prices of blue jeans at several stores. She was impulse

shopping. ⊚ true ⊚ false

83) Abigail checked out brands and prices of blue jeans at several stores. She was comparison

shopping. ⊚ true ⊚ false

84) One of the best ways to compare prices of food packages of different sizes is to use rebate

pricing. ⊚ true ⊚ false

85) Prices at the local convenience store will probably be lower than at the national retail grocery

store. ⊚ true ⊚ false

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86) Thomas bought a toaster that malfunctioned after six months. If he returned the toaster and

the manufacturer accepted the return, then this demonstrates that a full warranty was likely in place. ⊚ true ⊚ false

87) Thomas bought a vehicle from a used car dealer. He returned it to the dealer because the

transmission fell out 150 miles after he purchased it. The dealer refused to accept the return because the vehicle was sold "as is." This is an example of a limited warranty. ⊚ true ⊚ false

88) A service contract is frequently called an extended warranty even though service contracts

are not warranties. ⊚ true ⊚ false

89) Service contracts on vehicles usually are wise financial decisions. ⊚ true ⊚ false

90) An example of a "pre-shopping activity" is negotiating the price of a product. ⊚ true ⊚ false

91) The phases of the buying process are problem identification, pre-shopping activities,

evaluating alternatives, selection and purchase, and post-purchase activities. ⊚ true ⊚ false

92) During problem identification, a clear statement of a problem is "I need to have a car". ⊚ true ⊚ false

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93) In selecting vehicle options, a convenience option that consumers may look for in a vehicle is

special trim. ⊚ true ⊚ false

94) In selecting vehicle options, an aesthetic feature of a vehicle is air conditioning. ⊚ true ⊚ false

95) In comparing used vehicles, a vehicle that looks rusty on the outside will have major

operational problems. ⊚ true ⊚ false

96) In comparing used vehicles, a vehicle that looks rusty on the outside may hide a well-

maintained engine. ⊚ true ⊚ false

97) A lease for a car is typically for three to five years. ⊚ true ⊚ false

98) Advantages of a lease over a purchase include that the buyer can usually obtain a more

expensive vehicle and the monthly lease payments are usually lower than monthly financing payments. ⊚ true ⊚ false

99) One of the first steps in a new car purchase negotiation should be a discussion of the trade-in

vehicle. ⊚ true ⊚ false

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100)

In determining the purchase price of a new car, a trade-in vehicle should NOT be mentioned until the cost of the new car has been settled. ⊚ true ⊚ false

101)

If you are somewhat interested in a specific vehicle, you should provide a small deposit so the car seller will hold the vehicle for you. ⊚ true ⊚ false

102)

Lemon laws have been enacted in 48 of the 50 states for new vehicle purchases. ⊚ true ⊚ false

103)

The largest fixed expense associated with a new automobile is depreciation. ⊚ true ⊚ false

104)

Studies of consumer problems consistently rank auto repair services as one of the best consumer experiences with few consumer complaints. ⊚ true ⊚ false

105)

People do not anticipate problems with purchases but should be prepared for them. ⊚ true ⊚ false

106)

If you have a problem with a product and you are talking with a customer service person, you should raise your voice and demand unreasonable action during your conversation. ⊚ true ⊚ false

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107)

If you have a problem with a product, the first place you should express your dissatisfaction is to the corporate headquarters. ⊚ true ⊚ false

108)

Joe bought some cheese at his local grocery store. After he brought it home, he noticed it was moldy even though the expiration date was still three weeks away. First, he should contact the original sales location. If not resolved there, then he should call the toll-free hotline number printed on the package to tell the company about the problem he encountered. ⊚ true ⊚ false

109)

The settlement of a difference between two parties through discussion and negotiation by a mediator is legally binding. ⊚ true ⊚ false

110)

The settlement of a difference between two parties by an arbitrator is legally binding. ⊚ true ⊚ false

111)

Tracy went to a local restaurant and became ill from the meal she ate. She can contact her city or county health department to handle problems with the restaurant. ⊚ true ⊚ false

112)

Small claims court is used to take legal action by a few individuals on behalf of all who have suffered the same alleged injustice. ⊚ true ⊚ false

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113)

The best place to find a qualified lawyer who will meet your specific needs is a phone book. ⊚ true ⊚ false

114)

One of the common sources to find a qualified lawyer who will meet your specific needs is referrals from friends. ⊚ true ⊚ false

115)

A lawyer is necessary when you appear in small claims court. ⊚ true ⊚ false

116)

The best time to ask a lawyer about his fees is after he wins a case for you. ⊚ true ⊚ false

117)

To extend the life of your vehicle, you should get a tune-up every 25,000 to 30,000 miles. ⊚ true ⊚ false

118)

One of the best ways to compare prices of food packages of different sizes is to use unit pricing. ⊚ true ⊚ false

119)

A lease for a car is typically for 5 to 10 years. ⊚ true ⊚ false

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120)

All 50 states and the District of Columbia have enacted lemon laws. ⊚ true ⊚ false

121)

The settlement by an arbitrator is legally binding. ⊚ true ⊚ false

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Answer Key Test name: ch 6 (2) 1) A 2) C 3) C 4) C 5) D 6) D 7) A 8) B 9) C 10) E 11) B 12) C 13) E 14) D 15) C 16) D 17) E 18) C 19) E 20) C 21) C 22) C 23) A 24) A 25) D 26) D 27) B 28) B 29) B 30) E 31) E 32) A 33) E 34) D 35) C 36) C 37) D

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38) B 39) B 40) A 41) C 42) D 43) E 44) D 45) A 46) A 47) B 48) C 49) D 50) E 51) D 52) C 53) D 54) E 55) E 56) A 57) A 58) A 59) B 60) A 61) C 62) C 63) D 64) D 65) B 66) C 67) A 68) B 69) C 70) D 71) E 72) A 73) A 74) C 75) B 76) TRUE 77) FALSE

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78) TRUE 79) FALSE 80) FALSE 81) FALSE 82) FALSE 83) TRUE 84) FALSE 85) FALSE 86) TRUE 87) FALSE 88) TRUE 89) FALSE 90) FALSE 91) FALSE 92) FALSE 93) FALSE 94) FALSE 95) FALSE 96) TRUE 97) TRUE 98) TRUE 99) FALSE 100) TRUE 101) FALSE 102) FALSE 103) TRUE 104) FALSE 105) TRUE 106) FALSE 107) FALSE 108) TRUE 109) FALSE 110) TRUE 111) TRUE 112) FALSE 113) FALSE 114) TRUE 115) FALSE 116) FALSE 117) TRUE

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118) 119) 120) 121)

TRUE FALSE TRUE TRUE

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Chapter 7 (1) 1) Carrie bought a house five years ago for $105,000. At that time she borrowed $95,000 from

her bank. The house is now worth $127,000. Her PMI will automatically be dropped when her mortgage balance drops to: A) $95,000.

B) $81,900.

C) $105,000.

D) $106,000.

E) $127,000.

2) If you have a $156,000, 30-year, 5 percent mortgage, how much of your first monthly

payment of $838.5 would go toward interest?

A) $838.50 B) $188.50 C) $7,800.00 D) $691.60 E) $650.00

3) If you have a $204,000, 30-year, 5 percent mortgage, how much of your first monthly

payment of $1,096.5 would go toward principal?

A) $10,200.00 B) $246.50 C) $1,096.50 D) $850.00 E) $904.40

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Answer Key Test name: ch 7 (1) 1) B 2) E 3) B

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Chapter 7 (2) 1) Marcus can afford a monthly mortgage payment of $900. If he is eligible for a 30-year, 5

percent mortgage (where the mortgage factor is 5.37), how much of a mortgage loan can he afford?

A) $150,000.00 B) $167,597.77 C) $200,100.75 D) $324,000.00 E) $510,015.00

2) Which of the following is NOT correct?

A) Renting is usually less costly in the short run.

B) Home ownership usually has long-term financial advantages.

C) Lifestyle and financial factors should be analyzed to determine if you should rent or

buy.

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

E) Renting offers more mobility versus buying.

3) Which of the following is a disadvantage of renting?

A) Renters have fewer responsibilities than home owners.

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

C) Renters usually do not have to be concerned with maintenance and repairs.

D) Taking possession of a rental unit is less expensive than buying a home.

E) Renting can be more convenient for those who move frequently.

4) Which of the following is an advantage of renting?

A) Noise from parties may be monitored closely and restricted.

B) Renters have fewer responsibilities for maintenance than home owners.

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

D) Tenants may be subject to restrictions regarding remodeling.

E) Tenants may have restrictions regarding pets.

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

A) The amount of the down payment.

B) The conditions under which the landlord may enter the apartment.

C) The interest rate for a lease loan.

D) The name and address of the buyer.

E) The sale date.

6) The opportunity to have another person take over rent payments and live in the rental unit is

called (a): A) Lease.

B) Lessee.

C) Lessor.

D) Rental agreement.

E) Subletting.

7) A legal document that includes information about the due date of monthly rent is called a: A) Lease.

B) Lessee.

C) Lessor.

D) Rental statement.

E) Sublease.

8) The owner/landlord is known as the: A) Lease.

B) Lessee.

C) Lessor.

D) Renter.

E) Sublease.

9) The tenant is the: A) Lease.

B) Lessee.

C) Lessor.

D) Owner.

E) Sublease.

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10) Which of the following provides the tenant protection from rent increases?

A) A lease B) A lessee C) A lessor D) A rental statement E) A sublease

11) Which of the following gives the landlord the right to take legal action against a tenant for

nonpayment of rent or destruction of property?

A) A lease B) A lessee C) A lessor D) A rental statement E) A sublease

12) Which of the following expenses is NOT usually incurred by a tenant?

A) A security deposit B) Utilities (other than water) C) Renter's insurance D) Property taxes E) None of these are typically incurred

13) Which of the following is NOT a benefit of home ownership?

A) Stability of residence B) Personalized living location C) Deductibility of mortgage interest D) Deductibility of real estate taxes E) Costs of maintenance, repairs, and home improvements

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14) 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?

A) An advantage is that Donald can deduct mortgage interest and real estate taxes.

B) A disadvantage is that Donald is responsible for maintenance and costs of repairs and home improvements.

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

D) A disadvantage is that real estate taxes are a major expense for homeowners.

E) An advantage is that Donald can paint his house bright purple with green trim to match his college's colors.

15) Which of the following is a form of housing in which the owners pay a monthly fee for

maintenance of the common areas?

A) A condominium B) Cooperative housing C) A manufactured home D) A single-family dwelling E) An apartment

16) Which of the following is a form of housing in which the units are owned by a nonprofit

organization?

A) A condominium B) Cooperative housing C) A manufactured home D) A single-family dwelling E) A townhouse

17) Which of the following is a form of housing in which shareholders purchase stock to obtain

the right to live in a unit of the building?

A) A condominium B) Cooperative housing C) A manufactured home D) A single-family dwelling E) A townhouse

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18) Diane purchased her house and had it assembled before it was moved to her lot. She

purchased a: A) Condominium.

B) Cooperative housing.

C) Manufactured home.

D) Single-family dwelling.

E) Townhouse.

19) Elaine purchased her living unit in a building with five other separate units. She purchased a: A) Prefabricated home.

B) Duplex.

C) Manufactured home.

D) Single-family dwelling.

E) Townhouse.

20) Paul and Lora built their home. When they researched contractors, they should have

considered all of the following except: A) Contractors’ reputations and experiences.

B) Contractors’ relationships with suppliers and carpenters.

C) Payment arrangements during construction.

D) Time and payment schedules.

E) Contractors’ property tax payments during construction.

21) Frank and Diane want to buy a house. Which of the following do they need before they

purchase a house?

A) A down payment B) Renter’s insurance C) Mortgage interest D) Mortgage principal E) A handyman

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22) Georgina and Henry have a family and are looking at houses. Which of the following is

correct?

A) They should avoid buying a home that needs any repairs.

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

C) The amount they can afford for housing will be primarily determined by the down payment.

D) Their first home should contain all the features desired.

E) They should complete all repair work themselves to increase costs.

23) What should a home buyer consider when evaluating a house?

A) Zoning laws B) Location of businesses and future construction projects C) School system D) Property values of the community E) All of these should be evaluated.

24) 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: A) Providing advice on features to highlight.

B) Screening potential buyers to determine whether they will qualify for a mortgage.

C) Suggesting a selling price.

D) Showing Ingrid's home to potential buyers.

E) Home appraisal.

25) Jim wants to make an offer to buy an older house. At this point, he should: A) Move into the house.

B) Set up a home inspection.

C) Contact the seller to purchase his lawn tools.

D) Close the purchase transaction.

E) Sign his mortgage papers.

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26) Kelly selected a home and submitted an offer to the seller. Which of the following is correct?

A) The seller must accept her offer.

B) Her offer must have been for the asking price.

C) The seller's price is affected by Kelly's need to buy.

D) The seller may reject the offer and choose to provide a counteroffer.

E) Kelly will receive earnest money when she presents the offer.

27) Madeline wants to purchase a larger house. However, she has not yet sold her current home.

She may want to include a(n) ________ in her offer.

A) appraisal B) contingency clause C) dual agent D) counteroffer E) purchase agreement

28) When Nancy buys her house, the mortgage company will usually conduct: A) An appraisal.

B) A contingency clause.

C) A dual agent.

D) An earnest money analysis.

E) A purchase agreement.

29) 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) An appraiser.

B) A contingency clause.

C) A dual agent.

D) An earnest money analyzer.

E) A purchase agreement.

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30) Pauline just submitted an offer on her dream home. As evidence of good faith, she also

included: A) An appraisal.

B) A contingency clause.

C) A dual agent.

D) Earnest money.

E) A counteroffer

31) Private mortgage insurance: A) Cannot be avoided.

B) Is part of all mortgages.

C) Is usually required if the down payment is less than 25%.

D) Must be terminated automatically when the homeowner’s equity reaches 22% of the

property value at the time the mortgage was executed.

E) Protects the buyer from financial loss if the value of the home increases.

32) Major factors that affect the affordability of your mortgage include all of the following

except: A) B) C) D) E)

The amount available for a down payment.

Current mortgage rates.

Income.

The length of the loan.

The size of the home.

33) Quinn applied for a loan. He provided information about his finances and the home he plans

to purchase. Results of the affordability mortgage calculation included all of the following except: A) Expected maintenance costs.

B) The home purchase price he can afford.

C) The monthly mortgage payment he can afford.

D) The mortgage amount he can afford.

E) None of these choices is correct.

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34) Rebecca paid extra money to reduce her mortgage interest rate. That extra money is called: A) Amortization.

B) Escrow.

C) Lock.

D) PMI. E) Points.

35) Ricky has a conventional mortgage. He can monitor the reduction of his loan balance through

his payments by using _____ information.

A) amortization B) escrow C) lock D) PMI E) points

36) When Sam applied for a loan, he was assured that his rate would not change if he closed

within 30 to 90 days. Sam had a(n) ______ on the interest rate.

A) amortization B) escrow account C) lock D) PMI E) points

37) Trenton wants to buy a house but can provide only a 10 percent down payment. He probably

will be required to have: A) Amortization.

B) An escrow account.

C) A lock.

D) PMI. E) Points.

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38) As a result of being an armed services veteran, Dan should be eligible for a(n): A) ARM. B) FHA loan.

C) Negative amortization.

D) Payment cap.

E) VA loan.

39) Ursula wants to have an interest rate that can increase or decrease during the life of her loan.

She should look for a(n): A) ARM. B) FHA loan.

C) Negative amortization.

D) Second mortgage E) VA loan.

40) Paul is looking for a low interest, low-down-payment loan for his first home, but he is not a

veteran. He might be eligible for a(n): A) ARM. B) FHA loan.

C) Negative amortization.

D) Payment cap.

E) VA loan.

41) Veronica has had a variable-rate mortgage for several years. Unfortunately, the monthly

mortgage payments have not covered her interest owed. As a result, her home equity is decreasing because of: A) An ARM. B) An FHA loan.

C) Negative amortization.

D) A buy-down.

E) A VA loan.

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42) Yvette has a flexible-rate mortgage that limits the amount to which her monthly payments

can rise. This feature is called a(n): A) Rate cap B) FHA loan.

C) Negative amortization.

D) Payment cap.

E) VA loan.

43) If you have an interest rate subsidy from a home builder or real estate developer, you have

a(n): A) B) C) D) E)

Payment cap.

Buy-down.

ARM. Rate cap.

Interest-only mortgage.

44) If you do not pay back any of the loan amount for a portion of the loan period but are not

defaulting in the loan, you have a(n): A) FHA loan.

B) Buy-down.

C) ARM. D) Home equity mortgage.

E) Interest-only mortgage.

45) The primary benefit of a home equity loan is: A) Its limited availability.

B) The deductibility of the loan interest on federal taxes.

C) The required monthly payments.

D) Tax-free income in the form of a loan.

E) All of these are primary benefits.

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46) A reverse mortgage: A) Is the same thing as a second mortgage.

B) Allows a homeowner access to a line of credit program.

C) 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.

D) All of these choices are correct.

E) None of these choices is correct.

47) During the closing for a home purchase, you will normally do which of the following?

A) Order an appraisal.

B) Pay all closing costs, settle last-minute details, and sign documents C) Schedule an inspection of the condition of the home.

D) Sign documents and pay half of the settlement costs.

E) Review zoning laws for the municipality where the home is located.

48) Which of the following is the document that transfers ownership of property from one party

to another?

A) The deed B) Escrow C) The mortgage D) PMI E) The points

49) Which of the following is an account used to pay property taxes and homeowner’s insurance?

A) The deed B) Escrow C) The mortgage D) PMI E) The points

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50) Walt has decided to sell the home he has lived in for 50 years. The house has two bedrooms

on the first floor, a finished basement, and a finished attic with a low ceiling. To prepare his home for sale, he should: A) Exaggerate the size of his yard.

B) Keep everything "as is."

C) List his house as a three-bedroom.

D) Take steps to remove excess furniture to make areas look less cluttered and therefore larger.

E) Underestimate the cost of utilities.

51) Lonnie wanted to sell his house but didn't know what price to ask. He should consider all of

the following except: A) Current mortgage rates.

B) Demand in the housing market.

C) His original cost.

D) Recent selling prices of comparable homes in the area.

E) The appraised value of his home.

52) Which of the following is NOT correct?

A) Alex's daily maintenance and timely repairs around his home should make it

attractive to potential buyers.

B) Brenda's new hot tub will probably not increase the selling price.

C) When showing the home, Caryn's suggestion to open drapes but keep lights turned off to conserve energy will give her property a positive image.

D) Darryl's decision to sell his house "by owner" could save him several thousands of dollars in commission.

E) Eric's listing with a real estate agent will provide him with services such as advice on features of his home to highlight.

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53) Franklin wants to sell his house himself. Which of the following is NOT good advice about

his sale?

A) He should create a detailed information sheet and distribute it in stores and other public areas, as permitted.

B) He should plan to spend time and effort throughout the sales process.

C) He should require potential buyers to provide names, addresses, telephone numbers, and background information.

D) He should show the house only when he is home alone.

E) He should provide information about the availability of financing and financing requirements.

54) If you are selling your house by owner, you should still enlist the assistance of: A) A real estate agent to help with the closing.

B) A lawyer or title company to assist with the contract, closing, and other legal matters.

C) A lawyer to help stage your home.

D) A real estate agent to help with marketing efforts.

E) All of these are correct.

55) Which of the following is NOT correct regarding real estate agents?

A) They can provide advice on features of your home to highlight.

B) They can suggest a selling price.

C) They will make other agents aware of your home.

D) They may screen potential buyers to determine if they will qualify for a mortgage for

your home.

E) They require that you conduct your own showings.

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56) Given the information below, what is the total cost of renting per year?

Annual rent payments Annual renter's insurance Annual interest lost on security deposit Value of apartment A) B) C) D) E)

$ 14,400 $ 300 $ 10 $ 150,000

$14,400 $14,700 $14,710 $150,000 $164,700

57) Crystal is looking for a new apartment. Given the information below, what are her total

annual costs associated with renting?

Monthly rent payments Annual renter's insurance Annual interest lost on security deposit Value of apartment A) B) C) D) E)

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$ 1,000 $ 250 $ 20 $ 150,000

$1,270 $12,000 $12,250 $12,270 $162,270

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58) Given the information here, what is the annual cost of owning the home?

Home value

$ 300,000

Annual mortgage payments

$ 19,200

Annual property taxes

$ 4,800

Annual homeowner's insurance

$ 1,200

Estimated maintenance and repairs

1 % of home value $ 3,000

Growth in equity Tax savings (mortgage interest and property tax) Estimate annual appreciation A) B) C) D) E)

$ 2,800 1.5 % of home value

$17,900 $28,200 $38,500 $300,000 $338,500

59) Brett bought a house five years ago for $150,000. At that time, he borrowed $140,000 from

his bank. The house is now worth $162,000. The current value of his mortgage must be no higher than_______for him to request termination of his PMI policy.

A) $122,000 B) $126,360 C) $140,000 D) $150,000 E) $162,000

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60) Carrie bought a house five years ago for $150,000. At that time she borrowed $140,000 from

her bank. The house is now worth $162,000. Her PMI will automatically be dropped when her mortgage balance drops to: A) $117,000.

B) $122,000.

C) $140,000.

D) $150,000.

E) $162,000.

61) If you have a $150,000, 30-year, 5 percent mortgage, how much of your first monthly

payment of $805.23 would go toward interest?

A) $180.50 B) $625.00 C) $665.28 D) $805.50 E) $7,500.00

62) If you have a $150,000, 30-year, 5 percent mortgage, how much of your first monthly

payment of $805.23 would go toward principal?

A) $180.23 B) $625.00 C) $665.28 D) $805.50 E) $7,500.00

63) With a down payment of at least 5 percent, lenders use 33 percent of monthly gross income

as a guideline for PITI (principal, interest, taxes, and insurance). ⊚ true ⊚ false

64) The Real Estate Settlement Procedures Act (RESPA) requires that loan applicants be given

an estimate of the closing costs after the actual closing. ⊚ true ⊚ false

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65) Lease-to-purchase and rent-with-option allow homeowners to become renters. ⊚ true ⊚ false

66) Renter’s insurance protects the tenant by covering damage or theft to clothing, furniture, and

stereo equipment. ⊚ true ⊚ false

67) Your lifestyle affects your housing decision. ⊚ true ⊚ false

68) Your decision to rent or to buy your residence should be based solely on lifestyle factors. ⊚ true ⊚ false

69) An advantage of renting is pride of ownership. ⊚ true ⊚ false

70) Angela wanted to rent an apartment, so her landlord required her to sign a lease. The lease is

a legal document that defines the conditions of her rental agreement. ⊚ true ⊚ false

71) A landlord has the right to sublet an apartment. ⊚ true ⊚ false

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72) Lenny the landlord has the right to take legal action against Tina the tenant for nonpayment

of rent or destruction of property. ⊚ true ⊚ false

73) When Brett's apartment lease ends, he should receive his entire security deposit back even

though the carpet has been damaged while he was living there. ⊚ true ⊚ false

74) Rental insurance isn't important since the landlord's insurance on the building includes

coverage on all tenants' belongings. ⊚ true ⊚ false

75) A disadvantage of home ownership is the deductibility of mortgage interest and real estate

tax payments. ⊚ true ⊚ false

76) A duplex is a house with two or more separate dwellings. ⊚ true ⊚ false

77) A condominium is a form of housing in which the units in a building are owned by a

nonprofit organization. ⊚ true ⊚ false

78) When interest rates are high and the demand for homes is low, prices of homes will likely be

higher. ⊚ true ⊚ false

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79) Private mortgage insurance is usually required if the down payment for a home is less than

30%. ⊚ true ⊚ false

80) An approved mortgage application usually locks in an interest rate for 60 to 120 days. ⊚ true ⊚ false

81) As interest rates increase, more people are able to afford the cost of an average-priced home. ⊚ true ⊚ false

82) Mortgage points are paid to the lender at the end of the mortgage. ⊚ true ⊚ false

83) The most common conventional mortgage is the 20-year ARM. ⊚ true ⊚ false

84) Most new mortgages are assumable. ⊚ true ⊚ false

85) Merrill bought a house and applied for a loan through the VA (Veterans Administration). The

VA will provide the mortgage money. ⊚ true ⊚ false

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86) Most low- and middle-income people can qualify for a VA-guaranteed loan. ⊚ true ⊚ false

87) An advantage of a second mortgage is that the interest rate subsidy from the home builder

reduces the mortgage payments during the first few years of the loan. ⊚ true ⊚ false

88) An advantage of a buy-down is that the interest rate subsidy from the home builder reduces

the mortgage payments during the first few years of the loan. ⊚ true ⊚ false

89) If you pay an extra $100 per month on your mortgage, your total loan principal will decrease

and your total interest will remain the same. ⊚ true ⊚ false

90) At the closing of a home purchase, the buyer and seller conduct a walk-through of the

property. ⊚ true ⊚ false

91) The purpose of an escrow account is to pay the points at closing. ⊚ true ⊚ false

92) Home improvements will definitely increase the selling price of a house. ⊚ true ⊚ false

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93) Each year about 50 percent of home sales are made by the home’s owners. ⊚ true ⊚ false

94) A real estate agent can help screen potential buyers to determine whether they will qualify

for a mortgage. ⊚ true ⊚ false

95) Home equity is the current market value less the assessed value ⊚ true ⊚ false

96) Lease-to-purchase and rent-with-option allow renters to become homeowners. ⊚ true ⊚ false

97) A renter may have the right to sublet an apartment. ⊚ true ⊚ false

98) Home improvements may or may not increase the selling price of a house. ⊚ true ⊚ false

99) Each year about 10 percent of home sales are made by the home’s owners. ⊚ true ⊚ false

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Answer Key Test name: ch 7 (2) 1) B 2) D 3) B 4) B 5) B 6) E 7) A 8) C 9) B 10) A 11) A 12) D 13) E 14) C 15) A 16) B 17) B 18) C 19) E 20) E 21) A 22) B 23) E 24) E 25) B 26) D 27) B 28) A 29) C 30) D 31) D 32) E 33) A 34) E 35) A 36) C 37) D

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38) E 39) A 40) B 41) C 42) D 43) B 44) E 45) B 46) C 47) B 48) A 49) B 50) D 51) C 52) C 53) D 54) B 55) E 56) C 57) D 58) A 59) B 60) A 61) B 62) A 63) TRUE 64) FALSE 65) FALSE 66) TRUE 67) TRUE 68) FALSE 69) FALSE 70) TRUE 71) FALSE 72) TRUE 73) FALSE 74) FALSE 75) FALSE 76) FALSE 77) FALSE

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78) FALSE 79) FALSE 80) FALSE 81) FALSE 82) FALSE 83) FALSE 84) FALSE 85) FALSE 86) FALSE 87) FALSE 88) TRUE 89) FALSE 90) FALSE 91) FALSE 92) FALSE 93) FALSE 94) TRUE 95) FALSE 96) TRUE 97) TRUE 98) TRUE 99) TRUE

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Chapter 8 (1) 1) Cheyenne has a home insured for $190,000. It would cost $210,000 to rebuild her home. If

she has home insurance that provides personal property coverage at 70 percent of the home’s value, how much of her household belongings would be covered?

A) $190,000 B) $210,000 C) $147,000 D) $133,000 E) $76,000

2) Sally was driving her own car and collided with a pickup truck. Sally sustained $142,000 in

injuries, and her passenger sustained $27,000 in injuries. If her coverage was 100/300/50, what are the total medical expenses the insurance company would pay for this accident?

A) $117,000 B) $127,000 C) $142,000 D) $169,000 E) $27,000

3) Last month some of your friends were riding in a car together and were injured in an

accident. Their total injuries were as follows: Brenda Raquel Louis

$ 71,000 $ 147,000 $ 33,000

Coverage was 100/300/50. What was the total medical coverage in this accident?

A) $251,000 B) $147,000 C) $71,000 D) $33,000 E) $204,000

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Answer Key Test name: ch 8 (1) 1) D 2) B 3) E

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Chapter 8 (2) 1) An individual who purchases an insurance policy is called: A) An insurance company.

B) A policyholder.

C) An insurer.

D) A victim.

E) An employer.

2) What is the fee that a policyholder pays when an insurance company agrees to take on the

risk?

A) B) C) D) E)

Coverage Insurance The premium Peril Risk

3) An insurance company is a _________ business that agrees to pay for losses that may happen

to someone it insures.

A) risk-reducing B) risk-assuming C) risk-sharing D) risk-avoiding E) risk-eliminating

4) Barbara left a skateboard on her front steps. Her neighbor tripped on the skateboard and was

injured. The skateboard was a: A) Hazard.

B) Self-insurance negligence.

C) Pure peril.

D) Premium.

E) Speculative risk.

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5) Barbara left a skateboard on her front steps. Her neighbor tripped on the skateboard and was

injured. The fact that Barbara didn't put away the skateboard is called: A) Hazard.

B) Negligence.

C) Peril.

D) Premium.

E) Risk.

6) Barbara left a skateboard on her front steps. A windstorm swept the skateboard up and the

skateboard crashed through her window. The windstorm was a: A) Hazard.

B) Negligence.

C) Peril.

D) Premium.

E) Risk.

7) The most common risks are: A) Personal risks.

B) Property risks.

C) Liability risks.

D) All of these are common risks.

E) None of these are common risks.

8) Anything that may possibly cause a loss is called a: A) Hazard.

B) Negligence.

C) Peril.

D) Premium.

E) Speculation.

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9) The failure to take ordinary or reasonable care to prevent accidents from happening is called: A) Hazard.

B) Negligence.

C) Peril.

D) Premium.

E) Risk.

10) An insurance company will: A) Insure speculative and pure risks.

B) Insure pure risk, but not speculative risk.

C) Insure neither pure risk nor speculative risk.

D) Insure speculative risk, but not pure risk.

E) Insure all types of risks.

11) Which of the following is NOT one of the commonly used general risk management

techniques?

A) Risk reduction B) Risk assumption C) Risk shifting D) Risk avoidance E) Risk maximization

12) If you choose to avoid the risk of a traffic accident by not driving to work, you are using: A) Risk avoidance.

B) Risk reduction.

C) Risk assumption.

D) Risk shifting.

E) Risk increasing.

13) If you choose to wear your seat belt, you are using: A) Risk avoidance.

B) Risk reduction.

C) Risk assumption.

D) Risk shifting.

E) Risk increasing.

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14) If you choose to take responsibility for the negative results of a risk, you are using: A) Risk avoidance.

B) Risk reduction.

C) Risk assumption.

D) Risk shifting.

E) Risk increasing.

15) If you choose to insure your home or your vehicle, you are using: A) Risk avoidance.

B) Risk reduction.

C) Risk assumption.

D) Risk shifting.

E) Risk increasing.

16) The main goal when setting insurance goals is to: A) Increase possible loss of income caused by illness.

B) Increase possible loss of property caused by perils.

C) Maximize personal property and liability risks.

D) Keep the coverage constant or unchanged throughout one's life.

E) Minimize personal, property, and liability risks.

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

A) What do I need to insure?

B) How much should I insure something for?

C) What kind of insurance should I buy?

D) Whom should I buy insurance from?

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

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18) Which of the following is correct?

A) The best risk management plan is one that does not change throughout one's life.

B) Once a plan is set up, it should be reviewed every 10 years.

C) A solid risk management plan works well without insurance as a component.

D) One question that should be asked when developing a risk management plan is "What

do I need to insure?"

E) The main goal of insurance should be to maximize personal, property, and liability risks.

19) The two basic types of risk that people face regarding potential property losses are: A) Basic and criminal.

B) Physical damage and destruction.

C) Destruction and basic.

D) Physical damage and damage caused by criminal behavior.

E) Negligence and criminal behavior.

20) Liability is defined as: A) An insurance program for individuals and households.

B) The legal responsibility for the financial cost of another person's losses or injuries.

C) Negligence.

D) A loss due to physical damage.

E) Risk assumption.

21) Homeowner's insurance typically covers all of the following except: A) Personal property.

B) Personal liability and related coverage.

C) Additional living expenses.

D) Automobiles.

E) The building in which you live and any other structures on the property.

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22) Homeowner's insurance typically covers all of the following except: A) A detached garage.

B) Trees and shrubs.

C) A toolshed.

D) Personal property.

E) All of these are covered.

23) Homeowner's insurance typically covers all of the following except: A) Furniture.

B) The full value for jewelry valued at $25,000 that was stolen from your home.

C) Appliances.

D) Clothing.

E) Rental rug cleaner.

24) The best place to keep a household inventory is: A) On a bookshelf in the family room.

B) In the freezer.

C) In the attic.

D) In a safe deposit box.

E) In the garage.

25) All of the following are acceptable types of documentation for a household inventory except: A) Photographs with dates purchased and values of objects listed on the backs.

B) Video recordings of your home and its contents.

C) Receipts, serial numbers, brand names, and proof-of-value documents.

D) A household inventory form from your insurance agent with purchase dates and costs.

E) A listing of items and their details in your memory.

26) Insurance that covers valuable items, such as an expensive musical instrument, is called: A) Buildings and other structures coverage.

B) Homeowner's insurance.

C) A personal property floater.

D) Household inventory insurance.

E) Personal liability insurance.

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27) Personal property insurance covers: A) The full value of jewelry valued at $25,000 that is stolen from your home.

B) Furniture and appliances, but not clothing or some electronics.

C) Clothing and some electronics, but not furniture and appliances.

D) All items up to 200% of the insured value of the home.

E) Personal property items up to 55-75 percent of the insured value of the home.

28) Personal liability coverage does NOT cover: A) An occasional babysitter.

B) The cost of legal defense.

C) A guest.

D) Members of the homeowner's family who accidentally break a neighbor’s antique

lamp.

E) A housekeeper.

29) A policy that supplements your basic personal liability coverage is called a(n): A) Endorsement.

B) Homeowner's insurance.

C) Medical payments coverage.

D) Supplementary policy.

E) Umbrella policy.

30) When Stanley was visiting Elaine, he tripped on her front porch step and sprained his ankle.

His injuries were covered by: A) Elaine's medical payments coverage.

B) Stanley homeowner's policy.

C) Elaine's health insurance coverage.

D) Elaine's life insurance policy.

E) The insurance policy of the mason who installed the front porch step 15 years ago.

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31) If you have a loss due to a flood: A) Your homeowner's insurance should normally cover the loss.

B) You must have already purchased special coverage if you live in an area that has

frequent floods in order to be covered.

C) FEMA (Federal Emergency Management Agency) will automatically provide coverage if this is your second flood loss.

D) You need an umbrella policy for coverage.

E) Your additional living expenses coverage will apply if you move to an area that has not flooded in one year.

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

A) The broad form covers personal property against perils specified in the policy.

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

C) The comprehensive form protects personal property against perils not specifically

excluded in the policy.

D) Typical coverage pays only the actual cash value of one's losses.

E) Renter's insurance is relatively inexpensive versus homeowner’s insurance.

33) Homeowner's insurance includes all of the forms listed here except: A) HO-1.

B) HO-2.

C) HO-5.

D) HO-6.

E) HO-8.

34) Home insurance policies include coverage for all of the following except: A) Credit card fraud.

B) The cost of removing damaged property.

C) Temporary repairs after a loss to prevent further damage.

D) Business property.

E) Emergency removal of property to protect it from damage.

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35) Vincent is applying for insurance for his new home. Which of the following is correct?

A) He should base the amount of insurance on the price he paid for it.

B) He should insure the building for 75 percent of its replacement cost.

C) He should use the actual cash value method for settling claims to receive the full cost

of repairing or replacing his personal belongings.

D) His personal belongings should be covered with his home insurance at 55-75 percent of his home's insured amount.

E) His insured amount should remain the same as long as he lives in his house.

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

A) He should base the amount of insurance on the price to rebuild or repair the new

home.

B) He should insure the building for 75 percent of its replacement cost.

C) He should use the actual cash value method for settling claims to receive the full cost of repairing or replacing his personal belongings.

D) His personal belongings should be covered with his home at 125 percent of his home's insured amount.

E) His insured amount should remain the same as long as he lives in his house.

37) Zach is applying for insurance for his new home. Which of the following is correct?

A) He should base the amount of insurance on the price he paid for the new home.

B) He should insure the building under the replacement value method to receive the full

cost of repairing or replacing it.

C) He should use the actual cash value method for settling claims to receive the full cost of repairing or replacing his personal belongings.

D) His personal belongings should automatically be covered with his home at 125 percent of his home's insured amount.

E) His insured amount should remain the same as long as he lives in his house.

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38) Andrew is applying for insurance for his new home. Which of the following is correct?

A) He should base the amount of insurance on the price he paid for it.

B) He should insure the building for 75 percent of its replacement cost.

C) He should use the replacement value method for settling claims to receive the full

cost of repairing or replacing his personal belongings.

D) His personal belongings should be covered with his home at 125 percent of his home's insured amount.

E) His insured amount should remain the same as long as he lives in his house.

39) Barnaby is applying for insurance for his new home. Which of the following is correct?

A) He should base the amount of insurance on the price he paid for it.

B) He should insure the building for 75 percent of its replacement cost.

C) He should use the actual cash value method for settling claims to receive the full cost

of repairing or replacing his personal belongings.

D) His personal belongings should be covered with his home at 125 percent of his home's insured amount.

E) His coverage should be increased as construction costs rise.

40) Sandra is contacting several insurance companies to compare coverage for her home. Which

of the following should NOT affect her premium?

A) The existence of an alarm system in her home B) The amount of coverage C) The type of structure D) The deductible amount E) The location of her employer

41) Cindy was contacted by her home insurance agent to discuss ways to decrease her premium.

Which of the following should NOT reduce her premium?

A) Installing an alarm system B) Increasing the amount of coverage C) Installing smoke detectors or a fire extinguisher D) Increasing her deductible E) Installing dead-bolt locks

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42) Tom wanted to receive as many discounts on his home insurance as possible. Which of the

following would NOT provide a discount?

A) The existence of a smoke detector in his home B) Having a fire extinguisher in his kitchen C) Installing deadbolt locks on his doors D) The existence of an alarm system E) All of these should result in a discount for Tom.

43) Motor vehicle crashes cost around ______ in lost wages and medical bills every year.

A) $10,000 B) $750,000 C) $12 million D) $870 billion E) $2 trillion

44) Amber had permission from Bradley to borrow his car to run some errands. Unfortunately,

while Amber was driving, she looked down to change songs on her iPod and sideswiped a car and hit a bicyclist. Based on this information, which of the following would be true?

A) Amber's insurance company should refuse coverage of her medical payments because she was not driving in her own vehicle.

B) The insurance company of the owner of the sideswiped car should pay for all damages since the car was illegally parked.

C) Amber's insurance should not cover any damage since she carried liability, collision, and comprehensive coverage.

D) The bicyclist should cover his own medical expenses because he was at fault for riding on the road.

E) Amber's insurance policy should cover any property damage claims since she was driving Bradley's car with his permission.

45) Medical payments coverage applies to medical expenses of: A) Anyone who is injured in your vehicle, including you.

B) Anyone in your vehicle who is injured, except the driver.

C) The driver, but no passengers who are injured.

D) The owner of the vehicle, but not other passengers.

E) The uninsured motorist who causes an accident.

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46) 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?

A) The uninsured motorist needs to purchase insurance after the fact.

B) Paul's uninsured motorist protection should cover the cost of injuries for Paul and his kids.

C) The uninsured motorist will be required to purchase a new minivan for Paul's family.

D) It is likely that the uninsured motorist will not receive any citations or fines because she did not have insurance.

E) In all states, Paul's uninsured motorist coverage must cover damage to all vehicles involved in the accident.

47) 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?

A) Timothy's injuries would be covered to $100 and property damage would be limited to $300.

B) Nick's injuries would be covered to $50,000.

C) Individually, Timothy’s and Nick's injuries would be covered to $300,000 each.

D) The total coverage for Timothy and Nick would be $100,000, and the driver who caused the accident would be covered to $50,000.

E) The policy would provide a maximum of $100,000 for each person who was injured, and no more than $300,000 for total injuries of all parties in the accident.

48) Samantha was driving on the highway during a storm and hail dented her car. This damage

would be covered under her: A) Uninsured motorist protection.

B) Property damage liability coverage.

C) Comprehensive physical damage coverage.

D) Medical payments coverage.

E) Bodily injury liability coverage.

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49) Madeline had a severe allergy attack and crashed her car into a telephone pole while

sneezing. The damage to the telephone pole would be covered under Madeline's: A) Uninsured motorist protection.

B) Property damage liability coverage.

C) Collision coverage.

D) Comprehensive physical damage coverage.

E) Bodily injury liability coverage.

50) Henry was driving at dusk and hit a deer running across the road. His damage would be

covered under his: A) Uninsured motorist protection.

B) Medical payments coverage.

C) Collision coverage.

D) Comprehensive physical damage coverage.

E) Bodily injury liability coverage.

51) Patrick has an old car and wants to keep his insurance costs down, but he wants coverage in

case he damages the property of others, including street signs and telephone poles. In order to minimize the financial impact of an accident he may cause, he should, at a minimum, carry which type of insurance?

A) Property damage liability coverage B) Collision coverage C) Comprehensive physical damage coverage D) Bodily injury liability coverage E) Medical payments coverage

52) Albert left his vehicle parked on the street in the front of his house when he went on

vacation. While he was gone, his street flooded and his car was severely damaged. This damage would be covered under his: A) Uninsured motorist protection.

B) Property damage liability coverage.

C) Collision coverage.

D) Comprehensive physical damage coverage.

E) Bodily injury liability coverage.

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53) Zachary lived in a neighborhood that was known for gang activity. One day, he noticed that

his car had been vandalized. This damage would be covered under his: A) Uninsured motorist protection.

B) Property damage liability coverage.

C) Collision coverage.

D) Comprehensive physical damage coverage.

E) The vehicle would not be covered because he was not in it when the damage occurred.

54) Various states are trying to reduce the time and cost of settling vehicle injury cases. One

alternative is: A) Omitting uninsured motorist protection.

B) Requiring the driver to pay all medical expenses.

C) Using the no-fault system.

D) Requiring emergency road service coverage.

E) Having the state pay for driver's insurance.

55) Which of the following is a type of motor vehicle insurance available to drivers?

A) Wage loss insurance B) Towing and emergency road service coverage C) Rental reimbursement coverage D) All of these may be available to drivers.

E) None of these are available to drivers.

56) Which of the following is NOT correct?

A) If you live in a rural area, your auto insurance premium will likely be lower than if

you live in a large city.

B) In general, young drivers (under 25) and elderly drivers (over 70) have more frequent and more serious accidents.

C) Multiple accidents or tickets will increase insurance rates.

D) The cost and number of claims you have should not affect your premium.

E) Your credit score can cause your premium to change.

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57) Which of the following should reduce your auto insurance premium?

A) An increase in your number of claims B) Paying your speeding tickets immediately C) Maintaining good grades in college D) Decreasing your deductible E) Stopping smoking

58) Cheyenne has a home insured for $300,000. It would cost $320,000 to rebuild her home. If

she has home insurance that provides personal property coverage at 70 percent of the home’s value, how much of her household belongings would be covered?

A) $120,000 B) $210,000 C) $224,000 D) $300,000 E) $320,000

59) Sally was driving her own car and collided with a pickup truck. Sally sustained $125,000 in

injuries, and her passenger sustained $10,000 in injuries. If her coverage was 100/300/50, what are the total medical expenses the insurance company would pay for this accident?

A) $1,000 B) $100,000 C) $110,000 D) $125,000 E) $135,000

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60) Last month some of your friends were riding in a car together and were injured in an

accident. Their total injuries were as follows: Brenda Raquel Louis

$ 85,000 $ 125,000 $ 40,000

Coverage was 100/300/50. What was the total medical coverage in this accident?

A) $40,000 B) $85,000 C) $125,000 D) $225,000 E) $250,000

61) Insurance is protection against possible financial loss. ⊚ true ⊚ false

62) Samuel should buy insurance in order to eliminate his risk of losses. ⊚ true ⊚ false

63) An example of a peril is a robbery. ⊚ true ⊚ false

64) Defective house wiring is a hazard that increases the chance that a fire will start. ⊚ true ⊚ false

65) An example of a peril is maintenance and repairs. ⊚ true ⊚ false

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66) Risk avoidance is an organized plan for protecting yourself, your family, and your property. ⊚ true ⊚ false

67) Risk management is an organized plan for protecting yourself, your family, and your

property. ⊚ true ⊚ false

68) The first step in developing a personal insurance program is to set insurance goals. ⊚ true ⊚ false

69) Jim and Sandy are developing a personal insurance program. One of their goals should be to

reduce the possible loss of income due to fire or theft. ⊚ true ⊚ false

70) One of the four questions that should be asked when developing a risk management plan is

"What do I need to insure?" ⊚ true ⊚ false

71) Once a risk management plan is put into action, it should remain the same even as family

needs change. ⊚ true ⊚ false

72) An insurance claim is a request for payment to cover financial losses. ⊚ true ⊚ false

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73) Caroline was found liable in an accident. This is usually not due to negligence on her part. ⊚ true ⊚ false

74) A homeowner's insurance policy typically provides coverage for additional living expenses

so you can stay somewhere else if a fire damages your home. ⊚ true ⊚ false

75) Homeowner's insurance coverage typically excludes detached structures on your property. ⊚ true ⊚ false

76) A household inventory should be stored in a home office. ⊚ true ⊚ false

77) Robby fell on some ice on Peter's front steps and broke his arm. This is an example of a risk

covered by the personal liability portion of Peter's homeowner's policy. ⊚ true ⊚ false

78) Another name for a homeowner's insurance policy is an umbrella policy. ⊚ true ⊚ false

79) The National Flood Insurance Program makes flood and earthquake insurance available for

all homeowners. ⊚ true ⊚ false

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80) A landlord is responsible for paying renter's insurance. ⊚ true ⊚ false

81) Renter's insurance is typically quite expensive while mobile home insurance is relatively

inexpensive. ⊚ true ⊚ false

82) If you are borrowing money to buy a home, the lender will require that homeowners purchase

home (property) insurance. ⊚ true ⊚ false

83) Sam's house should be insured for the amount he originally paid for it. ⊚ true ⊚ false

84) The actual cash value method of settling claims is based on the replacement cost of an item

less depreciation. ⊚ true ⊚ false

85) A brick home will usually cost less to insure than a similar structure made of wood. ⊚ true ⊚ false

86) Angela should decrease her deductible from $1,000 to $250 in order to reduce her home

insurance premium. ⊚ true ⊚ false

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87) If you need information to compare two insurance providers: Acme Home Insurance and

Zebra Home Insurance, you should contact the state insurance commissioner or a consumer organization that deals with insurance. ⊚ true ⊚ false

88) Every state in the United States has a law requiring people to carry motor vehicle insurance. ⊚ true ⊚ false

89) Motor vehicle insurance falls into two categories: protection for bodily injury and protection

for property damage. ⊚ true ⊚ false

90) Uninsured motorist protection automatically covers you and your family members as well as

damage to the vehicle itself. ⊚ true ⊚ false

91) Collision insurance covers your vehicle against risks such as falling objects, hail, and other

non-accident situations. ⊚ true ⊚ false

92) Towing and emergency road service coverage includes coverage for a tow to a service station

as well as repairs to make the vehicle drivable. ⊚ true ⊚ false

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93) If you drive a model of vehicle that is frequently stolen, you will probably pay a higher

premium for your auto insurance. ⊚ true ⊚ false

94) If you live in a large city, you should expect to pay a higher premium for your auto insurance

than someone who lives in a rural area. ⊚ true ⊚ false

95) An assigned risk pool includes people who are able to obtain auto insurance due to a great

driving record. ⊚ true ⊚ false

96) It is illegal to use a credit score to determine the premium to charge an individual. ⊚ true ⊚ false

97) One way to keep auto insurance rates down is to insure each vehicle you own with a different

insurer. ⊚ true ⊚ false

98) Deductibles are a combination of risk assumption and risk shifting where the insured person

pays the first part of the claim (deductible) and the rest of the claim is shifted to the insurance company. ⊚ true ⊚ false

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99) A home insured for $160,000 has 55 percent worth of coverage for household belongings, so

the coverage is for $112,000. ⊚ true ⊚ false

100)

Computers and other equipment used in a home-based business are not usually covered by a home insurance policy. ⊚ true ⊚ false

101)

On average, you can save no more than 30 percent on homeowner’s insurance by comparing rates from several companies. ⊚ true ⊚ false

102)

Consumer organizations, such as Consumer Reports, rate insurance companies on a regular basis. ⊚ true ⊚ false

103)

An endorsement is a request for payment to cover financial losses. ⊚ true ⊚ false

104)

Homeowner's insurance typically includes coverage for detached structures on your property, such as a garage or toolshed. ⊚ true ⊚ false

105)

The renter is responsible for paying renter's insurance. ⊚ true ⊚ false

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106)

Renter’s insurance is relatively inexpensive as compared to mobile home insurance, which is typically quite expensive. ⊚ true ⊚ false

107)

Uninsured motorist protection automatically covers you and your family members, but in most states, it does NOT cover damage to the vehicle itself. ⊚ true ⊚ false

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Answer Key Test name: ch 8 (2) 1) B 2) C 3) C 4) A 5) B 6) C 7) D 8) C 9) B 10) B 11) E 12) A 13) B 14) C 15) D 16) E 17) E 18) D 19) D 20) B 21) D 22) E 23) B 24) D 25) E 26) C 27) E 28) E 29) E 30) A 31) B 32) B 33) E 34) D 35) D 36) A 37) B

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38) C 39) E 40) E 41) B 42) E 43) D 44) E 45) A 46) B 47) E 48) C 49) B 50) D 51) A 52) D 53) D 54) C 55) D 56) D 57) C 58) B 59) C 60) D 61) TRUE 62) FALSE 63) TRUE 64) TRUE 65) FALSE 66) FALSE 67) TRUE 68) TRUE 69) FALSE 70) TRUE 71) FALSE 72) TRUE 73) FALSE 74) TRUE 75) FALSE 76) FALSE 77) TRUE

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78) FALSE 79) FALSE 80) FALSE 81) FALSE 82) TRUE 83) FALSE 84) TRUE 85) TRUE 86) FALSE 87) TRUE 88) TRUE 89) TRUE 90) FALSE 91) FALSE 92) FALSE 93) TRUE 94) TRUE 95) FALSE 96) FALSE 97) FALSE 98) TRUE 99) FALSE 100) TRUE 101) FALSE 102) TRUE 103) FALSE 104) TRUE 105) TRUE 106) TRUE 107) TRUE

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Chapter 9 1) What is the primary purpose of medical expense insurance?

A) To protect against death expenses.

B) To provide payments to make up for some income of a person who cannot work as a

result of injury or illness.

C) To pay actual medical costs for illness or injury.

D) To pay a salary if an employee is disabled.

E) To repay loans if an employee cannot work because of illness or injury.

2) Which of the following is correct?

A) A premium reimburses you for hospital stays, doctors' visits, and medications.

B) A premium is the amount your employer will pay for your health insurance coverage.

C) Disability income insurance pays actual medical costs.

D) Medical expense insurance provides payments to make up for income of a person

who cannot work as a result of injury or illness.

E) Health insurance plans may reimburse an individual for hospital stays, doctors' visits, and medications.

3) Most people receive health insurance under a group plan from: A) Individual plans.

B) Their bank or lending institution.

C) Their employer.

D) COBRA. E) All of these choices are correct.

4) The Health Insurance Portability and Accountability Act of 1996: A) Sets federal standards to ensure that workers do not lose their health insurance if they

change jobs.

B) Sets state standards to ensure that workers do not lose their health insurance if they change jobs.

C) Applies to individual health insurance policies.

D) Prevents employees from moving from one group health plan to another without a lapse in coverage.

E) Is a replacement for the Consolidated Omnibus Budget Reconciliation Act of 1986.

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5) The coordination of benefits provision applies to: A) Combining health insurance and disability insurance coverage.

B) Combining all group and individual insurance coverage.

C) Combining the Health Insurance Portability and Accountability Act of 1996 and

COBRA. D) Combining three or more disability policies issued for an individual.

E) Combining the benefits of two insurance policies issued for a married couple.

6) Which of the following about individual health insurance policies is correct?

A) They are used by employees of large organizations.

B) All insurance companies that offer this type of policy are required to charge the same

rates.

C) They are primarily for employees of small companies.

D) They are permitted for individuals only, not for families.

E) They are available for the self-employed or others who are dissatisfied with the coverage that their group plan provides.

7) Which of the following about individual health insurance policies is NOT correct?

A) They can cover individuals.

B) They are used by the self-employed.

C) They can provide family coverage.

D) All insurance companies that offer this type of policy are required to charge the same

rates.

E) They can be purchased directly from the company of your choice.

8) COBRA stands for: A) Coverage of Benefits Reduction Act. B) Continuation of Benefits for Retirees Act. C) Consolidated Omnibus Budget Reconciliation Act. D) Coverage of Benefits for the Retired Act. E) Consolidation of Benefit Reapplication Act.

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9) The type of health insurance coverage that pays for some or all of the daily costs of room and

board during a hospital stay is: A) Dental expense.

B) Surgical expense.

C) Hospital expense.

D) Physician expense.

E) Major medical expense.

10) The type of health insurance coverage that may cover routine doctor visits, X-rays, and lab

tests is: A) B) C) D) E)

Dental expense.

Surgical expense.

Hospital expense.

Physician expense.

Major medical expense.

11) The type of health insurance coverage that may specify the maximum payment amount for

each type of operation is: A) Dental expense.

B) Surgical expense.

C) Hospital expense.

D) Physician expense.

E) Major medical expense.

12) The type of health insurance coverage that takes up where basic health insurance coverage

leaves off is: A) Dental expense.

B) Surgical expense.

C) Hospital expense.

D) Physician expense.

E) Major medical expense.

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13) Fran is interested in purchasing a major medical policy that limits the total out-of-pocket

amount that she will have to pay. She should consider a: A) Copay.

B) Coinsurance.

C) Stop-loss provision.

D) Hospital indemnity policy.

E) Dread disease policy.

14) Jenny wants health insurance that sets the amount that she must pay toward medical expenses

before the insurance starts paying benefits. She is concerned about a: A) Deductible.

B) Coinsurance.

C) Vision care policy.

D) Hospital indemnity policy.

E) Dread disease policy.

15) Miguel is concerned that the health insurance option he is considering plays upon unrealistic

fears. He is most concerned about a: A) Deductible.

B) Coinsurance.

C) Stop-loss provision.

D) Hospital indemnity policy.

E) Dread disease policy.

16) Nancy is studying the health insurance plan options offered by her employer. She wants a

policy that will have the insurance pay a percentage of her medical expenses after she meets her deductible. She should review the: A) Deductible.

B) Coinsurance.

C) Stop-loss provision.

D) Hospital indemnity policy.

E) Dread disease policy.

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17) The insurance that helps pay hospital, surgical, medical, and other bills with a low deductible

is known as a(n): A) Basic health insurance policy.

B) Individual policy.

C) Comprehensive major medical policy.

D) Hospital indemnity policy.

E) Dread disease policy.

18) Which of the following is NOT a type of health insurance available to individuals or

employees?

A) Dental expense insurance B) Hospital indemnity policy C) Dread disease policy D) Minor medical indemnity insurance E) Vision care insurance

19) This health insurance provision lets your insurer make direct payments to your doctor or

hospital.

A) Assigned benefits B) Benefit limits C) Exclusions and limitations D) Internal limits E) Service benefits

20) Which of the following is TRUE about long-term care insurance?

A) It covers help at home but not in a nursing home.

B) It covers a stay in a nursing home but not help at home.

C) All else held constant, the older you are when you enroll, the higher the annual

premium.

D) Insurance plans are sold primarily to individuals in the 20-40 age group.

E) These plans typically pay for all costs.

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21) This health insurance provision sets specific levels of repayment for certain services.

A) Assigned benefits B) Copayment C) Exclusions and limitations D) Internal limits E) Service benefits

22) A health insurance policy with this provision lists coverage in terms of services, not dollar

amounts.

A) Assigned benefits B) Benefit limits C) Exclusions and limitations D) Internal limits E) Service benefits

23) Which of the following is INCORRECT about dread disease policies?

A) They are illegal in many states.

B) Each policy covers a wide range of conditions.

C) They play upon unrealistic fears.

D) These policies are usually sold through the mail, in newspapers, and magazines, or by

door-to-door salespeople.

E) They cover diseases that are already covered if you are insured under a major medical plan.

24) What is a typical copayment amount for individuals?

A) $0-5 B) $20-40 C) $35-50 D) $75-100 E) $100-200

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25) A policy that pays you back for actual expenses is called: A) A coinsurance plan.

B) A reimbursement plan.

C) A deductible plan.

D) An indemnity plan.

E) A reasonable and customary plan.

26) After you have reached a certain limit that you must pay for the deductible and coinsurance,

the insurance company covers 100% of any additional cost. This is called a(n): A) Reimbursement.

B) Out-of-pocket limit.

C) Deductible.

D) Internal limit.

E) Indemnity.

27) The set amount that you must pay toward medical expenses before the insurance company

pays benefits is called a(n): A) Reimbursement.

B) Reasonable and customary charge.

C) Deductible.

D) Internal limit.

E) Indemnity.

28) A provision in a health insurance policy that sets specific levels of repayment for certain

services is called a(n): A) Reimbursement.

B) Out-of-pocket limit.

C) Deductible.

D) Internal limit.

E) Indemnity.

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29) Brittany and Brandon are both charged $250 for an office visit to the same specialist.

Brittany's reimbursement policy has a deductible of $300. Once she has met the deductible, the policy will cover the full cost of her visits. Brandon's indemnity policy will pay him $150, the maximum amount his plan provides for a visit to any specialist. Which of the following is correct?

A) Brittany will pay less because the policy will cover up to $300 for her visit.

B) Brittany will pay more because she must pay the entire bill since she has not met her deductible while Brandon will have part of his bill paid by his policy.

C) Brandon will pay $150 and his insurance company will pay $100.

D) Brandon will pay more because Brittany will have the first $300 paid by her policy.

E) None of these choices is correct.

30) A health insurance plan should include all of the following “must-haves” except: A) Basic coverage for hospital and doctor bills.

B) No unreasonable exclusions.

C) Limits on out-of-pocket expenses to no more than $8,000 to $9,000 per year.

D) Coverage for at least 120 days' hospital room and board in full.

E) Lifetime maximum coverage of up to $50,000.

31) Which of the following is a government health care program?

A) Health maintenance organization (HMO) B) Home health care agency C) Hospital and medical service plan D) Medicare E) Preferred provider organization (PPO)

32) Blue Cross and Blue Shield are: A) Health maintenance organizations (HMO).

B) Private insurance companies.

C) Statewide organizations.

D) Types of Medicare.

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33) Steve’s employer offers a health plan that stresses preventive services and covers routine

immunizations and checkups, screening programs, and diagnostic tests. What kind of plan does his employer offer?

A) Health maintenance organization (HMO) B) Public insurance company C) Hospital and medical service plan D) Medicare E) Medicaid

34) Yvonne's employer offers a health plan that has a group of doctors and hospitals that agree to

provide specified medical services to members at prearranged fees. This health plan offers some flexibility since members can either visit a physician from a list or go to their own doctors. What kind of plan does her employer offer?

A) Medicaid B) Public insurance company C) Hospital and medical service plan D) Medicare E) Preferred provider organization (PPO)

35) This type of plan combines features of health maintenance organizations and PPOs. It uses a

network of participating physicians and medical professionals who have contracted to provide services for certain fees.

A) Home health care agency B) Hospital and medical service plan C) Medicare D) Point-of-service (POS) plan E) Public insurance company

36) Who is most likely to use a home health care agency?

A) A mother who is looking for a plan to cover immunizations for her children.

B) A healthy young adult.

C) A family with teenagers who need annual check-ups for sports at school.

D) An elderly neighbor.

E) All of these would be likely to use a home health care agency.

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37) Anna contributes pretax dollars to an account managed by her employer for her health care

expenses. If she does not spend all of her money by the end of the year, she may forfeit it.

What kind of plan does she have?

A) FSA B) HRA C) Medicaid D) Medicare E) Self-funded health plan

38) Monica's employer offers a health insurance plan with a very high deductible. In addition,

her employer provides a fund for her to spend specifically on health care. What kind of plan does she have?

A) FSA B) HRA C) HSA D) Medicare E) Self-funded health plan

39) Jacob is concerned that his out-of-pocket health care expenses will be quite high, so he is

considering adding contributions to a tax-free account that he can use with his highdeductible policy to cover catastrophic expenses. What kind of plan does he have?

A) FSA B) HRA C) HSA D) Medicare E) Self-funded health plan

40) Individuals over the age of 65 who are eligible for Medicare may also be interested in

purchasing more coverage called: A) Medicare Part A. B) Medicare Part B. C) Medicaid.

D) Medigap.

E) Statewide health coverage.

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41) Jack needs comprehensive medical coverage. However, his income is very low. What plan

should he investigate?

A) Medicare Part A B) Medicare Part B C) Medicaid D) Medigap E) Medicare Part C

42) Medicare (Part A) covers: A) Dental care.

B) Routine checkups.

C) Most immunizations.

D) Inpatient hospital care.

E) None of these are covered.

43) A Medigap policy fills the gap between Medicare payments and medical costs not covered

by: A) B) C) D) E)

Home health care agencies.

Hospital and medical service plans.

Medicare.

Medicaid.

Private insurance companies.

44) Medicaid covers: A) Lab services.

B) Skilled nursing and home health services.

C) Prescription drugs.

D) Eyeglasses.

E) All of these choices are correct.

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45) Which of the following is incorrect?

A) Disability income insurance provides regular cash income when you're unable to

work because of a disability.

B) Disabilities can include pregnancy, a non-work-related accident, or an illness.

C) The exact definition of disability varies from insurer to insurer.

D) All disability policies pay you if you cannot work at your regular job.

E) Disability can cause even greater financial problems than death.

46) All of the following are sources of disability income except: A) Worker's compensation.

B) Employer plans.

C) Social Security.

D) Private income insurance programs.

E) All of these are sources of disability income.

47) How much does a private income insurance program pay for loss of normal income from a

disability?

A) 0% B) 10-30% C) 40-60%, with some plans paying up to 75% D) 50-70%, with some plans paying up to 100% E) 100%

48) Katrina was injured in an accident at work. The benefits she will receive to cover part of her

income will come from: A) A public income insurance program.

B) Her health insurance plan.

C) Medicare.

D) Social Security.

E) Worker's compensation.

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49) Mark was severely injured while on vacation and expects to be unable to work for at least 12

months. Because of his injury, he should expect to be eligible for disability income from: A) A public income insurance program.

B) Medicaid.

C) Medicare.

D) Social Security.

E) Worker's compensation.

50) Cameron, age 25, sustained a debilitating hand injury and was unable to perform his job as a

viola player in the local orchestra for 45 days. His employer has a disability income insurance policy that pays 70% of take-home pay with an elimination period of 60 days and coverage to age 65. Given this information, which of the following is true for Cameron?

A) He will receive disability income for 15 days.

B) His employer will pay 70% of his current income for 40 years.

C) He will not be eligible for any disability income because his disability ended before the elimination period ended.

D) He will receive disability income for 45 days.

E) His employer will estimate his average salary through age 65 to determine his disability income.

51) All else held constant, which of the following is typically true about an elimination period?

A) Premiums for a plan with an elimination period of 30 days will be less than premiums

for a plan with an elimination period of 45 days.

B) Premiums for a plan with an elimination period of 50 days will be the same as premiums for a plan with an elimination period of 75 days.

C) Premiums for a plan with an elimination period of 40 days will be less than premiums for a plan with an elimination period of 75 days.

D) Premiums for a plan with an elimination period of 90 days will be the same as premiums for a plan with an elimination period of 60 days.

E) Premiums for a plan with an elimination period of 90 days will be less than premiums for a plan with an elimination period of 60 days.

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52) The duration of benefits for a disability income insurance plan can be: A) For only a few years.

B) Until age 65.

C) For life.

D) All of these are possibilities.

E) None of these is correct.

53) If you are concerned that your disability insurer may try to cancel your coverage if your

health becomes poor, you should look for a plan that offers: A) Duration of benefits to age 65.

B) 70-80% of your take-home pay once you are determined to be disabled.

C) Accident and sickness coverage.

D) Guaranteed renewability.

E) A short elimination period.

54) Rising health costs are due to all of the following except: A) Costs of prescription drugs.

B) The growing number of uninsured.

C) Advancements in medical technology.

D) Baby boomers using fewer health care services.

E) The overweight population.

55) Which of the following is NOT an underlying cause of high health care costs?

A) The use of sophisticated and expensive technologies.

B) Victims of accidents and crimes require fewer emergency medical services than in the

past.

C) Regulations that shift costs instead of reducing costs.

D) Duplication of tests.

E) Limited competition and restrictive work rules in the health care delivery system.

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56) Which of the following activities is NOT a step being taken to reduce health care costs?

A) Community health education programs are being created to motivate people to take

better care of themselves.

B) Physicians are encouraging patients to pay cash for routine medical care and lab tests.

C) Programs are being created to carefully review health care fees and the use of health care services.

D) Community health planning is underway to help achieve a better balance between health needs and health care resources.

E) All of these steps are being taken to reduce health care costs.

57) Under the Patient Protection and Affordable Care Act of 2010, which of the following is

NOT correct?

A) New health care plans are required to allow adult children to remain on their parents' insurance policy until age 26.

B) Most insurers must provide preventive care screenings without charging deductibles or copays.

C) Employers must offer continuing coverage through COBRA for up to 24 months after you leave your job.

D) Denial of coverage to children with preexisting medical conditions is prohibited.

E) The Medicaid program for the nation’s poorest individuals was expanded.

58) The Patient Protection and Affordable Care Act of 2010: A) Prohibits denying coverage to children with preexisting medical conditions.

B) Bans insurance companies from dropping people from coverage when they get sick.

C) Eliminates copays for preventive services.

D) Ensures consumers have access to an effective appeals process to appeal decisions by

the health insurance plan.

E) All of these are true.

59) In which circumstances may the right to elect continued coverage under COBRA exist for a

covered spouse or dependent?

A) Divorce B) Legal separation C) Loss of dependent child status D) Death of covered employee E) The right exists in all of these circumstances.

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60) Which of the following is correct about your health plan's summary plan description?

A) It contains information about the coverage of dependents.

B) It contains information about what services will require a copay.

C) It contains information about circumstances when your employer can terminate your

health plan benefits.

D) All of these are correct.

E) None of these is correct.

61) Georgia is considering two health insurance policies. One includes a deductible of $600 and

the other includes a coinsurance of 20%. If a bill is $4,000, how much will she be required to pay under the policy with the coinsurance?

A) $0 B) $120 C) $600 D) $800 E) $4,000

62) Georgia has a health insurance policy that includes a deductible of $500. If her total bill is

$3,000, how much will her insurance pay?

A) $0 B) $3,500 C) $5,000 D) $3,000 E) $2,500

63) Sandy went to the doctor three times and each appointment cost $200. Her copayment was

$25 per visit. How much was Sandy required to pay in total for her three visits?

A) $25 B) $75 C) $175 D) $200 E) $525

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64) Cynthia was charged $300 for a specialist office visit. Her indemnity policy will pay $125.

What amount will she have to pay?

A) $425 B) $300 C) $175 D) $125 E) None of the choices are correct.

65) Health insurance is a form of protection that eases the financial burden people may

experience as a result of someone's death. ⊚ true ⊚ false

66) All group health insurance plans provide the same level of protection. ⊚ true ⊚ false

67) The Health Insurance Portability and Accountability Act of 1996 set new federal standards to

ensure that workers would not lose their health insurance if they changed jobs. ⊚ true ⊚ false

68) Surgical expense insurance pays all or part of the surgeon's fees for an operation in a doctor's

office. ⊚ true ⊚ false

69) A deductible is a set amount you must pay toward medical expenses before the insurance

company pays benefits. ⊚ true ⊚ false

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70) Long-term care insurance is used to pay for a stay in a nursing home but not for help at

home. ⊚ true ⊚ false

71) The copayment provision deals with the amount that someone will pay for a bill such as 20%

coinsurance. ⊚ true ⊚ false

72) The benefit limits provision identifies the minimum benefits that will be paid for days spent

in the hospital. ⊚ true ⊚ false

73) With a guaranteed renewable provision in a health insurance policy, the insurer is permitted

to raise premiums only if they do so for all members of a group. ⊚ true ⊚ false

74) A health insurance policy that pays you back for actual expenses is called an indemnity

policy. ⊚ true ⊚ false

75) A health insurance policy that pays you back for actual expenses is called a reimbursement

policy. ⊚ true ⊚ false

76) Blue Cross and Blue Shield are two types of health maintenance organizations. ⊚ true ⊚ false

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77) A PPO is a group of doctors and hospitals that agree to provide health care at rates approved

by the insurer. ⊚ true ⊚ false

78) A PPO is another name for an HMO. ⊚ true ⊚ false

79) An employer self-funded health plan requires a low level of financial assets. ⊚ true ⊚ false

80) A flexible spending account (FSA) is typically funded solely by an employer. ⊚ true ⊚ false

81) A health reimbursement account (HRA) is funded solely by your employer and gives you a

pot of money to spend on health care. ⊚ true ⊚ false

82) FSAs and HSAs provide tax advantages for health care expenses. ⊚ true ⊚ false

83) A Medicare Advantage Plan (Part C) combines your Part A (Hospital) and Part B (Medical)

coverage into one plan. ⊚ true ⊚ false

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84) Medicare typically covers routine checkups. ⊚ true ⊚ false

85) Medicare is offered to certain low-income individuals and families. ⊚ true ⊚ false

86) Disability income insurance covers your medical expenses when you are disabled. ⊚ true ⊚ false

87) A disability income insurance plan typically pays out if you cannot work at your regular job

due to pregnancy, a non-work related accident, or an illness. ⊚ true ⊚ false

88) The financial problems caused by death are greater than those caused by disability. ⊚ true ⊚ false

89) Workers are considered disabled if they have a physical or mental condition that prevents

them from working and that is expected to last for at least 12 months or to result in death. ⊚ true ⊚ false

90) The period before you can receive benefits in a disability plan is called the probationary

period. ⊚ true ⊚ false

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91) A disability policy with a longer elimination period typically charges lower premiums than a

policy with a short elimination period. ⊚ true ⊚ false

92) Disability income insurance policies are required to provide benefits for disabled

policyholders until age 65. ⊚ true ⊚ false

93) The United States has the fifth highest per capita medical expenditures of any country in the

world. ⊚ true ⊚ false

94) Administrative costs in the United States consume half of the health care dollars spent. ⊚ true ⊚ false

95) Health care costs have decreased because of aging baby boomers using fewer health care

services. ⊚ true ⊚ false

96) A summary plan description outlines the disadvantages of your health plan along with your

legal rights under the Employee Retirement Income Security Act. ⊚ true ⊚ false

97) Everyone qualifies for COBRA. ⊚ true ⊚ false

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98) The Patient Protection and Affordable Care Act of 2010 requires health insurance companies

to submit justification for all requested premium increases. ⊚ true ⊚ false

99) If you are unemployed and cannot afford health insurance, then you may be eligible for an

affordable health insurance plan through the Health Insurance Marketplace. ⊚ true ⊚ false

100)

Managed care health plans include Health maintenance organizations, PPOs, and POSs. ⊚ true ⊚ false

101)

As health care costs continue to grow, it is projected that the Medicare program will be bankrupt by the year 2035 if no changes are made. ⊚ true ⊚ false

102)

Long-term care insurance is used to pay for a stay in a nursing home and to provide for payment of home care help with daily activities. ⊚ true ⊚ false

103)

A health insurance policy that pays you back for actual expenses is called a reimbursement policy. ⊚ true ⊚ false

104)

A premium is a set amount you must pay toward medical expenses before the insurance company pays benefits. ⊚ true ⊚ false

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105)

The United States has the highest per capita medical expenditures of any country in the world. ⊚ true ⊚ false

106)

Administrative costs in the United States consume nearly 26% of health care dollars spent. ⊚ true ⊚ false

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Answer Key Test name: ch 9 1) C 2) E 3) C 4) A 5) E 6) E 7) D 8) C 9) C 10) D 11) B 12) E 13) C 14) A 15) E 16) B 17) C 18) D 19) A 20) C 21) D 22) E 23) B 24) B 25) B 26) B 27) C 28) D 29) B 30) E 31) D 32) C 33) A 34) E 35) D 36) D 37) A

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38) B 39) C 40) D 41) C 42) D 43) C 44) E 45) D 46) E 47) C 48) E 49) D 50) C 51) E 52) D 53) D 54) D 55) B 56) E 57) C 58) E 59) E 60) D 61) D 62) E 63) B 64) C 65) FALSE 66) FALSE 67) TRUE 68) TRUE 69) TRUE 70) FALSE 71) FALSE 72) FALSE 73) TRUE 74) FALSE 75) TRUE 76) FALSE 77) TRUE

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78) FALSE 79) FALSE 80) FALSE 81) TRUE 82) TRUE 83) TRUE 84) FALSE 85) FALSE 86) FALSE 87) TRUE 88) FALSE 89) TRUE 90) FALSE 91) TRUE 92) FALSE 93) FALSE 94) FALSE 95) FALSE 96) FALSE 97) FALSE 98) TRUE 99) TRUE 100) TRUE 101) TRUE 102) TRUE 103) TRUE 104) FALSE 105) TRUE 106) TRUE

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Chapter 10 (1) 1) Stephanie is the wage earner in a "typical family" with $20,000 gross annual income. Use the

easy method to determine how much insurance she should carry.

A) $200,000 B) $98,000 C) $214,000 D) $20,000 E) $140,000

2) Holly and Matt want to use the "nonworking" spouse method to determine the amount of life

insurance coverage they need. If their two children are ages 7 and 3 years old, how much do they need?

A) $30,000 B) $300,000 C) $36,000 D) $360,000 E) $60,000

3) Tim and Tammy are updating their financial plan and are concerned that they might not have

enough life insurance coverage for their family, which includes two children, ages 4 and 10.

They have determined that their annual income is $51,000, and their net worth is now $150,000. What is the amount of life insurance they should carry using the easy method?

A) $249,900 B) $510,000 C) $51,000 D) $545,700 E) $357,000

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Answer Key Test name: ch 10 (1) 1) B 2) B 3) A

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Chapter 10 (2) 1) A person who is named to receive the proceeds from a life insurance policy is a(n): A) Contract.

B) Beneficiary.

C) Policyholder.

D) Insurer.

E) Child.

2) Most people buy life insurance to: A) Pay off a loan on an automobile.

B) Protect the people who depend on the insured from financial losses caused by his or

her death.

C) Pay for a vacation.

D) Spend money.

E) Pay taxes.

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

A) A single adult living alone B) An adult child living with parents C) A retired couple with a pension D) A household with children E) An independently wealthy adult

4) Judy and James have a 4-year-old child. They plan to purchase life insurance using this

formula: Current income × 7 × 70%. Which method are they using to determine their life insurance needs?

A) Easy method B) Dual income, no kids method C) Formal calculation method D) Nonworking spouse method E) Family need method

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5) Jeff and Erica have two children. They plan to purchase life insurance using this formula: (18

minus Youngest child's age) × $20,000. Which method are they using to determine their life insurance needs?

A) Easy method B) Dual income, no kids method C) Formal calculation method D) Nonworking spouse method E) Family need method

6) Donald and Charlene are married and do not have any children. They plan to ensure that the

other will not be unduly burdened by debts in case one of them dies. Each plans to continue to work after the other one dies. Which method are they using to determine their life insurance needs?

A) Easy method B) Dual income, no kids method C) Formal calculation method D) Nonworking spouse method E) Family needs method

7) Francisco and Maria have three children and want to complete a detailed worksheet to

determine the amount of life insurance they need to purchase. They will consider factors such as Social Security and liquid assets. Which method are they using to determine their life insurance needs?

A) Easy method B) Dual income, no kids method C) Formal calculation method D) Nonworking spouse method E) Family need method

8) Of the 841 life insurance companies in the United States, about ___ are stock companies.

A) 5% B) 25% C) 50% D) 75% E) 95%

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9) You want to purchase a life insurance policy that pays a policy dividend. What kind of policy

would you want to purchase?

A) Dividend policy B) Nonparticipating policy C) Mutual policy D) Participating policy E) Stock policy

10) Todd plans to purchase a life insurance policy from a stock life insurance company. What

kind of policy is he planning to purchase?

A) Dividend policy B) Nonparticipating policy C) Mutual policy D) Participating policy E) Stock policy

11) Jeanne wants to purchase a life insurance policy with guaranteed premiums. What kind of

policy would she want to purchase?

A) Dividend policy B) Nonparticipating policy C) Mutual policy D) Participating policy E) Stock policy

12) Another name for temporary life insurance is: A) Whole life insurance.

B) Straight life insurance.

C) Ordinary life insurance.

D) Term life insurance.

E) Cash-value life insurance.

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

A) Whole life B) Straight life C) Ordinary life D) Term life E) Cash value

14) Another name for permanent life insurance is: A) Whole life.

B) Renewable term.

C) Conversion term.

D) Decreasing term.

E) Return-of-premium term.

15) Which of the following is NOT temporary insurance?

A) Whole life B) Renewable term C) Conversion term D) Decreasing term E) Multiyear level term

16) If you want to purchase term insurance, you will receive all of the following except: A) Protection against loss of life for only a specified term.

B) Cash value.

C) Temporary insurance.

D) A benefit during the period it covers, such as 1, 5, 10, or 20 years.

E) A policy whose coverage continues if you stop paying premiums.

17) Which of the following is NOT a type of permanent life insurance?

A) Whole life B) Variable life C) Universal life D) Adjustable life E) Decreasing term

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18) If you have a renewable term policy, then: A) You may not continue it for another term once your term ends.

B) Your premium may increase if you continue it for another term because you will be

older.

C) Your premium will not increase because your policy is renewable.

D) You can convert your policy to a permanent type at the end of the term.

E) All of the choices are correct.

19) If you have a multiyear level term policy, then: A) You can convert your policy to a permanent type at the end of the term.

B) Your policy will continue for one year.

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

D) Your premium will not increase when you renew it.

E) All of the choices are correct.

20) If you have a conversion term policy, then: A) Your premium will not increase when you renew it.

B) You can convert your policy from permanent to term at any time.

C) You can convert your term policy to a permanent policy.

D) Your policy will have the same premium as other term policies.

E) Your benefit to your beneficiary will be less as time passes.

21) This term life insurance policy will guarantee that you will pay the same premium for the

duration of your policy.

A) Renewable term B) Multiyear level term C) Decreasing term D) Limited payment E) Conversion term

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22) Another name for a straight term policy is: A) Renewable term.

B) Multiyear level term.

C) Decreasing term.

D) Limited payment.

E) Conversion term.

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

A) It accumulates cash value.

B) It provides both a death benefit and a savings component.

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

D) You can borrow from your cash value but must pay interest on the loan.

E) The policy requires that you pay a specified premium each year for the rest of your

life.

24) Of the following, which one is the most positive feature of whole life insurance for a person

who wants a more structured way to save?

A) You must pay interest on any loans.

B) You pay premiums each year for the rest of your life.

C) It is more expensive than term insurance.

D) It builds cash value.

E) It is permanent life insurance.

25) Megan wants to purchase a type of whole life insurance policy that will allow part of her

premium to be invested in stock, bonds, or money market funds. Which of the following policies should she buy?

A) Adjustable life B) Group life C) Limited life D) Universal life E) Variable life

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26) Molly is thinking about buying a type of whole 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?

A) Adjustable life B) Group life C) Limited life D) Universal life E) Variable life

27) Polly wants the opportunity to change the amount she pays for her annual premium through

the life of her insurance policy without changing her coverage. Which of the following types of whole life policies would meet her needs?

A) Adjustable life B) Group life C) Limited life D) Universal life E) Variable life

28) Pam just started working at XYZ Widget Company and finally wants to get insurance

coverage through her employer. 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?

A) Adjustable life B) Group life C) Limited life D) Universal life E) Variable life

29) This life insurance is used to pay off certain debts, such as auto loans, in the event that you

die before the debts are paid in full. Which of the following is typically not the best buy for the amount of protection offered?

A) Group life B) Term C) Credit life D) Endowment life E) Adjustable life

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30) Wendy has had a life insurance policy for five years with her spouse listed as the person who

receives the benefit if she dies. She was recently divorced. Which of the following provisions should she take action on?

A) Incontestability clause B) Misstatement of age provision C) Naming a beneficiary D) Policy reinstatement E) The grace period

31) Which of the following provisions requires the policyholder to again qualify as an acceptable

risk and pay overdue premiums with interest in order to put a lapsed policy back in force?

A) Incontestability clause B) Misstatement of age provision C) Naming a beneficiary D) Policy reinstatement E) The grace period

32) 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?

A) Incontestability clause B) Misstatement of age provision C) Naming a beneficiary D) Policy reinstatement E) The grace period

33) Georgia was supposed to pay her premium by the 15th of the month. Which of the following

provisions allows her to keep her coverage if she is a couple of weeks late with paying her premium (without penalty)?

A) Incontestability clause B) Misstatement of age provision C) Naming a beneficiary D) Policy reinstatement E) The grace period

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34) 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 fraudulent misrepresentation?

A) Incontestability clause B) Misstatement of age provision C) Naming a beneficiary D) Policy reinstatement E) The grace period

35) The policy loan provision means that: A) An individual can take out a loan on his or her term policy.

B) The death benefit will be increased by the amount of an outstanding policy loan.

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

D) The beneficiary can borrow any amount up to the total benefit.

E) No interest will accumulate for any loans related to life insurance.

36) Amy bought a life insurance policy and named Ben as her beneficiary. Amy still lives with

her parents, who provide some of her living expenses. She has since died. Who will receive the benefits from her policy?

A) Ben B) Ben's beneficiaries C) Her contingent beneficiaries D) Her parents E) None of these choices is correct.

37) Bonnie is most concerned about being able to buy additional insurance without undergoing

medical exams. Which of the following riders should she consider?

A) Waiver of premium disability benefit B) Accidental death benefit C) Guaranteed insurability option D) Cost-of-living protection E) Accelerated benefits

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38) 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?

A) Waiver of premium disability benefit B) Accidental death benefit C) Guaranteed insurability option D) Cost-of-living protection E) Accelerated benefits

39) Frank, age 38, was killed in a car accident. Which of the following riders provided an

additional benefit for his heirs?

A) Waiver of premium disability benefit B) Accidental death benefit C) Guaranteed insurability option D) Cost-of-living protection E) Accelerated benefits

40) A young employee is buying individual life insurance and is worried about the impact

inflation will have on his life insurance coverage. Which of the following riders should he consider?

A) Waiver of premium disability benefit B) Accidental death benefit C) Guaranteed insurability option D) Cost-of-living protection E) Accelerated benefits

41) Mildred was diagnosed with terminal cancer and knows that she doesn't have long to live.

Which of the following riders would allow her to receive cash now?

A) Waiver of premium disability benefit B) Accidental death benefit C) Guaranteed insurability option D) Cost-of-living protection E) Accelerated benefits

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42) The most important part of an insurance agent's job is to: A) Sell you the highest level of coverage available.

B) Collect premiums for the insurance contract.

C) Tell you why her product is better than the competitor's.

D) Help you select the proper kind of protection within your financial boundaries.

E) Convince you to buy the policy that will pay her the highest commission.

43) Which of the following is NOT recommended when buying life insurance?

A) Buying from a financially strong company B) Buying from professionally qualified representatives C) The non-life insurance products offered by local agencies D) Working with a representative who will help you select the proper kind of protection

within your financial boundaries E) Asking trusted, experienced family or friends for recommendations to choose an insurance company

44) Which of the following is NOT a factor that affects the price a company charges for a life

insurance policy?

A) The company's cost of doing business B) The return on its investments C) The mortality rate it expects among its policyholders D) The policy features E) All of these affect the price.

45) All of the following are major rating agencies for insurance except: A) A.M. Best.

B) Dun & Bradstreet.

C) Moody's.

D) Standard & Poor's.

E) Weiss Research.

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46) After you purchase a life insurance contract, you have a "free look" period that lasts: A) 3 days.

B) 5 days.

C) 10 days.

D) 30 days.

E) 60 days.

47) The settlement option that pays the life insurance proceeds in equal periodic installments for

a specified number of years after your death is called: A) Lump-sum payment.

B) Limited installment payment.

C) Final life payment.

D) Life income option.

E) Proceeds left with the company.

48) The settlement option that pays the life insurance proceeds to the beneficiary for as long as

she or he lives is called: A) Lump-sum payment.

B) Limited installment payment.

C) Final life payment.

D) Life income option.

E) Proceeds left with the company.

49) The settlement option in which the company acts as trustee and pays interest to the

beneficiary is called: A) Lump-sum payment.

B) Limited installment payment.

C) Final life payment.

D) Life income option.

E) Proceeds left with the company.

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50) Which of the following annuities is purchased with a lump-sum payment and allows an

individual to receive income payments beginning now?

A) Term insurance B) Deferred annuity C) Whole life insurance D) Immediate annuity E) Universal life insurance

51) Which of the following statements is correct?

A) A deferred annuity allows an individual to receive payments from an annuity

immediately.

B) A deferred annuity allows an individual to receive payments from a life insurance policy immediately.

C) A life insurance policy allows an individual to receive payments from an annuity beginning at once.

D) A deferred annuity allows an individual to receive payments from a life insurance policy at some future date.

E) An immediate annuity allows an individual to receive income payments from an annuity beginning at once.

52) Which of the following statements is incorrect?

A) A deferred annuity allows an individual to receive payments from an annuity at some

future date.

B) An immediate annuity allows an individual to receive income payments from an annuity beginning at once.

C) A life insurance policy allows the beneficiary to receive proceeds at some future date.

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

E) An annuity is a financial contract written by an insurance company that provides you with regular income.

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53) Which of the following allows an individual to receive a fixed amount of income over a

certain period of time, or over his or her life?

A) A fixed annuity B) Term insurance C) Whole insurance D) A variable annuity E) A 401(k)

54) Which of the following allows an individual to receive an amount of income that will change

based on the income received from stocks or other investments over a certain period of time, or over his or her life?

A) A fixed annuity B) Term insurance C) Whole life insurance D) A variable annuity E) A 401(k)

55) When considering why to buy annuities, which of the following statements is correct?

A) It is better to fund a fixed annuity before fully funding your IRA, Keogh, or 401(k).

B) The timing for payments of a fixed annuity is variable.

C) It is better to fund a variable annuity before fully funding your IRA, Keogh, or

401(k).

D) A fixed annuity is one where the investments put into the annuity are variable.

E) It is better to fully fund your IRA, Keogh, or 401(k) before buying an annuity.

56) The Tax Reform Act of 1986: A) Preserved the tax advantage of annuities but curtailed deductions for IRAs. B) Allowed whole life insurance policies to be sold.

C) Considered annuities to be the same as certificates of deposit.

D) Allowed annuities to be purchased for individual retirement accounts.

E) Made all annuities tax free.

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57) Which of the following is a charge you will pay when you purchase a variable annuity?

A) Surrender charge B) Mortality and expense risk charge C) Administrative fee D) Fund expense E) All of these are charges you will pay.

58) Stephanie is the wage earner in a "typical family" with $40,000 gross annual income. Use the

easy method to determine how much insurance she should carry.

A) $40,000 B) $196,000 C) $280,000 D) $400,000 E) $430,000

59) Holly and Matt want to use the "nonworking" spouse method to determine the amount of life

insurance coverage they need. If their two children are ages 9 and 5 years old, how much do they need?

A) $13,000 B) $18,000 C) $50,000 D) $260,000 E) $180,000

60) Tim and Tammy are updating their financial plan and are concerned that they might not have

enough life insurance coverage for their family, which includes two children, ages 4 and 10.

They have determined that their annual income is $70,000, and their net worth is now $150,000. What is the amount of life insurance they should carry using the easy method?

A) $140,000 B) $343,000 C) $490,000 D) $700,000 E) $750,000

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61) Tim and Tammy are updating their financial plan and are concerned that they might not have

enough life insurance coverage for their family, which includes two children, ages 4 and 10.

They have determined that their annual income is $70,000, and their net worth is now $150,000. What is the amount of life insurance they should carry using the "nonworking" spouse method?

A) $280,000 B) $343,000 C) $490,000 D) $700,000 E) $750,000

62) Marianne and Roger are in good health and have reasonably secure careers. Each earns

$45,000 annually. They own a home with a $125,000 mortgage; they owe $25,000 for their car loans and have $22,000 in student loans. If one should die, they think that funeral expenses would be $12,000. What is their total insurance need using the DINK method?

A) $12,000 B) $86,000 C) $98,000 D) $172,000 E) $217,000

63) A life insurance policy is a basic and inexpensive purchase. ⊚ true ⊚ false

64) Life insurance benefits may be used to pay off a home mortgage or other debts at the time of

death. ⊚ true ⊚ false

65) The sooner a person is likely to die, the lower the premiums he or she will pay. ⊚ true ⊚ false

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66) Life expectancy for men is longer than that for women. ⊚ true ⊚ false

67) Life insurance is a wise purchase for all individuals. ⊚ true ⊚ false

68) The "nonworking" spouse method of estimating life insurance includes factors such as Social

Security and liquid assets. ⊚ true ⊚ false

69) The "family need" method of estimating life insurance includes factors such as Social

Security and liquid assets. ⊚ true ⊚ false

70) Mutual life insurance companies specialize in the sale of nonparticipating policies. ⊚ true ⊚ false

71) Another name for a straight term policy is a renewable return-of-premium term policy. ⊚ true ⊚ false

72) Decreasing term insurance pays less to the beneficiary as time passes. ⊚ true ⊚ false

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73) Return-of-premium term pays out all premiums plus interest to a beneficiary. ⊚ true ⊚ false

74) A limited payment policy is a type of whole life policy that requires premiums to be paid for

a certain length of time, usually 20 or 30 years. ⊚ true ⊚ false

75) Premium payments are fixed with a variable life policy. ⊚ true ⊚ false

76) According to the suicide clause, the beneficiaries of someone who dies by suicide will never

be eligible to receive any benefits from his or her life insurance policy. ⊚ true ⊚ false

77) Competition among companies with comparable policies affects the price a company charges

for life insurance. ⊚ true ⊚ false

78) An interest-adjusted index is a method of evaluating the cost of life insurance by taking into

account the time value of money. ⊚ true ⊚ false

79) The lower the interest-adjusted index, the lower the cost of a life insurance policy. ⊚ true ⊚ false

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80) If you change your mind about your insurance policy, you have 60 days to return it to receive

a refund of your premium. ⊚ true ⊚ false

81) The most widely used settlement option for a life insurance program is the lump-sum

payment. ⊚ true ⊚ false

82) If you switch life insurance policies, you will automatically still be insurable. ⊚ true ⊚ false

83) Annuities are more attractive for people who expect to live only a short time. ⊚ true ⊚ false

84) The earnings from an investment in an annuity is taxed the same as earnings from an

investment in a certificate of deposit. ⊚ true ⊚ false

85) An administrative fee, which averages $150 per year, may be deducted to cover

recordkeeping and other administrative expenses related to a variable annuity. ⊚ true ⊚ false

86) When you buy life insurance, you are making a contract with the company issuing the policy

where you agree to pay a premium periodically and the company agrees to pay a death benefit. ⊚ true ⊚ false

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87) In 2017, life expectancy had risen, and a male who is 25 years old would expect to live an

additional 60 years. ⊚ true ⊚ false

88) In 2017, life expectancy had risen, and a female who is 30 years old would expect to live an

additional 51.1 years. ⊚ true ⊚ false

89) If you have misplaced a life insurance policy, your state’s insurance commission may be able

to help you locate it. ⊚ true ⊚ false

90) If you shop for insurance on the internet, the website is secure if the URL begins with

“https:” or if the lock icon is in the address bar. ⊚ true ⊚ false

91) Life insurance may be one of the most important and expensive purchases you may ever

make. ⊚ true ⊚ false

92) The sooner a person is likely to die, the higher his or her premiums will be. ⊚ true ⊚ false

93) Mutual life insurance companies specialize in the sale of participating policies, which

provide a policy dividend. ⊚ true ⊚ false

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94) Another name for a straight term policy is multiyear level term. ⊚ true ⊚ false

95) Decreasing term insurance pays more to the beneficiary as time passes. ⊚ true ⊚ false

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Answer Key Test name: ch 10 (2) 1) B 2) B 3) D 4) A 5) D 6) B 7) E 8) D 9) D 10) B 11) B 12) D 13) D 14) A 15) A 16) B 17) E 18) B 19) C 20) C 21) B 22) B 23) C 24) D 25) E 26) A 27) D 28) B 29) C 30) C 31) D 32) B 33) E 34) A 35) C 36) A 37) C

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38) A 39) B 40) D 41) E 42) D 43) C 44) E 45) B 46) C 47) B 48) D 49) E 50) D 51) E 52) D 53) A 54) D 55) E 56) A 57) E 58) B 59) D 60) B 61) A 62) C 63) FALSE 64) TRUE 65) FALSE 66) FALSE 67) FALSE 68) FALSE 69) TRUE 70) FALSE 71) FALSE 72) TRUE 73) FALSE 74) TRUE 75) TRUE 76) FALSE 77) TRUE

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78) TRUE 79) TRUE 80) FALSE 81) TRUE 82) FALSE 83) FALSE 84) FALSE 85) FALSE 86) TRUE 87) FALSE 88) FALSE 89) TRUE 90) TRUE 91) TRUE 92) TRUE 93) TRUE 94) TRUE 95) FALSE

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Chapter 11 (1) 1) You are considering an investment in a municipal bond that has a yield of 9 percent. Your tax

rate is 27.00 percent. What is your taxable equivalent yield? (Round your answer to 2 decimal places.)

A) 1.93% B) 3.86% C) 12.33% D) 4.36% E) 5.79%

2) Assume that you purchase a $1,800 bond issued by Harley-Davidson that pays 8 percent

interest each year, paid every 6 months. What is the amount of each interest payment?

(Round your answer to 2 decimal places.)

A) $144.00 B) $1,800.00 C) $72.00 D) $7.20 E) $14.40

3) Assume that you purchase a $3,500 bond issued by Kohls that pays 6 percent interest each

year, paid every 6 months. What is the amount of each interest payment? (Round your answer to 2 decimal places.)

A) $21.00 B) $105.00 C) $10.50 D) $3,500.00 E) $210.00

4) What is the approximate market value of a bond that pays $220 interest each year if

comparable interest rates have dropped to 5 percent?

A) $100 B) $1,100 C) $1,300 D) $8,800 E) $4,400

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5) If a bond is quoted in the newspaper at 74.5, what is its price? (Round your answer to 2

decimal places.)

A) $7.45 B) $745.00 C) $1,074.50 D) $1,000.00 E) $74.50

6) If a bond is quoted in the newspaper at 85.5, what is its price? (Round your answer to 2

decimal places.)

A) $1,000.00 B) $1,085.50 C) $855.00 D) $85.50 E) $8.55

7) Gwendolyn Francis is interested in buying a bond that pays $70 annually. The current price

of the bond is $940. What is her current yield? (Round your answer to 3 decimal places.)

A) 3.400% B) 6.810% C) 5.960% D) 7.447% E) 2.980%

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Answer Key Test name: ch 11 (1) 1) 2) 3) 4) 5) 6) 7)

C C B E B C D

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Chapter 11 (2) 1) Which of the following is not a true statement?

A) The decision to start an investment plan is one you must make for yourself.

B) To be useful, investment goals must be specific and measurable.

C) The sooner you start an investment program, the more time your investments have to

work for you.

D) Because investment goals deal with the future, it is ineffective to make long-term goals.

E) A short-term investment goal involves a period of 12 months.

2) A valid short-term investment goal is: A) Saving $4,000 per year for retirement.

B) Spending less than $500 per month for housing.

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

D) Using credit cards less in the next six months.

E) Purchasing a $250,000 life insurance policy within the next four years.

3) Which of the following steps should be completed before making your first investment?

A) Pick out at least two stocks or bonds to invest in B) Work to balance your budget C) Save at least $10,000 to invest D) Invest in certificates of deposit E) These steps are all completed at the same time and before your first investment.

4) Which of the following steps is not a factor to be considered before making your first

investment?

A) Work to balance your budget B) Manage your credit card debt C) Have access to other sources of cash for emergency needs D) Save at least $10,000 to invest E) Start an emergency fund

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5) All of the following statements are considered to be good advice for a potential investor in

performing a financial checkup except: A) Work to balance your budget.

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

C) Manage your credit card debt.

D) Start an emergency fund.

E) Establish a line of credit for emergency needs.

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

tax) income.

A) 20 percent B) 30 percent C) 40 percent D) 50 percent E) 60 percent

7) A _____________ is an employer-sponsored retirement account, and participating in one is

one of the easiest ways to begin an investment program.

A) TRA account B) 301(a) account C) 509(re) account D) 401(k) account E) 321(a) account

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

correct?

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

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

C) The rate of return doesn't matter; your total dollar return will be the same with any investment.

D) The length of time your money is invested does not make a difference.

E) Your investment will be worth $160,000 at retirement.

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9) Safe investments include all of the following except: A) Government bonds.

B) Savings accounts.

C) Certificates of deposit.

D) Certain corporate bonds.

E) Commodities.

10) Which of the following would be considered speculative investments?

A) Government bonds B) Savings accounts C) Certificates of deposit D) Most corporate bonds E) Precious metals

11) Speculative investments include all of the following except: A) Options.

B) Commodities.

C) Precious stones.

D) Savings accounts.

E) Precious metals.

12) Which of the following would be considered a safe investment?

A) Options B) Collectibles C) Precious metals D) Savings accounts E) Commodities

13) Regarding older investors, which of the following holds true for most?

A) They choose investments with higher risks.

B) Their choices of investments do not change.

C) They choose investments with less risk.

D) They choose investments with no risk.

E) They move all of their money into a savings account.

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14) Gwendolyn and Jack Francis are investors with no financial training or investment

background. Which approach will they likely take?

A) They will choose investments with higher risks.

B) Their choices of investments will not be affected by risk.

C) They will choose investments with less risk.

D) They will choose investments with no risk.

E) They will move all of their money into a savings account.

15) The potential return on any investment should: A) Be directly related to the risk the investor assumes.

B) Be inversely related to the risk of the investment.

C) Not have any relationship to the risk of any investment.

D) Be inversely related to the risk the investor assumes.

E) Be guaranteed.

16) Which of the following is not one of the four components of the risk factor to be considered

when evaluating investments?

A) Business failure risk B) Inflation risk C) Interest rate risk D) Market risk E) Stock risk

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

are: A) B) C) D) E)

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Business failure, inflation, buying power, and stock.

Buying power, inflation, interest rate, and market.

Inflation, interest rate, business failure, and market.

Market, bond, stock, and inflation.

Stock, interest rate, market, and buying power.

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18) Which of the following risks reduces your purchasing power?

A) Inflation risk B) Interest rate risk C) Business failure risk D) Market risk E) Stock risk

19) Which of the following risks associated with preferred stocks or government or corporate

bonds is a result of changes in rates in the economy?

A) Inflation risk B) Interest rate risk C) Business failure risk D) Market risk E) Stock risk

20) Which of the following risks deals with the possibility that bad management, unsuccessful

products, or other factors will cause the business to be less profitable than originally anticipated?

A) Inflation risk B) Interest rate risk C) Business failure risk D) Market risk E) Stock risk

21) Which of the following risks deals with fluctuations in the economy from a period of rapid

expansion followed by a period of recession?

A) Inflation risk B) Interest rate risk C) Business failure risk D) Market risk E) Stock risk

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22) Inflation risk deals with: A) A reduction in purchasing power.

B) Changes in interest rates.

C) Bad management and/or unsuccessful products.

D) Political or social conditions.

E) Predictable sources of income.

23) Business failure risk can be due to: A) A reduction in purchasing power.

B) Changes in interest rates.

C) Bad management and/or unsuccessful products.

D) Political or social conditions.

E) Predictable sources of income.

24) Market risk is associated with fluctuations in the market due to: A) A reduction in purchasing power.

B) Changes in interest rates.

C) Bad management and/or unsuccessful products.

D) Economic conditions such as rapid expansion and recession.

E) Predictable sources of income.

25) All of the following can be factors that influence business failure risk except: A) Bad management.

B) Unsuccessful products.

C) Competition.

D) All of these can affect business failure risk.

E) None of these can affect business failure risk.

26) Business failure risk: A) Cannot be diversified.

B) Causes the business to increase its dividends.

C) Leads to improved earnings, in the worst case.

D) Is associated with government bonds.

E) Causes the business to be less profitable than originally anticipated.

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27) Timothy Calibe purchased common stock in XYZWidgets.com. To be a successful investor,

he should: A) Buy more common stock in XYZWidgets.com.

B) Buy preferred stock in XYZWidgets.com.

C) Buy bonds in XYZWidgets.com.

D) Continue to evaluate his investment in XYZWidgets.com after the purchase.

E) Any of these would reduce his business failure risk.

28) If your primary investment objective is to receive investment income, which of the following

would not be an appropriate investment for you?

A) Utility stocks B) Corporate bonds C) Municipal bonds D) Preferred stocks E) Aggressive growth funds

29) Which of the following describes a growth company?

A) The company pays a large dividend.

B) Profits are reinvested in the company for future growth.

C) Sales revenues are not increasing.

D) The company has managers who cannot solve the problems associated with rapid

expansion.

E) The company is considered a conservative company for investors.

30) Which of the following does not describe a growth company?

A) The company pays a large dividend.

B) Profits are reinvested in the company for future growth.

C) Earnings potential is high.

D) Managers can solve problems associated with rapid expansion.

E) Sales revenue is increasing.

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31) If your main focus is to have your investments increase in value, you are most concerned

with: A) B) C) D) E)

Income.

Growth.

Liquidity.

Business failure risk.

Market risk.

32) If your main focus is to be able to buy or sell an investment quickly without substantially

affecting the investment's value, you are most concerned with: A) Income.

B) Growth.

C) Liquidity.

D) Business failure risk.

E) Market risk.

33) Which of the following investments is the most liquid?

A) Certificate of deposit B) Corporate bond C) Interest-bearing checking account D) Municipal bond E) Preferred stock

34) The process of spreading your assets among several different types of investments to lessen

risk is called: A) Asset allocation.

B) Asset combination.

C) Asset reinstatement.

D) Asset riskiness.

E) Asset returns.

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35) A fancy way of saying you need to diversify your investments is: A) A bird in the hand is worth two in the bush.

B) A stitch in time saves nine.

C) Birds of a feather flock together.

D) Don't judge a book by its cover.

E) Don't put all of your eggs in one basket.

36) Which of the following investors would mostly prefer conservative investments with less risk

to speculative investments with higher risks?

A) A 25-year-old single investor with no children with a job that pays $60,000 per year B) An unemployed single parent who just received a $300,000 divorce settlement C) A 30-year-old who is independently wealthy and has a separate trust fund for day-today expenses D) A dual-career couple in their 30s with secure jobs whose combined income is $95,000 E) A healthy 45-year-old who plans to work in his secure job for at least 25 more years

37) Which of the following investors would mostly prefer speculative investments with higher

risks over conservative investments with less risk?

A) A 25-year-old single investor who does not have an emergency fund B) An unemployed single parent who just received a $300,000 divorce settlement C) A 70-year-old who uses his dividends and interest to pay his monthly bills D) A dual-career couple (with no children) in their 30s whose combined income is $95,000 E) An elderly retired couple with $850,000 in retirement savings

38) Which of the following investments typically has the largest potential growth?

A) Government bonds B) Cash C) Cash equivalents D) Certificates of deposit E) Stocks

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39) Which of the following investments typically has the most risk?

A) Government bonds B) Cash C) Cash equivalents D) Certificates of deposit E) Stocks

40) Which of the following has returned an average of almost 10 percent per year over the past

100 years?

A) Bonds B) Certificates of deposit C) Conservative portfolio D) Savings account E) Stocks

41) If you need access to your funds in two years or less, which of the following investments

would be least appropriate?

A) Cash B) Certificates of deposit C) Short-term government bonds D) Highly rated corporate bonds E) Stocks and mutual funds

42) If you do not need to access your funds for 5-10 years or more, which of the following

investments would be most appropriate?

A) Cash B) Certificates of deposit C) Short-term government bonds D) Highly rated corporate bonds E) Stocks and mutual funds

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43) Older investors are often more interested in ______ investments.

A) aggressive B) international C) speculative D) conservative E) growth-oriented

44) Young investors are often more interested in ______ investments than are older investors.

A) growth-oriented B) government bond C) cash D) conservative E) high-quality corporate bonds

45) Some financial experts suggest that investors include a percentage of growth investments as

part of their investment plan. This percentage can be calculated by subtracting your age from: A) 50.

B) 95.

C) 100.

D) 120.

E) 200.

46) When investing, in your role as an investor, you should not: A) Evaluate potential investments.

B) Let the investments manage themselves.

C) Monitor the value of investments.

D) Keep accurate records.

E) Consider tax consequences of selling investments.

47) After you purchase an investment, you should: A) Assume that your investment is tax-free.

B) Continually evaluate your investment.

C) Ignore other potential investments.

D) Leave recordkeeping to the financial adviser.

E) Let the investment manage itself.

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48) When monitoring the value of your stock investments, it is important to: A) Wait until you sell them to determine their value.

B) Track the prices in the December copy of a financial magazine.

C) Estimate their values based on similar stocks.

D) Determine their values using the price quotations reported on the Internet and in

newspapers.

E) Assume that the values remain the same as long as you hold them.

49) To maximize profit or reduce dollar losses when you sell your investments, it is important to

do all of the following except: A) Keep purchase records of actual dollar costs.

B) Keep accurate records to help you spot opportunities for when to sell.

C) Identify and document commissions or fees paid.

D) Keep a list of sources of information (such as Internet addresses) for reference.

E) Identify the actual dollar cost of the investments after you sell them.

50) When should you consider the tax consequences of selling your investments?

A) Only when you make your own decisions B) Only when you have professional help C) When the taxes due are less than $300 per transaction D) When you make your own decisions or when you have professional help E) When you are working with professionals and taxes due are less than $300 per

transaction

51) Which of the following is not a U.S. Treasury security?

A) Treasury note B) Treasury bond C) Treasury Inflation-Protected Security (TIPS) D) Treasury stock E) Treasury bill

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52) A discounted security means that the actual purchase price is: A) The face value.

B) Less than the maturity value.

C) Greater than the face value.

D) The value at maturity.

E) The expected interest rate.

53) Which of the following statements is false?

A) The federal government sells bonds to obtain financing.

B) U.S. government securities carry a reduced risk of default.

C) U.S. government securities are considered a very conservative and safe investment.

D) Individual investors who purchase U.S. government securities must hold the

investments until maturity.

E) Treasury securities may be purchased through banks or brokers.

54) A U.S. government security issued in minimum units of $100 with 4-, 8-, 13-, 26-, or 52-

week maturities is called a: A) Subordinated bond.

B) Treasury bill.

C) Treasury note.

D) Treasury bond.

E) Savings bond.

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

correct?

A) Treasury bond rates < Treasury bill rates < Treasury note rates B) Treasury bill rates < Treasury note rates < Treasury bond rates C) Treasury note rates < Treasury bill rates < Treasury bond rates D) Treasury bill rates < Treasury bond rates < Treasury note rates E) Treasury bond rates < Treasury note rates < Treasury bill rates

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56) A U.S. government security issued in $100 units with maturities of more than 1 year but not

more than 10 years is called a: A) Subordinated bond.

B) Treasury bill.

C) Treasury note.

D) Treasury bond.

E) Savings bond.

57) A U.S. government security issued in minimum units of $100 with a 30-year maturities is

called a: A) Subordinated bond.

B) Treasury bill.

C) Treasury note.

D) Treasury bond.

E) Savings bond.

58) A security issued by the U.S. government where the principal increases with inflation and

decreases with deflation is called a: A) Treasury note.

B) TIPS. C) SAFE. D) Treasury bond.

E) Treasury bill.

59) A bond backed by the full faith, credit, and unlimited taxing power of the government that

issued it is called a ____________ bond.

A) debenture B) mortgage C) secured D) general obligation E) revenue

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60) A bond that is repaid from the income generated by the project it is designed to finance is

called a(n): A) Treasury bill.

B) Savings bond.

C) Revenue bond.

D) General obligation bond.

E) Agency bond.

61) A debt security issued by a state or local government is known as a: A) Treasury bond.

B) Municipal bond.

C) Corporate bond.

D) Subordinated bond.

E) Federal agency bond.

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

A) Interest may be tax-exempt at the federal level.

B) Interest may be tax-deductible at the federal level.

C) The face value may be tax-deductible at the state level.

D) The face value may be a tax credit at the federal level.

E) All payments are tax-deductible at all governmental levels.

63) The taxable equivalent yield for a municipal bond is calculated using the: A) Investor's tax rate and Treasury bill yield.

B) Tax-exempt yield and current inflation rate.

C) Tax-exempt yield and the investor's tax rate.

D) Current inflation rate and number of years until maturity.

E) Tax-exempt yield and number of years until maturity.

64) Which of the following is not correct?

A) The taxable equivalent yield is greater than the tax-exempt yield.

B) The taxable equivalent yield can be compared to the return on a taxable investment.

C) An investor can have a capital gain if she sells a municipal bond before maturity.

D) The taxable equivalent yield is calculated for municipal securities.

E) The tax-exempt yield is associated primarily with federal government securities.

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65) Generally, interest on corporate bonds is normally paid every: A) Month.

B) Three months.

C) Six months.

D) Nine months.

E) Year.

66) Corporations use bonds: A) For financing ongoing business activities.

B) When it is difficult to sell stock.

C) To improve financial leverage.

D) All of these are correct.

E) None of these is correct.

67) Interest paid to corporate bond owners is: A) Tax-deductible for the investor.

B) Tax-deductible for the corporation.

C) Tax-exempt for the investor.

D) Tax-exempt for the corporation.

E) Tax-deductible for both the investor and the corporation.

68) The financially independent firm or individual that acts as the bondholders' representative is

the: A) B) C) D) E)

Chairman of the board.

President of the corporation.

Debenture holder.

Indenture holder.

Trustee.

69) Which of the following statements is correct?

A) For the corporation, interest paid on corporate bonds is not tax-deductible.

B) Bond financing is seldom used to pay for a corporation's ongoing business activities.

C) Bonds are a form of debt financing.

D) Bonds do not have to be repaid at maturity.

E) Interest payments to bond owners are at the discretion of the corporation.

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70) A bond that is backed only by the reputation of the issuing corporation is called a(n)

____________ bond.

A) debenture B) mortgage C) indenture D) preemptive E) treasury

71) A corporate bond that is secured by various assets of the issuing firm is called a(n)

____________ bond.

A) debenture B) mortgage C) indenture D) preemptive E) treasury

72) A bond that can be exchanged, at the owner's option, for a specified number of shares of the

corporation's stock is called a(n) ____________ bond.

A) debenture B) mortgage C) indenture D) convertible E) subordinated

73) Which of the following statements is true?

A) Convertible corporate bonds are more secure than government bonds.

B) Convertible bonds often pay 1-2 percent more interest than nonconvertible bonds.

C) Because of the conversion feature, it is not necessary to evaluate convertible

corporate bonds.

D) Investors can often achieve lower risk by investing in corporate bonds or may achieve higher returns, with higher risk by investing in common stock.

E) Even after convertible bondholders convert their investments to common stock, the bondholders still receive interest payments.

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74) A call feature: A) Allows bondholders to convert their bonds to a specified number of shares of

common stock.

B) Is not available for corporate bonds.

C) Allows the corporation to buy outstanding bonds from current bondholders before the maturity date.

D) Is sold by companies with a poor earnings history.

E) Is used in connection with leveraged buyouts.

75) A fund to which annual or semiannual deposits are made for the purpose of redeeming a

bond issue is called a(n) ____________ fund.

A) serial B) sinking C) debenture D) indenture E) money

76) Bonds of a single issue that mature on different dates are called ____________ bonds.

A) debenture B) mortgage C) sinking fund D) subordinate E) serial

77) Which of the following is not a rating agency for bonds?

A) Moody's Investors Service B) Bond Rating Corporation C) Standard & Poor's Corporation D) Fitch Ratings E) All of these are rating agencies.

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78) Why do investors purchase corporate bonds?

A) To earn interest income B) For the repayment at maturity C) For the potential increase in value D) All of these choices are correct.

E) None of these options are correct.

79) The type of bond that is tracked electronically by the issuing company using computers to

record the owners’ information is a: A) General obligation bond.

B) Registered bond.

C) Revenue bond.

D) Tax-exempt bond.

E) Zero-coupon bond.

80) If overall interest rates in the economy rise, a corporate bond with a fixed interest rate will

generally: A) Increase in value.

B) Decrease in value.

C) Remain unchanged.

D) Become worthless.

E) Be returned to the corporation.

81) Which of the following securities are rated by three companies?

A) Treasury bills B) Treasury notes C) Corporate bonds D) Treasury bonds E) TIPS

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82) If your monthly expenses total $2,000, you should save at least _______ in an emergency

fund before focusing on your investment program.

A) $1,000 B) $2,000 C) $4,000 D) $6,000 E) $8,000

83) If your monthly expenses total $2,500, you should save at least _______ in an emergency

fund before focusing on your investment program.

A) $1,000 B) $2,500 C) $5,000 D) $7,500 E) $10,000

84) According to some financial experts, how much of an investment program should a 30-year-

old investor have in growth investments?

A) 30% B) 55% C) 60% D) 70% E) 100%

85) According to some financial experts, how much of an investment program should a 30-year-

old investor have in safe (non-growth) investments?

A) 30% B) 40% C) 70% D) 80% E) 100%

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86) According to some financial experts, how much of an investment program should a 50-year-

old investor have in growth investments?

A) 30% B) 40% C) 45% D) 50% E) 70%

87) According to some financial experts, how much of an investment program should a 60-year-

old investor have in safe (non-growth) investments?

A) 30% B) 40% C) 50% D) 60% E) 70%

88) You are considering an investment in a municipal bond that has a yield of 4 percent. Your tax

rate is 25 percent. What is your taxable equivalent yield?

A) 0.75% B) 3.75% C) 4.00% D) 4.25% E) 5.33%

89) You are considering an investment in a municipal bond that has a yield of 5 percent. Your tax

rate is 25 percent. What is your taxable equivalent yield?

A) 0.75% B) 4.75% C) 5.00% D) 5.25% E) 6.67%

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90) Assume that you purchase a $1,000 bond issued by GE that pays 5 percent interest each year.

What is the annual interest amount?

A) $5.00 B) $25.00 C) $40.00 D) $50.00 E) $1,000

91) Assume that you purchase a $1,000 bond issued by Harley-Davidson that pays 6 percent

interest each year, paid every 6 months. What is the amount of each interest payment?

A) B) C) D) E)

$3.00 $6.00 $30.00 $60.00 $1,000

92) Assume that you purchase a $1,000 bond issued by Kohls that pays 8 percent interest each

year, paid every 6 months. What is the amount of each interest payment?

A) $4.00 B) $8.00 C) $40.00 D) $80.00 E) $1,000

93) What is the approximate market value of a bond that pays $60 interest each year if

comparable interest rates have dropped to 5 percent?

A) $100 B) $300 C) $500 D) $1,200 E) $2,400

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94) If a bond is quoted in the newspaper at 90, what is its price?

A) $9 B) $90 C) $900 D) $1,000 E) $1,090

95) If a bond is quoted in the newspaper at 105, what is its price?

A) $1.05 B) $10.50 C) $105.00 D) $1,000.00 E) $1,050.00

96) 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?

A) 3.50% B) 4.00% C) 7.00% D) 8.00% E) 8.75%

97) To survive a crisis, you can take which of the following step(s)?

A) Establish a larger than usual emergency fund B) Know what you owe and reduce your spending C) Notify your lenders if you are unable to make payments D) Monitor the value of your investment and retirement accounts E) All of these choices are correct.

98) Investment goals are always oriented to the future. ⊚ true ⊚ false

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99) Short-term goals should be completed in 30 or fewer days. ⊚ true ⊚ false

100)

A good rule of thumb is to limit consumer credit payments to 30 percent of your net (after-tax) income. ⊚ true ⊚ false

101)

To help survive a financial crisis, it is important to establish a larger than usual emergency fund. ⊚ true ⊚ false

102)

If you are unable to make your credit card payments, you should not contact your credit card company. ⊚ true ⊚ false

103)

From both a legal and ethical standpoint, you have an obligation to pay for credit purchases. ⊚ true ⊚ false

104)

For many people, the easiest way to begin an investment program is to participate in an employer-sponsored retirement account – often referred to as a 401(k) or a 403(b). ⊚ true ⊚ false

105)

Investments that earn a lower rate of interest will have a higher total dollar return than those that earn a high rate of interest. ⊚ true ⊚ false

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106)

An example of an investment with high risk is a government bond. ⊚ true ⊚ false

107)

The potential return on any investment should be directly related to the risk that the investor assumes. ⊚ true ⊚ false

108)

Investors pick investments that have less risk, because they know there is a moderate chance that these investments will become worthless. ⊚ true ⊚ false

109)

Market risk is associated with some investments and indicates that periods of economic expansion are followed by periods of recession. ⊚ true ⊚ false

110)

Patrick Guitman wants to protect himself against losses in his investments after the purchase. To do this, he should monitor the value of his investments to determine if he should hold, sell, or increase his stake in a specific investment. ⊚ true ⊚ false

111)

With business failure risk, you face the possibility that good management and successful products will cause the business to be less profitable than originally anticipated. ⊚ true ⊚ false

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112)

The risk of fluctuations in the market prices of stocks or bonds relates only to fundamental changes in the financial health of corporations that issue these investments. ⊚ true ⊚ false

113)

To investors, liquidity means their investments will increase in value. ⊚ true ⊚ false

114)

To investors, liquidity is the ability to buy or sell an investment quickly without substantially affecting the investment's value. ⊚ true ⊚ false

115)

For almost 100 years, stocks have earned an average annual return of almost 10 percent. ⊚ true ⊚ false

116)

Asset allocation is the process of spreading your assets among several different types of investments to increase risk. ⊚ true ⊚ false

117)

The purpose of diversification or asset allocation is to spread your assets among several different types of investments to decrease risk. ⊚ true ⊚ false

118)

An unemployed single parent who just received a $300,000 divorce settlement would likely prefer investments with less risk. ⊚ true ⊚ false

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119)

A 25-year-old single investor with a secure, full-time job that pays $60,000 would likely prefer investments with less risk. ⊚ true ⊚ false

120)

The potential return on any investment should be indirectly related to the risk the investor assumes. ⊚ true ⊚ false

121)

As investors age, they tend to invest more in growth-oriented investments. ⊚ true ⊚ false

122)

Younger investors tend to invest in more growth-oriented investments than older investors. ⊚ true ⊚ false

123)

Younger investors tend to invest in more growth-oriented investments, because they do not have time to recover if their investments take a nosedive. ⊚ true ⊚ false

124)

An easy way to determine what percentage of your assets should be invested in growth investments is to take your age and subtract it from 80. ⊚ true ⊚ false

125)

Considering your role in the investment process, it is important to let the investments manage themselves after you invest. ⊚ true ⊚ false

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126)

At the most, you should keep only the purchase records of the actual dollar cost of your investments. ⊚ true ⊚ false

127)

At the least, you should keep purchase records of the actual dollar cost of your investments plus any commissions or fees paid. ⊚ true ⊚ false

128)

Whether you are making your own decisions or have professional help, you must consider the tax consequences of selling your investments. ⊚ true ⊚ false

129)

A corporate bond is a written pledge of a government or a municipality to repay a specified sum of money, along with interest. ⊚ true ⊚ false

130)

Municipal bonds generally are only tax-exempt at the federal level. ⊚ true ⊚ false

131)

The taxable equivalent yield for a municipal bond will be lower than the tax-exempt yield for that bond. ⊚ true ⊚ false

132)

The usual face value of a corporate bond is $100. ⊚ true ⊚ false

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133)

In the event of bankruptcy, stockholders have a claim to assets of the corporation before bondholders. ⊚ true ⊚ false

134)

The value of a bond is not tied to the corporation's ability to repay its bond at maturity. ⊚ true ⊚ false

135)

Investors can typically find more websites about stocks and mutual funds than they can find for bonds. ⊚ true ⊚ false

136)

Bond ratings range from AAA (the highest) to D (the lowest) for Standard & Poor’s Corporation. ⊚ true ⊚ false

137)

An emergency fund is an amount of money you can obtain quickly in case of immediate need. ⊚ true ⊚ false

138)

While all cardholders have reasons for using their credit cards, it is very difficult to get in trouble by using your credit cards. ⊚ true ⊚ false

139)

A corporation issuing bonds appoints a trustee to represent bondholders, because corporate bond indentures are very difficult for the average person to read and understand. ⊚ true ⊚ false

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140)

A $1,000 bond issued by ABC Corporation pays a 6 percent rate of interest, which resulted in an annual amount of interest of $600. ⊚ true ⊚ false

141)

Investments that earn a higher rate of interest will have a higher total dollar return than those that earn a low rate of interest. ⊚ true ⊚ false

142)

An example of an investment that is very safe with low risk is a government bond. ⊚ true ⊚ false

143)

The usual face value of a corporate bond is $1,000. ⊚ true ⊚ false

144)

In the event of bankruptcy, bondholders have a claim to assets of the corporation before stockholders. ⊚ true ⊚ false

145)

The value of a bond is closely tied to the corporation's ability to repay its bond indebtedness at maturity. ⊚ true ⊚ false

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Answer Key Test name: ch 11 (2) 1) D 2) C 3) B 4) D 5) B 6) A 7) D 8) B 9) E 10) E 11) D 12) D 13) C 14) C 15) A 16) E 17) C 18) A 19) B 20) C 21) D 22) A 23) C 24) D 25) D 26) E 27) D 28) E 29) B 30) A 31) B 32) C 33) C 34) A 35) E 36) B 37) D

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38) E 39) E 40) E 41) E 42) E 43) D 44) A 45) C 46) B 47) B 48) D 49) E 50) D 51) D 52) B 53) D 54) B 55) B 56) C 57) D 58) B 59) D 60) C 61) B 62) A 63) C 64) E 65) C 66) D 67) B 68) E 69) C 70) A 71) B 72) D 73) D 74) C 75) B 76) E 77) B

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78) D 79) B 80) B 81) C 82) D 83) D 84) D 85) A 86) D 87) D 88) E 89) E 90) D 91) C 92) C 93) D 94) C 95) E 96) E 97) E 98) TRUE 99) FALSE 100) FALSE 101) TRUE 102) FALSE 103) TRUE 104) TRUE 105) FALSE 106) FALSE 107) TRUE 108) FALSE 109) TRUE 110) TRUE 111) FALSE 112) FALSE 113) FALSE 114) TRUE 115) TRUE 116) FALSE 117) TRUE

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118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130) 131) 132) 133) 134) 135) 136) 137) 138) 139) 140) 141) 142) 143) 144) 145)

TRUE FALSE FALSE FALSE TRUE FALSE FALSE FALSE FALSE TRUE TRUE FALSE FALSE FALSE FALSE FALSE FALSE TRUE TRUE TRUE FALSE TRUE FALSE TRUE TRUE TRUE TRUE TRUE

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Chapter 12 (1) 1) Gregory bought 765 shares of stock at a price of $53 per share. He later sold his stock at a

price of $50. What was his total return on his investment?

A) $53 capital loss B) $2,295 capital gain C) $2,295 capital loss D) $36,720 capital gain E) $3 capital gain

2) Using the information given here, what are the earnings per share for DEF Company?

(Round your answer to 2 decimal places.)

Number of shares outstanding = 79,000 Price per share = $49 Book value per share = $10 Earnings = $199,000 A) $5.04 B) $0.52 C) $2.52 D) $4.52 E) $1.52

3) Using the information given here, what are the earnings per share for GHI Company?

(Round your answer to 2 decimal places.)

Number of shares outstanding = 195,000 Price per share = $61 Book value per share = $15 Earnings = $994,500 A) $5.60 B) $5.10 C) $10.10 D) $2.93 E) $3.93

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4) Using the information given here, what is the price-earnings ratio for DEF Company?

(Round your answer to 2 decimal places.)

Number of shares outstanding = 50,000 Price per share = $45.00 Book value per share = $10 Earnings per share = $4.00 After-tax income = $200,000 A) 22.50 B) 11.25 C) 8.75 D) 5.00 E) 4.00

5) Using the information given here, what is the price-earnings ratio for DEF Company? (Hint:

This is a two-step calculation.) (Round your answer to 2 decimal places.)

Earnings = $320,000 Number of shares outstanding = 40,000 Price per share = $108.00 Book value per share = $10 A) 8.00 B) 27.00 C) 9.00 D) 11.00 E) 13.50

6) Given the information shown here for NMOP, Incorporated, calculate the dividend yield.

(Round your answer to 2 decimal places.)

Annual dividend = $6.00 Current market price per share = $85.00 A) 6.00% B) 0.71% C) 7.06% D) 14.17% E) 1.42%

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7) Given the information shown here for NMOP, Incorporated, calculate the dividend yield.

Annual dividend = $25.20 Number of shares outstanding = 252,000 Current market price per share = $90.00 Book value per share = $6.00 A) 42% B) 112% C) 28% D) 70% E) 56%

8) Given the information shown here for QRS, Incorporated, calculate the book value per share.

Assets = $6,500,000 Liabilities = $5,000,000 Number of shares outstanding = 500,000 A) $1.50 B) $2.50 C) $0.33 D) $5.50 E) $3.00

9) Given the information shown here for TUV, Incorporated, calculate the total return.

Dividends per share = $2.90 Purchase price (July 15, 2010) = $95 Sell price (July 15, 2011) = $102 A) $2.90 B) −$7.00 C) $7.00 D) −$4.10 E) $9.90

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10) If you bought stock using dollar cost averaging as listed here, what was your average cost per

share? (Round your answer to 2 decimal places.)

Date Purchased June 15 July 15 August 15 A) B) C) D) E)

Investment Value $ 35 $ 35 $ 35

Shares Purchased 3.95 shares 3.70 shares 4.15 shares

$8.62 $9.69 $11.12 $9.08 $8.90

11) Mike bought 650 shares of PDQ stock on margin at $45/share. The stock increased to

$51.50/share. What was Mike's profit?

A) $29,250 B) $33,475 C) $34,475 D) $2,113 E) $4,225

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Answer Key Test name: ch 12 (1) 1) C 2) C 3) B 4) B 5) E 6) C 7) C 8) E 9) E 10) E 11) E

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Chapter 12 (2) 1) Which of the following is incorrect?

A) There is no substitute for researching a potential investment.

B) Beginning investors sometimes worry that they won't understand stock information.

C) Some investors do not know where to get the information they need to evaluate

potential investments.

D) Very little information is available about stocks.

E) All of these statements are correct.

2) For the past 100 years, the average annual return for stocks has been almost: A) 8 percent.

B) 10 percent.

C) 12 percent.

D) 14 percent.

E) 16 percent.

3) Amanda wants to be part of the most basic form of ownership for a corporation. She should

invest in: A) Bonds.

B) Common stock.

C) Dividends.

D) A savings account.

E) A proxy.

4) Equity financing is money received from the sale of: A) Bonds.

B) Common stock.

C) Dividends.

D) A savings account.

E) A proxy.

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5) A distribution of money, stock, or other property that is paid to the stockholders of a

company is called a: A) Bond.

B) Common stock.

C) Dividend.

D) Savings account.

E) Proxy.

6) A legal form that requests that stockholders transfer their voting rights to individual(s) is

called a: A) Bond.

B) Common stock.

C) Dividend.

D) Savings account.

E) Proxy.

7) All of the following statements are correct except: A) Dividends are paid out of profits.

B) Dividend payments must be approved by the stockholders.

C) A dividend can be a distribution of money, stock, or other property.

D) Dividends are not mandatory.

E) Utility companies typically distribute a higher percentage of earnings than rapidly

growing firms.

8) 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: A) Alberta will receive the same amount as Bobby if they owned the stock two business days before the record date.

B) Both will receive the dividend as long as they sell their stock three days before the record date.

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

D) Both will receive the dividend if they bought the stock on the record date.

E) Alberta and Bobby will receive the same amount if they bought the shares at least one month before the record date.

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9) If you buy common stock, you may receive income from: A) Dividends.

B) Dollar appreciation of stock value.

C) Possible increases in value from stock splits.

D) None of these are correct.

E) All of these are correct.

10) MNOP, Incorporated, 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 this stock and receive the dividend. What is the latest date that she needs to have purchased the stock in order to receive the dividend?

A) September 12 B) September 14 C) September 15 D) September 19 E) October 18

11) MNOP, Incorporated, declared a $1.00 dividend with a record date of Thursday, September

15, and a payment date of Thursday, October 20. Cheri does not want to receive this current dividend. What is the earliest date that she should purchase the stock in order to avoid receiving the dividend?

A) September 14 B) September 15 C) September 16 D) October 18 E) October 20

12) Why does a company split its stock?

A) The stock is trading at a low price, and the company wants to increase its stock value.

B) It wants fewer shares outstanding.

C) The stock is trading at a high price, and the company wants to bring the price in line

with a theoretical ideal range.

D) It wants the total market capitalization to be lower than the current level.

E) The company wants to guarantee that the stock price will increase.

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13) Which of the following statements about stock splits is correct?

A) If a company has a 2-for-1 split, the price will be doubled.

B) If a company has a 3-for-1 split, the price will increase by a factor of 3.

C) If a company has a 4-for-1 split, the new number of shares outstanding will be four

times as many as before the split.

D) If a company has a 5-for-1 split, the new number of shares outstanding will be equal to the old number of shares divided by 5.

E) None of these is correct.

14) Which of the following is not correct regarding preferred stock?

A) Preferred stocks are considered to be safer investments than common stocks.

B) Owners of preferred stock have first claim to a corporation's assets after creditors in a

bankruptcy.

C) Owners of preferred stock receive cash dividends before common stockholders receive their dividends.

D) The dollar amount of the dividend on preferred stock is known before the stock is purchased.

E) The yield on preferred stocks is often lower than the yield on corporate bonds.

15) Megan decided to start investing in stocks. Which of the following should she do first?

A) Base her investing decisions on hot tips she hears at work B) Buy stocks based solely on her stockbroker's recommendation C) Choose stocks based on recommendations from her family members D) Pick stocks at random E) Research the corporations she is interested in as well as their industries

16) Which of the following statements is correct?

A) The Internet is not to be trusted as a reliable source to evaluate potential investments.

B) Individual company websites usually charge for access to their own financial reports.

C) The Internet provides websites that may be more up-to-date and thorough than printed

materials.

D) Websites like Yahoo! Finance are not dependable.

E) None of these is correct.

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17) A stock issued by a stable corporation that generally attracts conservative investors is called

a(n) _______ stock.

A) blue chip B) income C) micro-cap D) mid-cap E) penny

18) An investment that pays higher-than-average dividends is called a(n) _______ stock.

A) blue chip B) income C) micro-cap D) mid-cap E) penny

19) A stock that typically sells for less than $5 per share (or in some cases, less than $1 per share)

is called a(n) _______ stock.

A) blue chip B) income C) micro-cap D) mid-cap E) penny

20) A stock issued by a corporation that has a capitalization between $2 billion and $10 billion is

called a(n) _______ stock.

A) blue chip B) income C) micro-cap D) mid-cap E) penny

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21) A stock issued by a company that has a capitalization between $50 and $300 million or less

is called a(n) _______ stock.

A) blue chip B) income C) micro-cap D) mid-cap E) penny

22) Cliff retired 10 years ago and wants to still own a few stocks. Dividends are important to

him, and he wants to invest in a large, stable corporation. He should purchase _______ stocks.

A) blue chip B) cyclical C) micro-cap D) mid-cap E) penny

23) Patrick graduated from college five years ago. He has set up an emergency fund and has been

paying off his student loans. In addition, he participates in the retirement plan offered by his employer. He wants to invest $75 per month in very small companies (capitalization between $50 and $300 million or less). He should purchase _______ stocks.

A) blue chip B) income C) micro-cap D) mid-cap E) penny

24) Which of the following is some of the information found on a financial website such as

Yahoo! Finance?

A) Company name, last price (previous day’s close), target price, price change (day’s range) B) 52-week price range, number of shares traded (volume) C) Market capitalization (Market Cap) D) Dividend paid and yield E) All of this information is included on the website.

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25) Which of the following usually offers some free information and charges for the more

detailed online information you may need to evaluate a stock investment?

A) Financial websites such as www.finance.yahoo.com B) Personal finance websites such as www.smartmoney.com C) Professional advisory services such as Standard & Poor's Financial Services D) Search engines such as Yahoo!

E) The Securities and Exchange Commission website

26) Which of the following is(are) true?

A) Zacks Handbook of Common Stocks is a misnomer because it analyzes only

industries.

B) Standard & Poor's reports are available only on the Internet.

C) Stock advisory services include printed materials ranging from alphabetical listings to detailed financial reports.

D) Value Line is the only reliable stock advisory service used by investors.

E) All of these are correct.

27) Detailed financial reports from advisory services such as Value Line include all of the

following sections except: A) The top of the report includes price information and price projections for a share of stock.

B) The middle of the report includes revenues, earnings per share, dividends, etc.

C) The bottom of the report includes information about the type of business and prospects for the future.

D) None of the choices are included.

E) All of the information is included in financial reports.

28) Annual reports: A) Are available only online from a corporation’s internet website.

B) C) D) E)

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Are available only to current stockholders.

Include the same information as a prospectus.

May be sent to all stockholders on an annual basis.

Include estimated financial data only.

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29) Which of the following is correct?

A) The ability to generate earnings is a minor factor in determining the value of a stock.

B) Corporate earnings are reported in the proxy statement.

C) Earnings per share uses the price of the stock in the calculation.

D) The price/earnings ratio should not be used to evaluate stock investments.

E) The price/earnings ratio is the price of a share of stock divided by the corporation's

earnings per share of stock.

30) Earnings per share equals the: A) Total number of shares of preferred stock divided by earnings.

B) Total number of shares of common stock divided by earnings.

C) Total earnings divided by number of shares of preferred stock.

D) Total earnings divided by number of shares of common and preferred stock.

E) None of these are correct.

31) When analyzing a price-earnings ratio: A) A higher price-earnings ratio indicates pessimism because the price is too high

compared to the earnings.

B) The higher the price-earnings ratio, the more investors are paying for earnings.

C) A low ratio indicates that investors expect higher earnings in the future.

D) Price-earnings ratios are helpful when comparing two companies in the same industry, but not to the market in general.

E) The price-earnings ratio alone provides enough information to allow an investor to decide whether to invest in a particular stock.

32) Which of the following is based on historical numbers?

A) Projected Earnings B) Earnings per share C) Price-earnings ratio D) Both Earnings per share and Price-earnings ratio E) None of these is correct.

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33) If you want to compare two companies, you should use: A) Book value per share.

B) Dividend yield.

C) Price per share.

D) Net income.

E) Price-earnings ratio.

34) Which of the following is a profitability measure that uses the number of outstanding shares

in the calculation?

A) Capital gains B) Earnings per share C) Price per share D) Net income E) Dividend yield

35) This measure uses the market price per share of the stock and the earning per share.

A) Book value per share B) Earnings per share C) Capital gains D) Net income E) Price-earnings ratio

36) Changes in which of the following changes would not cause analysts to revise earnings

estimates for a health care corporation?

A) The company’s sales B) The company’s profits C) The economy in general D) The company’s industry E) The weather

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37) This calculation uses the current price per share and the annual amount of money paid to

investors from the company.

A) Book value B) Dividend yield C) Earnings per share D) Market value E) Price-earnings ratio

38) The formula "(Assets − Liabilities)/Number of shares outstanding" equals: A) Book value.

B) Dividend yield.

C) Earnings per share.

D) Market value.

E) Price-earnings ratio.

39) This calculation includes the yearly dividends in dollars plus the increase in the original

purchase price of the investment.

A) Book value B) Capital gain C) Market value D) Price-earnings ratio E) Total return

40) Total return equals: A) Dividend yield.

B) Yearly dividends in dollars plus capital gains.

C) Capital gains.

D) Yearly dividends in dollars less capital gains.

E) Capital gains less yearly dividends in dollars.

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41) Dividend yield equals: A) Annual dividend amount/Current price per share.

B) Quarterly dividend amount/Price per share.

C) Annual dividend amount/Book value per share.

D) Quarterly dividend amount/Book value per share.

E) Annual dividend amount/Earnings per share.

42) Book value equals: A) (Assets + Liabilities)/Number of shares outstanding.

B) (Liabilities − Assets)/Number of shares outstanding.

C) (Assets + Liabilities)/Earnings per share.

D) (Liabilities + Assets/Price-earnings ratio.

E) (Assets − Liabilities)/Number of shares outstanding.

43) When XYZ wanted to sell new security issues to the general public for the first time, it

sought the assistance of a(n): A) initial public offering.

B) investment bank.

C) primary market.

D) secondary market.

E) securities exchange.

44) Stephen wanted to become one of the owners of GHI Corporation when it initially became

available to the general public. He participated in the: A) Initial public offering.

B) Investment bank.

C) Treasury market.

D) Secondary market.

E) Securities exchange.

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45) Kelly bought some stock using an investment bank from the issuer of those securities. She

bought her shares: A) From a specialist.

B) From an investment bank.

C) On the primary market.

D) On the secondary market.

E) From a securities exchange.

46) Patrick sold his GE shares using his online broker. One can say that he sold them: A) At an initial public offering.

B) Through an investment bank.

C) In the primary market.

D) In the secondary market.

E) At a securities exchange.

47) Jake wanted to buy and sell various stocks on the NYSE. He was using one of the largest

_______________ in the world.

A) initial public offerings B) investment banks C) primary markets D) over-the-counter markets E) securities exchanges

48) A marketplace where member brokers who represent investors meet to buy and sell securities

is called a(n): A) Initial public offering.

B) Investment bank.

C) Primary market.

D) Intermediary market.

E) Securities exchange.

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49) The NYSE is an example of a(n): A) Initial public offering.

B) Investment bank.

C) Primary market.

D) Intermediary market.

E) Securities exchange.

50) NYSE stands for: A) New York Securities Exchange.

B) New York Stock Exchange.

C) New York School of Engineering.

D) Never Yet So Even.

E) New Year Selling Exchange.

51) Jackson was interested in purchasing low-value securities that were not listed on the NYSE.

He probably used _____ to complete his transaction.

A) an initial public offering B) an investment bank C) the over-the-counter market D) a primary market E) the securities exchange commission website

52) A licensed individual who works for a brokerage firm and buys or sells securities for his or

her clients is called a(n): A) Account executive.

B) Account investor.

C) Online executive.

D) Market maker.

E) All of these are correct.

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53) Peter is a NASDAQ dealer who matches buy and sell orders for Ford. He is known as a(n): A) Account executive.

B) Account investor.

C) Discount broker.

D) Full-service broker.

E) Market maker.

54) Excessive buying and selling of securities to generate commissions is called: A) Churning.

B) Flipping.

C) Marketing.

D) Prospecting.

E) Scamming.

55) Claudia is a licensed individual who buys or sells investment for her clients. Which of the

following is not correct?

A) She is an account executive.

B) She should not use her discretion without her client's approval.

C) She should focus on churning for her clients.

D) She should provide information and advice to be used in evaluating potential investments.

E) She is known as a stockbroker.

56) Terry wants to begin investing and needs some guidance because he is uncomfortable

making investment decisions. He should use a(n): A) Discount broker.

B) Full-service broker.

C) Market maker.

D) Online broker.

E) None of these is correct.

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57) Tammy understands how to research stocks and feels quite comfortable trading her own

stocks using the Internet. She should use a(n): A) Discount broker.

B) Full-service broker.

C) Market maker.

D) Online broker.

E) All of these are correct.

58) Tanya understands the "how to" of researching stocks and likes to make her own decisions.

However, she is not comfortable using the Internet to trade stocks. She should use a(n): A) Discount broker.

B) Full-service broker.

C) Market maker.

D) Online broker.

E) All of these are correct.

59) Avery is considering whether to use a full-service or discount brokerage firm. He should

consider all of the following except: A) Whether he can buy or sell stocks using the Internet or over the phone.

B) Whether there a charge for statements, research reports, and other financial reports.

C) The typical commission fee for a stock transaction.

D) The existence of a toll-free number for customer use.

E) All of these are appropriate considerations.

60) Mallory wants to purchase stock at the current market price. She should use a: A) Current sale order.

B) Limit order.

C) Market order.

D) Stop order.

E) Stop-loss order.

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61) Devin wants to purchase DEF stock for a specified price of $40.00 or less, and he

understands this request will be executed after all previously received orders have been fulfilled. He should use a: A) Current sale order.

B) Limit order.

C) Market order.

D) Stop order.

E) Stop-loss order.

62) Gavin has owned MNOP stock for several years and has seen the stock increase in value

from $20 to $35. He wants to "lock in" his gains, so he needs to place an order that will sell his stock at the next available opportunity after its market price drops to $33. What kind of order should he use?

A) Current sale order B) Limit order C) Market order D) Stop-loss order E) None of these are correct.

63) Ethan wants to purchase some stock for the first time. Which of the following is correct?

A) His account executive should be encouraged to churn Ethan's account to maximize

his return.

B) He should use an online broker to get professional help about purchasing stock.

C) His purchase price will exactly equal the number of shares he purchases times the average price per share and is known in advance.

D) If he uses a commission order, he can lock in the price at which he wants to buy the stock.

E) His commission should be lower at an online broker than at a full-service broker.

64) If you bought a stock on June 15, 2018, and sold it on July 15, 2020, you would likely be

classified as a(n): A) Speculator.

B) Trader.

C) Investor.

D) None of these are correct.

E) All of these are correct.

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65) If you bought a stock on July 1, 2020, and sold it on July 15, 2020, you may be a(n): A) Speculator.

B) Trader.

C) Investor.

D) Two of these are correct.

E) Three of these are correct.

66) Brenda purchases stock and plans to hold on to it for a number of years. She could be

considered to be using a: A) Buy-and-hold technique.

B) Direct investment plan.

C) Direct reinvestment plan.

D) Dollar cost averaging technique.

E) Margin technique.

67) Marissa purchases $500 of stock directly from a corporation without having to use an

account executive or a brokerage firm. She is using a: A) Buy-and-hold technique.

B) Direct investment plan.

C) Direct reinvestment plan.

D) Dollar cost averaging technique.

E) Margin technique.

68) Rebecca owns stock that pays a dividend. She does not want the cash now; instead, she

would prefer to have more shares of stock. She should use a: A) Buy-and-hold technique.

B) Direct investment plan.

C) Dividend reinvestment plan.

D) Dollar cost averaging technique.

E) Margin technique.

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69) Timothy has $100 automatically invested in a stock each month. This way, he doesn't buy

high and sell low. He is using a: A) Buy-and-hold technique.

B) Direct investment plan.

C) Direct reinvestment plan.

D) Dollar cost averaging technique.

E) Margin technique.

70) Faye sometimes borrows money from her broker to buy her stock. She is buying: A) A call option.

B) A direct investment.

C) On margin.

D) A put option.

E) A short sale.

71) Investors who earn larger returns because they borrow part of the money needed to buy a

particular stock are using which of the following techniques?

A) A call option B) Direct investing C) Buying on margin D) A put option E) Selling short

72) If you buy or sell with this technique, you may be required to pledge additional collateral or

cash for a loan.

A) A call option B) Direct investing C) Buying on margin D) A put option E) Selling short

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73) Ben is selling stock that he borrowed from his broker and planned to replace at a later date.

Which of the following strategies is he using?

A) A call option B) Direct investing C) Buying on margin D) A put option E) Selling short

74) Which of the following is correct?

A) A broker pays an investor interest on money borrowed to purchase stock on margin.

B) Selling short is selling stock borrowed from a brokerage firm.

C) A put option is the right, but not the obligation, to purchase a stock at a specified

price by a given date.

D) A brokerage firm typically receives double its commission when stock is bought and sold when the investor is selling short.

E) If the stock price increases and you purchased stock on margin, you may receive a margin call.

75) Which of the following is not correct?

A) The investor must pay interest on money borrowed to purchase stock on margin.

B) Selling short is selling stock borrowed from a brokerage firm.

C) An option is the right to buy or sell a stock at a predetermined price during a specified

period of time.

D) A brokerage firm typically receives double its commission when stock is bought and sold when the investor is selling short.

E) If the stock price decreases and you purchased that stock on margin, you may receive a margin call.

76) The opportunity, but not the obligation, to buy a security within a specified period of time at

a guaranteed price is: A) A call option.

B) Direct investing.

C) Buying on margin.

D) A put option.

E) A short sale.

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77) The opportunity, but not the obligation, to sell a security within a specified period of time at

a guaranteed price is: A) A call option.

B) Direct investing.

C) Buying on margin.

D) A put option.

E) A short sale.

78) Mary Sue owns 1,000 shares of QRS Moving Company. QRS pays a yearly dividend of

$1.00 per share. What is the total annual dividend that Mary Sue will receive?

A) $0.50 B) $2.00 C) $250.00 D) $500.00 E) $1,000.00

79) Mary Jane owns 1,000 shares of TUV Trucking Company. TUV pays a yearly dividend of

$2.00 per share. What is the total annual dividend that Mary Jane will receive?

A) $0.25 B) $1.00 C) $500 D) $1,000 E) $2,000

80) Gregory bought 500 shares of stock at a price of $60 per share. He later sold his stock at a

price of $56. What was his total return on his investment?

A) $2,000 capital loss B) $60 capital loss C) $4 capital gain D) $2,000 capital gain E) $26,500 capital gain

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81) Using the information given here, what are the earnings per share for DEF Company?

Number of shares outstanding = 60,000 Price per share = $30 Book value per share = $10 Earnings = $180,000 A) $1.00 B) $2.00 C) $3.00 D) $5.00 E) $6.00

82) Using the information given here, what are the earnings per share for GHI Company?

Number of shares outstanding = 150,000 Price per share = $60 Book value per share = $20 Earnings = $375,000 A) $0.33 B) $1.33 C) $2.50 D) $3.00 E) $7.50

83) Using the information given here, what is the price-earnings ratio for DEF Company?

Number of shares outstanding = 60,000 Price per share = $30 Book value per share = $10 Earnings per share = $3.00 After-tax income = $180,000 A) 3.00 B) 4.00 C) 7.50 D) 10.00 E) 20.00

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84) Using the information given here, what is the price-earnings ratio for DEF Company? (Hint:

This is a two-step calculation.)

Earnings = $180,000 Number of shares outstanding = 60,000 Price per share = $30 Book value per share = $10 A) 3.00 B) 4.00 C) 7.50 D) 10.00 E) 20.00

85) Given the information shown here for NMOP, Incorporated, calculate the dividend yield.

Annual dividend = $4.00 Current market price per share = $60.00 A) 6.70% B) 0.67% C) 15.00% D) 1.50% E) 4.00%

86) Given the information shown here for NMOP, Incorporated, calculate the dividend yield.

Annual dividend = $4.00 Number of shares outstanding = 40,000 Current market price per share = $40.00 Book value per share = $8.00 A) 10% B) 15% C) 20% D) 25% E) 40%

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87) Given the information shown here for QRS, Incorporated, calculate the book value per share.

Assets = $18,000,000 Liabilities = $10,000,000 Number of shares outstanding = 2,000,000 A) $1.33 B) $2.50 C) $3.50 D) $4.00 E) $7.50

88) Given the information shown here for TUV, Incorporated, calculate the total return.

Dividends per share = $1.50 Purchase price (July 15, 2010) = $50.00 Sell price (July 15, 2011) = $56.00 A) −$6.00 B) −$4.50 C) $1.50 D) $6.00 E) $7.50

89) If you bought stock using dollar cost averaging as listed here, what was your average cost per

share?

Date Purchased June 15 July 15 August 15 A) B) C) D) E)

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Investment Value $ 50.00 $ 50.00 $ 50.00

Shares Purchased 1.75 shares 1.65 shares 2.00 shares

$27.50 $27.78 $27.96 $28.57 $30.00

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90) Mike bought 200 shares of PDQ stock on margin at $15/share. The stock increased to

$21/share. What was Mike's profit?

A) $600 B) $1,200 C) $3,000 D) $4,200 E) $5,200

91) When beginning an investment program, many investors do not know where to get the

information they need to evaluate potential investments. ⊚ true ⊚ false

92) Stocks are guaranteed to have large returns. ⊚ true ⊚ false

93) For almost 100 years, the average annual return for stocks has been almost 10 percent. ⊚ true ⊚ false

94) Stocks are equity financing. ⊚ true ⊚ false

95) Companies need to repay money from equity financing. ⊚ true ⊚ false

96) Sandy has invested in a stock. She is assured of receiving a dividend. ⊚ true ⊚ false

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97) When companies experience a bad year regarding earnings, they may choose to reduce or

omit their dividend payments. ⊚ true ⊚ false

98) Preferred stockholders elect the board of directors. ⊚ true ⊚ false

99) Dividends for common stock must be in cash. ⊚ true ⊚ false

100)

If the record date is Friday, April 7, then the ex-dividend date is Tuesday, April 11. ⊚ true ⊚ false

101)

If Jodi owns 200 shares of stock, a 2-for-1 stock split will double the value of her holdings. ⊚ true ⊚ false

102)

Many people purchase investments without doing any research. ⊚ true ⊚ false

103)

Before investing in a company's stock, an investor should evaluate the industry in which the company operates. ⊚ true ⊚ false

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104)

A micro-cap stock is one issued by a company that has a capitalization of $500 million or less. ⊚ true ⊚ false

105)

A mid-cap stock is one issued by a company that has a capitalization of up to $300 million. ⊚ true ⊚ false

106)

Company websites are often good sources of information when evaluating potential stock investments. ⊚ true ⊚ false

107)

The Yahoo! Finance website provides specific information about a particular company, including quotes and charts. ⊚ true ⊚ false

108)

The findings of a stock advisory service are the only information that an investor should rely on in order to make decisions about buying or selling stocks. ⊚ true ⊚ false

109)

A prospectus that contains detailed financial data may be sent annually to stockholders of publicly owned corporations. ⊚ true ⊚ false

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110)

Many financial experts believe that a corporation's ability or inability to generate dividends in the future may be one of the most significant factors that account for an increase or decrease in the value of a stock. ⊚ true ⊚ false

111)

Corporate earnings are reported in the firm's annual report, or are obtained from a professional advisory service or accessing a website such as Yahoo! Finance. ⊚ true ⊚ false

112)

Earnings per share equals the corporation's earnings divided by the number of outstanding shares of a firm's common stock. ⊚ true ⊚ false

113)

The EPS of a company can be compared to the industry's average EPS. ⊚ true ⊚ false

114)

The total return can be calculated only if a company pays dividends. ⊚ true ⊚ false

115)

The book value of a stock is determined by deducting all liabilities from the corporation’s assets and dividing the remainder by the number of outstanding shares of common stock. ⊚ true ⊚ false

116)

A bargain exists when a stock's share price is greater than its book value. ⊚ true ⊚ false

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117)

If you purchase stock from another investor, such as your cousin Sam, then you are buying stock on the primary market. ⊚ true ⊚ false

118)

Buying 100 shares of stock in an IPO is a primary market transaction. ⊚ true ⊚ false

119)

Any company's stock can be listed on the NYSE. ⊚ true ⊚ false

120)

Most securities that are considered "over-the-counter" are traded through the NYSE. ⊚ true ⊚ false

121)

Joseph has been Leon's account executive for several years. Leon has been questioning Joseph's integrity because it appears as though Joseph might be churning. If Leon wants to take formal action about his concern, he likely will be required to use an arbitration board. ⊚ true ⊚ false

122)

A.J. wants to buy a stock at its current market price. He should use a market order. ⊚ true ⊚ false

123)

Kenny wants to sell his stock at a specified price or higher without a guarantee that his order will be executed. He should use a stop order. ⊚ true ⊚ false

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124)

The execution of a limit order will be the highest priority above previously received orders if and when the specified price is reached. ⊚ true ⊚ false

125)

If you want to guarantee that your order to sell a stock will be executed, you should place a stop order instead of a limit order. ⊚ true ⊚ false

126)

Generally, the commission paid for a stock sale will be lower with a full-service broker than for an online brokerage firm. ⊚ true ⊚ false

127)

Glen bought XYZ stock on November 8, 2018, at a price of $39.20 and then sold it on March 19, 2020, at $11.20. Glen can be classified as a speculator. ⊚ true ⊚ false

128)

Gloria bought ABC stock on March 4, 2020, at a price of $5.87 and then quickly sold it on March 19, 2020, at $11.20. Gloria is classified as a speculator. ⊚ true ⊚ false

129)

An investor is entitled to a dividend only if they use the long-term buy-and-hold technique. ⊚ true ⊚ false

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130)

An example of dollar cost averaging is an employee purchasing shares of his or her company's stock through a payroll deduction plan or as part of a retirement plan. ⊚ true ⊚ false

131)

The main goal of dollar cost averaging is buying high and selling low. ⊚ true ⊚ false

132)

A direct investment plan does not allow you to take advantage of dollar cost averaging. ⊚ true ⊚ false

133)

Long-term investing techniques are generally more risky than short-term investing techniques. ⊚ true ⊚ false

134)

An investor may receive a margin call when selling stock short. ⊚ true ⊚ false

135)

A put option is the right to buy 100 shares of stock at a guaranteed price before a specified expiration date. ⊚ true ⊚ false

136)

Dividend policies vary among corporations, but most firms distribute between 30 and 70 percent of their earnings to stockholders. ⊚ true ⊚ false

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137)

A proxy is a legal form that requests that stockholders transfer their selling rights to some individual or individuals. ⊚ true ⊚ false

138)

Value Line, Standard & Poor’s reports, and Zacks are three widely used advisory services that provide detailed research for stock investors. ⊚ true ⊚ false

139)

If you sold 100 shares of ABCD stock for $40 a share that you originally purchased for $33 a share, then your capital gain would be $700. ⊚ true ⊚ false

140)

Stocks are a form of debt financing. ⊚ true ⊚ false

141)

Common stockholders elect the board of directors. ⊚ true ⊚ false

142)

A prospectus is provided to disclose information when the corporation is selling new issues of securities to potential investors. ⊚ true ⊚ false

143)

A put option is the right to sell 100 shares of stock at a specific price before a specified expiration date. ⊚ true ⊚ false

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Answer Key Test name: ch 12 (2) 1) D 2) B 3) B 4) B 5) C 6) E 7) B 8) C 9) E 10) A 11) A 12) C 13) C 14) E 15) E 16) C 17) A 18) B 19) E 20) D 21) C 22) A 23) C 24) E 25) C 26) C 27) E 28) D 29) E 30) E 31) B 32) D 33) E 34) B 35) E 36) E 37) B

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38) A 39) E 40) B 41) A 42) E 43) B 44) A 45) C 46) D 47) E 48) E 49) E 50) B 51) C 52) A 53) E 54) A 55) C 56) B 57) D 58) A 59) E 60) C 61) B 62) D 63) E 64) C 65) D 66) A 67) B 68) C 69) D 70) C 71) C 72) C 73) E 74) B 75) D 76) A 77) D

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78) E 79) E 80) A 81) C 82) C 83) D 84) D 85) A 86) A 87) D 88) E 89) B 90) B 91) TRUE 92) FALSE 93) TRUE 94) TRUE 95) FALSE 96) FALSE 97) TRUE 98) FALSE 99) FALSE 100) FALSE 101) FALSE 102) TRUE 103) TRUE 104) FALSE 105) FALSE 106) TRUE 107) TRUE 108) FALSE 109) FALSE 110) FALSE 111) TRUE 112) TRUE 113) FALSE 114) FALSE 115) TRUE 116) FALSE 117) FALSE

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118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130) 131) 132) 133) 134) 135) 136) 137) 138) 139) 140) 141) 142) 143)

TRUE FALSE FALSE TRUE TRUE FALSE FALSE TRUE FALSE FALSE TRUE FALSE TRUE FALSE FALSE FALSE FALSE FALSE TRUE FALSE TRUE TRUE FALSE TRUE TRUE TRUE

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Chapter 13 (1) 1) The investments in the Alamo Basics Contingency Fund have a current market value of $365

million. The fund also has liabilities that total $40 million. If this mutual fund has 6.5 million shares, what is the net asset value per share? (Round your answer to 2 decimal places.)

A) $50.00 B) $6.15 C) $62.31 D) $40.00 E) $56.15

2) The investments in the Already Been Counted Fund have a current market value of $356

million. The fund also has liabilities that total $41 million. If this mutual fund has 14 million shares, what is the net asset value per share?

A) $2.93 B) $22.50 C) $25.43 D) $28.36 E) None of these is correct.

3) The Anderson Balanced mutual fund charges a sales load of 4.55 percent. If you invest

$13,000, how much must you pay in commissions?

A) $481.00 B) $611.00 C) $4.55 D) $591.50 E) $455.00

4) The Anderson Balanced mutual fund charges a sales load of 4.15 percent. If you invest

$22,000, how much of your investment will actually be used to purchase shares in the fund?

A) $21,214.50 B) $21,299.50 C) $22,000.00 D) $21,064.50 E) $21,087.00

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5) Francesca withdrew $12,500 from B shares that she owned in the Already Been Counted

mutual fund within one year of her purchase. If she must pay a 2.0 percent contingent deferred sales fee, what will her total fee be?

A) $2.50 B) $2,500.00 C) $250.00 D) $0 E) $25.00

6) Francesca withdrew $13,500 from B shares that she owned in the Already Been Counted

mutual fund within one year of her purchase. If she must pay a 5.6 percent contingent deferred sales fee, what amount will she actually receive?

A) $13,500 B) $12,744 C) $756 D) $14,406 E) $14,256

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Answer Key Test name: ch 13 (1) 1) 2) 3) 4) 5) 6)

A B D E C B

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Chapter 13 (2) 1) Which of the following are major reasons that investors purchase mutual funds?

A) Diversification B) Professional management C) Loads of up to 8.5% D) Diversification and professional management E) All of these options are positive reasons to invest in mutual funds.

2) What percentage of all mutual funds are exchange-traded funds?

A) 6% B) 17% C) 36% D) 85% E) 93%

3) In which type of fund are the prices determined by factors of supply and demand like the

prices of a stock?

A) A closed-end fund B) An SEC government fund C) A net asset value fund D) A no-load fund E) An open-end fund

4) Which of the following is a fund that invests in the stocks or securities contained in a specific

stock or securities index?

A) A closed-end fund B) An exchange-traded fund C) A net asset value fund D) A no-load fund E) An open-end fund

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5) The shares of which fund are issued and redeemed by the investment company at the request

of investors?

A) A closed-end fund B) An exchange-traded fund C) A net asset value fund D) A no-load fund E) An open-end fund

6) How is an ETF similar to a closed-end fund?

A) Shares can be traded on a securities exchange.

B) An investor can purchase as little as one share of a fund.

C) Prices for shares are determined by supply and demand, the value of stocks and other

investments contained in the fund’s portfolio, and by investor expectations.

D) Shares can be traded in the over-the-counter market.

E) All of these are correct.

7) Which of the following is correct for a closed-end fund?

A) It is not traded on a securities exchange.

B) The price of its shares is determined by supply and demand, by the value of stocks in

the portfolio, and by investor expectations.

C) It is not actively managed by professional fund managers.

D) Investors are free to buy and sell shares at the net asset value.

E) Its load cannot exceed 2 percent.

8) The net asset value is calculated as: A) (Liabilities − Value of portfolio) + Number of shares outstanding.

B) Number of shares outstanding/(Liabilities − Value of portfolio).

C) (Liabilities − Value of portfolio)/Number of shares outstanding.

D) (Current market value of portfolio − Liabilities)/Number of shares outstanding.

E) Number of shares outstanding/(Value of portfolio − Liabilities).

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9) Many mutual funds charge a commission every time shares are purchased by investors.

These are called: A) Load funds.

B) Closed-end funds.

C) Exchange-traded funds.

D) Net asset value funds.

E) Open-end funds.

10) A load fund is allowed to collect a sales charge (commission) as high as ___ of the purchase

price for investments.

A) 1 percent B) 2 percent C) 3-5 percent D) 8.5 percent E) 11.5 percent

11) Many exceptions exist, but the average load charge for mutual funds is: A) 1 percent.

B) 2 percent.

C) 3-5 percent.

D) 8.5 percent.

E) 11.5-14.5 percent.

12) The average upfront sales charge for the purchase of a no-load mutual fund is: A) $0; there is no upfront charge.

B) 2 percent.

C) 3-5 percent.

D) 8.5 percent.

E) 11.5-14.5 percent.

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13) A no-load mutual fund: A) May require investors to pay a sales charge.

B) Charges commission when you buy shares.

C) Uses salespeople to sell the funds.

D) Is available only via the Internet.

E) Can charge a 12b-1 fee of up to 0.25 percent of its assets.

14) A contingent deferred sales load is known as a: A) Back-end load.

B) B fund.

C) Redemption fee.

D) None of these are correct.

E) Back-end load, B fund, or redemption fee.

15) A fee charged to defray the costs of advertising and marketing a mutual fund is called a ____

fee.

A) B) C) D) E)

3c 12b-1 14c-2 401(k) 403(b)

16) Which of the following is not correct about the 12b-1 fee?

A) It is also known as a distribution fee.

B) A no-load fund can charge a 12b-1 fee of up to 0.25 percent of its assets.

C) It is often an ongoing fee that is charged on an annual basis.

D) It needs to be disclosed in the annual report but not in the prospectus.

E) It is used to defray the costs of advertising and marketing a mutual fund and to fund

commissions paid to a broker who sold you shares in the mutual fund.

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17) Which class of shares charges a commission (sales charge) when shares are purchased?

A) A B) B C) C D) K E) Q

18) Which class of shares charges a commission when withdrawals are made over the first five

years?

A) B) C) D) E)

A B C K Q

19) Which of the following types of stock funds invests in stock issued by companies with a long

history of paying dividends?

A) Equity income funds B) Growth funds C) Index funds D) International funds E) Regional funds

20) Which of the following types of stock funds invests in stock issued by companies expecting

higher-than-average revenue and earnings growth?

A) Equity income funds B) Growth funds C) Index funds D) International funds E) Regional funds

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21) Which of the following types of stock funds invests in the same companies included in the

Standard & Poor's 500 stock index?

A) Equity income funds B) Growth funds C) Index funds D) International funds E) Regional funds

22) Which of the following types of stock funds invests in stock issued by companies throughout

the world?

A) Equity income funds B) Growth funds C) Index funds D) International funds E) Regional funds

23) Which of the following types of stock funds invest in stock traded within one specific region

of the world?

A) Equity income funds B) Growth funds C) Index funds D) International funds E) Regional funds

24) Sally wants to invest in a fund that invests only in stock. Which of the following will meet

her needs?

A) Asset allocation funds B) Balance funds C) Junk bond funds D) Mid-cap funds E) Short-term corporate bond funds

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25) Thomas wants to invest in a fund that invests in stock, bonds, and money market instruments.

Which of the following will meet his needs?

A) Asset allocation funds B) Aggressive growth funds C) Junk bond funds D) Mid-cap funds E) Short-term corporate bond funds

26) Val wants to invest in a fund whose primary objective is to conserve principal, provide

income, and provide long-term growth. Which of the following will best meet her needs?

A) Cyclical funds B) Balanced funds C) Junk bond funds D) Mid-cap funds E) Short-term corporate bond funds

27) An example of a lifecycle fund is a fund that: A) Assists investors with planning for retirement by a specific date.

B) Initially invests in conservative securities, then changes to invest in more risk-

oriented securities as time goes by.

C) Invests in shares of other mutual funds in order to increase diversification and asset allocation.

D) Has principal protection as its main objective.

E) None of these is an example of a lifecycle fund.

28) If you start a new job and are offered the opportunity to participate in the company's 401(k)

or 403(b) retirement plan, which of the following decisions can affect your financial future?

A) Participating in the retirement account as a way to reduce income taxes B) Participating in the retirement account to take advantage of the employer's matching contributions C) Choosing mutual funds from a number of different fund options for your retirement account D) Basing your actual choice of investments on your age, how long before you retire, and your tolerance for risk E) All of these decisions can affect your financial future.

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29) For which of the following is time an important factor when evaluating a managed mutual

fund?

A) B) C) D) E)

The existence of the underlying index The life of the companies in the fund How long the present fund manager has been managing the fund The status of the economy None of these are correct.

30) Which of the following is not correct?

A) When evaluating a mutual fund, an important consideration is how long the present

fund manager has been managing the fund.

B) Over many years, the majority of managed mutual funds have failed to outperform the Standard & Poor's 500 stock index.

C) Managed funds may be open-end funds or closed-end funds.

D) A benchmark of a good fund manager is the ability to increase share value when the economy is good and retain that value when the economy is bad.

E) A managed fund will outperform an index fund only 60% of the time.

31) Which of the following is not a way one can access reliable information about mutual funds

on the internet?

A) Find statistical information from the web page of the investment companies that sponsor mutual funds B) Obtain current market values for mutual funds by using a search engine such as http://finance.yahoo.com C) Review blogs from amateur investors about their favorite mutual funds D) Research reports for mutual funds using professional advisory services E) All of these are reliable sources of information about mutual funds.

32) Professional advisory services provide detailed information about mutual funds. Which of the

following is not a professional advisory service?

A) Dun and Moody's B) Refinitiv Lipper C) Morningstar, Incorporated D) Value Line E) All of these are professional advisory services that provide information about mutual funds.

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33) Professional advisory services provide research on mutual funds in a report that includes all

of the following areas except: A) A historical profile.

B) Statistical information.

C) Performance, risk, and portfolio analysis.

D) A summary of the analyst's research.

E) All of these are included by professional advisory services.

34) Sally wants to invest in a mutual fund. The mutual fund must provide a(n) ____ to her as a

potential investor.

A) analysis from a financial publication B) past performance report C) prospectus D) quarterly report E) summary report

35) Which of the following provides up-to-date information that can help investors make

decisions quickly without having to make a trip to the library?

A) Financial publications B) Internet resources C) Mutual fund annual reports D) Newspapers E) Professional advisory services

36) For which of the following have producers reduced or eliminated mutual fund coverage?

A) Financial publications B) Internet resources C) Mutual fund annual reports D) Newspapers E) Professional advisory services

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37) Which of the following contains a letter from the president of the investment company,

detailed financial information, a schedule of investments, and a letter from the fund's independent auditors?

A) Financial publications B) Internet resources C) Mutual fund annual reports D) Newspapers E) Professional advisory services

38) How do mutual funds provide returns to their shareholders?

A) Income dividends B) Capital gain distributions C) Capital gains D) All of these are correct.

E) None of these are correct.

39) Earnings paid to shareholders that are not related to the sale of securities in the fund's

portfolio are called: A) Capital gain distributions.

B) Income dividends.

C) Capital gains.

D) Mutual fund money.

E) Fund taxes.

40) Payments to a fund’s shareholders that result from the sale of securities in the fund's portfolio

are: A) B) C) D) E)

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Capital gain distributions.

Income dividends.

Capital gains.

Mutual fund money.

Fund taxes.

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41) When you sell your shares in a mutual fund, you may receive a profit that results from an

increase in value called a(n): A) Capital gain distribution.

B) Income dividend.

C) Capital gain.

D) Mutual fund distribution.

E) Fund tax.

42) Which of the following is true about mutual funds and taxes?

A) Capital gain distributions are taxed as short-term capital gains.

B) Income dividends are taxed quarterly.

C) Investment companies are required to send each shareholder a year-end statement that

specifies how much each received in income dividends and capital gain distributions.

D) Capital gains distributions are not reported on your federal tax return.

E) Taxes can be eliminated if you hold your mutual fund shares in your 401(k) retirement account.

43) If you hold mutual fund shares in your Roth individual retirement account, the taxes on

reinvested income will be: A) Deferred.

B) Eliminated.

C) Evaluated.

D) Payable immediately.

E) None of these is correct.

44) Which of the following is a problem with taxation of mutual funds?

A) Professional management B) The possibility to eliminate taxes if held in a Roth individual retirement account C) Being required to report reinvested income dividends and capital gain distributions on

your federal tax return as current income D) Tax deferral if the fund is held in a retirement account like a 401(k) account E) The diversification offered to investors

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45) All of the following are valid ways to purchase open-end mutual funds except: A) A regular account transaction.

B) A voluntary savings plan.

C) A contractual savings plan.

D) A reinvestment plan.

E) All of the ways listed are valid purchase options.

46) Melinda wants to withdraw some money from her mutual fund. She has a minimum required

asset value of $10,000. Which of the following is not an option available for her to systematically withdraw some money?

A) Withdraw a specified, fixed dollar amount each investment period until the fund has been exhausted.

B) Sell off a certain number of shares each investment period.

C) Withdraw a fixed percentage of asset growth.

D) Withdraw all income dividends and capital gain distributions earned in an investment period.

E) Withdraw all principal and leave interest dividends and capital gain distributions in the account.

47) The investments in the Alamo Basics Contingency Fund have a current market value of $800

million. The fund also has liabilities that total $60 million. If this mutual fund has 20 million shares, what is the net asset value per share?

A) $3.00 B) $37.00 C) $40.00 D) $43.00 E) $60.00

48) The investments in the Already Been Counted Fund have a current market value of $600

million. The fund also has liabilities that total $40 million. If this mutual fund has 25 million shares, what is the net asset value per share?

A) $1.60 B) $22.40 C) $24.00 D) $25.60 E) None of these is correct.

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49) The Anderson Balanced mutual fund charges a sales load of 4.85 percent. If you invest

$15,000, how much must you pay in commissions?

A) $4.85 B) $485.00 C) $600.00 D) $727.50 E) $750.00

50) The Anderson Balanced mutual fund charges a sales load of 4.85 percent. If you invest

$15,000, how much of your investment will actually be used to purchase shares in the fund?

A) $14,250.00 B) $14,272.50 C) $14,400.00 D) $14,485.00 E) $15,000.00

51) Francesca withdrew $7,000 from B shares that she owned in the Already Been Counted

mutual fund within one year of her purchase. If she must pay a 5 percent contingent deferred sales fee, what will her total fee be?

A) $0 B) $3.50 C) $35.00 D) $350.00 E) $3,500.00

52) Francesca withdrew $7,000 from B shares that she owned in the Already Been Counted

mutual fund within one year of her purchase. If she must pay a 5 percent contingent deferred sales fee, what amount will she actually receive?

A) $350 B) $6,650 C) $7,000 D) $7,350 E) $7,500

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53) Nicholas purchased 150 shares of ABC Mutual Fund at $10.50 and sold them one year later

at a price of $14.50. His total capital gain was: A) $400.

B) $600.

C) $2,025.

D) $2,625.

E) $4,650.

54) Joseph purchased 100 shares of ABCD Growth fund for $10.00 per share for a total

investment of $1,000. At the end of one year, he sold his investment for $11.20 per share.

What is his total capital gain?

A) $1.20 B) $10.00 C) $11.00 D) $100.00 E) $120.00

55) Shelby purchased 100 shares of ABCD Growth fund for $10.00 per share. She had income

dividends of $15, capital gain distributions of $35, and a capital gain of $120 in the year she sold her shares. What was her percentage of total return on this investment?

A) 10% B) 15% C) 17% D) 35% E) 120%

56) For individuals, stocks and bonds are better investment choices than mutual funds because

money is pooled from many investors for stocks and bonds. ⊚ true ⊚ false

57) Many people can invest in mutual funds through their retirement accounts. ⊚ true ⊚ false

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58) Investors in the United States can choose from more than 35,000 mutual funds. ⊚ true ⊚ false

59) Mutual funds carry a "real risk" that they can decrease in value. ⊚ true ⊚ false

60) Mutual funds provide amateur management. ⊚ true ⊚ false

61) The majority of all mutual funds are closed-end funds offered by investment companies. ⊚ true ⊚ false

62) An exchange-traded fund is actively managed by professional fund managers, and shares are

traded on the floors of stock exchanges. ⊚ true ⊚ false

63) An "A fund" is a mutual fund in which investors may pay a commission as high as 9.5

percent of the purchase price for investments. ⊚ true ⊚ false

64) Fred wants to invest in a "no-load" fund. This means that the fund has no 12b-1 fees. ⊚ true ⊚ false

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65) An aggressive growth fund invests in companies with a long history of paying dividends. ⊚ true ⊚ false

66) The difference between a global stock fund and an international fund is that the global stock

fund invests in companies throughout the world, including the United States, whereas the international fund invests outside the United States. ⊚ true ⊚ false

67) Stephanie wants to invest in a mutual fund that invests in companies within the same

industry. She should put her money into a regional fund. ⊚ true ⊚ false

68) A socially responsible fund invests in companies that produce tobacco, nuclear energy, and

weapons in order to influence the boards to change the companies' mission statements. ⊚ true ⊚ false

69) A family of funds is a grouping of funds that all invest in bonds or all invest in stocks. ⊚ true ⊚ false

70) Open-end mutual funds have managers, and closed-end funds do not. ⊚ true ⊚ false

71) Over many years, the majority of managed mutual funds outperform the Standard & Poor's

500 stock index. ⊚ true ⊚ false

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72) A "good" fund manager has the ability to increase the share value when the economy is good

and retains that value when the economy is bad. ⊚ true ⊚ false

73) If Ryan wants to invest in an index mutual fund, he should not expect his fund to behave

differently than the underlying index. ⊚ true ⊚ false

74) Brenda wants to invest in a fund that will outperform most others over many years. On

average, she would be better off to invest in an index fund instead of a managed closed-end fund. ⊚ true ⊚ false

75) The only way to get reliable information about mutual funds is to pay a fee for it. ⊚ true ⊚ false

76) An investment company sponsoring a mutual fund must give potential investors an annual

report. ⊚ true ⊚ false

77) A newspaper will provide more complete coverage of mutual funds compared to other

sources. ⊚ true ⊚ false

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78) For many investors, mutual funds have become the investment of choice and are a part of

their retirement accounts. ⊚ true ⊚ false

79) A capital gain distribution is the profit that results from an increase in value when the

investors sell their shares in a fund. ⊚ true ⊚ false

80) Cynthia received an IRS Form 1099DIV. This form is sent at the end of each quarter to

specify how much she received in income dividends and capital gain distributions. ⊚ true ⊚ false

81) Shelby purchased 100 shares of ABCD Growth fund and had income dividends of $15,

capital gain distributions of $35, and a capital gain of $120 in the year she sold her shares, which resulted in a total dollar return of $170. ⊚ true ⊚ false

82) The turnover ratio is a measure of a fund’s trading activity. ⊚ true ⊚ false

83) The expense ratio is the amount that investors pay for all of a mutual fund’s management fees

and operating costs. ⊚ true ⊚ false

84) A higher turnover ratio for a mutual fund can result in higher income tax bills. ⊚ true ⊚ false

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85) Investors in the United States can choose from over 12,000 mutual funds. ⊚ true ⊚ false

86) Mutual funds provide amateur management. ⊚ true ⊚ false

87) The majority of all mutual funds are open-end funds. ⊚ true ⊚ false

88) If Ryan wants to invest in an index mutual fund, he should expect his fund to outperform the

underlying index. ⊚ true ⊚ false

89) An investment company sponsoring a mutual fund must give potential investors a prospectus. ⊚ true ⊚ false

90) A lower turnover ratio for a mutual fund can result in higher income tax bills versus the bills

for a mutual fund with a higher turnover ratio. ⊚ true ⊚ false

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Answer Key Test name: ch 13 (2) 1) D 2) B 3) A 4) B 5) E 6) E 7) B 8) D 9) A 10) D 11) C 12) A 13) E 14) E 15) B 16) D 17) A 18) B 19) A 20) B 21) C 22) D 23) E 24) D 25) A 26) B 27) A 28) E 29) C 30) E 31) C 32) A 33) E 34) C 35) B 36) D 37) C

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38) D 39) B 40) A 41) C 42) C 43) B 44) C 45) E 46) E 47) B 48) B 49) D 50) B 51) D 52) B 53) B 54) E 55) C 56) FALSE 57) TRUE 58) FALSE 59) TRUE 60) FALSE 61) FALSE 62) FALSE 63) FALSE 64) FALSE 65) FALSE 66) TRUE 67) FALSE 68) FALSE 69) FALSE 70) FALSE 71) FALSE 72) TRUE 73) TRUE 74) TRUE 75) FALSE 76) FALSE 77) FALSE

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78) TRUE 79) FALSE 80) FALSE 81) TRUE 82) TRUE 83) TRUE 84) TRUE 85) TRUE 86) FALSE 87) TRUE 88) FALSE 89) TRUE 90) FALSE

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Chapter 14 1) When thinking about retirement, which of the following is correct?

A) You'll spend less money when you retire.

B) Saving just a little bit won't help.

C) You can depend on Social Security and a company pension plan to pay your basic

living expenses.

D) The sooner you start saving, the better.

E) Your pension benefits will increase to keep pace with inflation.

2) When conducting a financial analysis for retirement planning, you should review: A) Housing.

B) Life insurance.

C) Other Investments.

D) Assets.

E) All of these are correct.

3) When conducting a financial analysis for retirement planning: A) A large mortgage should not affect your financial planning.

B) Investments should be evaluated to determine whether their income can help cover

living expenses.

C) Keeping your current, large house will be cheaper to maintain than a move to a smaller house.

D) Life insurance should be avoided.

E) All of these are true.

4) According to the text, which of the following will probably be your most valuable asset at

retirement?

A) Automobile B) House C) Investments D) Life insurance E) None of these are correct.

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5) What steps should be taken in retirement planning?

A) Avoid life insurance B) Estimate preretirement living expenses C) Exceed budget amounts for spending D) Conduct a financial analysis and estimate retirement living expenses E) All of these are correct.

6) An "average" older (65+) household spends most of its money on: A) Entertainment.

B) Food.

C) Housing.

D) Medical care.

E) Transportation.

7) An "average" older (65+) household spends more money on: A) Clothing than on housing.

B) Cash contributions than on medical care.

C) Entertainment than on transportation.

D) Housing than on cash contributions, entertainment, and clothing combined.

E) Personal insurance than on food.

8) When you retire versus now, you will probably spend less money on: A) Clothing.

B) Health insurance.

C) Medical care.

D) Recreation.

E) All of these are correct.

9) When you retire versus now, you will probably spend more money on: A) Clothing.

B) Transportation.

C) Taxes.

D) Health insurance.

E) All of these are correct.

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10) When planning for retirement, inflation: A) Decreases through retirement.

B) Should be ignored since it will have no effect on retirement funding.

C) Should be considered since income received earlier in retirement will buy more than

the same amount received later in retirement due to the rising prices of goods and services.

D) Is unimportant since pension income does not change in retirement.

E) Should be recognized since it will increase the value of income received in retirement.

11) Which of the following is not a major source of retirement income?

A) Annuities B) Employer pension plans C) Personal retirement plans D) Public pension plans E) All of these are major sources of retirement income.

12) All of the following are examples of defined contribution plans except: A) Defined-benefit plan.

B) Money-purchase plan.

C) Profit-sharing plan.

D) Salary-reduction plan.

E) Stock bonus plan.

13) When an employer promises to set aside a certain amount of money for each employee each

year, it has set up a: A) Defined-benefit plan.

B) Money-purchase plan.

C) Profit-sharing plan.

D) Salary-reduction plan.

E) Stock bonus plan.

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14) A salary-reduction plan is also known as a: A) 401(k) plan.

B) Money-purchase plan.

C) Profit-sharing plan.

D) Defined-benefit plan.

E) Stock bonus plan.

15) When an employer's contribution is used to buy stock in the company for its employees, it

has a: A) B) C) D) E)

401(k) plan.

Money-purchase plan.

Profit-sharing plan.

Salary-reduction plan.

Stock bonus plan.

16) An employer's contribution will vary according to the company's profits in a: A) 401(k) plan.

B) Money-purchase plan.

C) Stock bonus plan.

D) Profit-sharing plan.

E) Salary-reduction plan.

17) An employer may choose to match the contribution made by employees in a(n): A) 401(k) plan or a salary-reduction plan.

B) Money-purchase plan.

C) Stock bonus plan.

D) Profit-sharing plan.

E) Individual retirement account.

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18) Vesting is the right to receive the: A) Employer's contributions to a pension plan even if the employee leaves the company

before retiring.

B) 401(k) contributions made by the employee.

C) Employee's contributions each pay period.

D) Portable employee benefits from a defined-benefit plan.

E) Employee of the month award.

19) Which retirement plan specifies the benefits you'll receive at retirement age based on your

total earning and years on the job?

A) Defined-benefit plan B) Money-purchase plan C) Defined-contribution plan D) Profit-sharing plan E) 401(k) plan

20) In 1974 ERISA was passed. What does ERISA stand for?

A) Employee Retirement Income Security Act B) Employer Retirement Income Security Act C) Employee Retirement Investment Security Act D) Employer Retiring Investment Stock Act E) Entity Retirement Investment Security Act

21) Social Security: A) Covers 97 percent of all American workers.

B) Offers full retirement benefits beginning at age 62.

C) Provides benefits only for retirees.

D) Provides 100 percent of retirement income for recipients.

E) Was established in 1947.

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22) What percentage of American workers are covered by Social Security?

A) 15% B) 50% C) 78% D) 97% E) 100%

23) How is eligibility determined for receiving Social Security retirement benefits?

A) Marital status B) Credits C) Family size D) Tax bracket E) All of these are correct.

24) Employees who were born in 1960 or later can receive full Social Security benefits beginning

at age: A) 59½.

B) C) D) E)

62.

65.

67.

70.

25) Julian's annual contributions to his retirement are not tax-deductible, but his earnings

accumulate tax-free. He is investing in a: A) 401(k) plan.

B) Regular IRA. C) Roth IRA. D) SEP plan.

E) Spousal IRA.

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26) Lawrence is self-employed and wants to establish the simplest type of retirement plan. He

should set up a: A) 401(k) plan.

B) Regular IRA. C) Roth IRA. D) SEP plan.

E) Spousal IRA.

27) Jill is 45 years old and thinks that her future tax rate will be lower than what she currently

pays, so she wants to defer her taxes on her contributions of up to $6,000 in 2020. Which plan would allow her to meet her goals?

A) 401(k) plan B) Regular IRA C) Roth IRA D) SEP plan E) Spousal IRA

28) Robert's wife Fiona does not work, and they file a joint tax return. Robert can contribute on

behalf of Fiona into a: A) 401(k) plan.

B) Regular IRA. C) Roth IRA. D) SEP plan.

E) Spousal IRA.

29) Another name for a Coverdell account is a(n): A) Education IRA. B) Regular IRA. C) Roth IRA. D) SEP plan.

E) Spousal IRA.

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30) Another name for an H.R. 10 plan or a self-employed retirement plan is a: A) 401(k) plan.

B) Keogh plan.

C) Regular IRA. D) SEP plan.

E) Spousal IRA.

31) If you have fully funded your 401(k) and profit-sharing plans up to the allowable limits, then

you may want to put away more money for retirement in a(n): A) Annuity.

B) Keogh plan.

C) Roth IRA. D) SEP plan.

E) Spousal IRA.

32) When estimating your budget or spending plan at retirement, you should do all of the

following except: A) Check that you are receiving all income to which you are entitled.

B) Evaluate all assets or valuables that you might be able to convert to cash or sources of income.

C) Receive special discounts because of your retiree status or age.

D) Take advantage of free and low-cost recreation opportunities.

E) Withdraw all retirement savings within five years of retirement.

33) Estate planning is an essential part of: A) Preretirement planning.

B) Budgeting basic living expenses.

C) Vacation planning.

D) Both retirement planning and financial planning.

E) Both financial and vacation planning.

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34) An estate consists of: A) Home, vehicle, and retirement accounts only.

B) Furniture, home, and collections only.

C) Everything you own.

D) Everything you own except your home if you hold a mortgage on it.

E) None of these are correct.

35) The best definition of estate planning is: A) Calculating assets less liabilities.

B) Creating a definite plan for managing property during one's lifetime and at one's

death.

C) Naming a beneficiary.

D) Accumulating savings.

E) Creating a will.

36) Sean's estate planning should: A) Consist of acquiring assets using debt.

B) Designate distribution of assets first to his cousin, then distribute whatever is left to

his wife.

C) Ignore his beneficiaries.

D) Consist primarily of a will.

E) Take the needs of his wife and children into account.

37) Which of the following is not an important document associated with estate planning?

A) Birth certificate B) Legal name change form C) Insurance policy D) Marriage certificate E) Spending plan or budget

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38) Intestate is: A) The process of validating a will.

B) A written will.

C) A type of trust.

D) Dying without a valid will.

E) The selection of a trust.

39) Jacob is updating his estate planning and wants to draft a legal document that leaves

everything to his spouse. He is writing a(n): A) Exemption trust will.

B) Guardian will.

C) Simple will.

D) Stated amount will.

E) Traditional marital share will.

40) William is updating his estate planning and wants to draft a legal document that leaves all of

his assets to his wife except a certain amount which goes into a trust. He is writing a(n): A) Exemption trust will.

B) Guardian will.

C) Simple will.

D) Stated amount will.

E) Traditional marital share will.

41) Candice is updating her estate planning and wants to write a legal document that will allow

all of her assets to go to her spouse except for a certain amount that will be set up in a trust.

The trust (plus interest) can provide her spouse lifelong income that will not be taxed. She is writing a(n): A) Exemption trust will.

B) Guardian will.

C) Simple will.

D) Stated amount will.

E) Traditional marital share will.

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42) Darlene is updating her estate planning and wants to set up a legal document that leaves

$5.34 million to her husband. She is writing a(n): A) Exemption trust will.

B) Guardian will.

C) Simple will.

D) Stated amount will.

E) Traditional marital share will.

43) Jason is updating his estate planning and wants to set up a legal document that leaves half of

the adjusted gross estate to his wife. He is writing a(n): A) Exemption trust will.

B) Guardian will.

C) Simple will.

D) Stated amount will.

E) Traditional marital share will.

44) A handwritten will is known as a(n): A) Formal will.

B) "I love you" will.

C) Holographic will.

D) Ordinary will.

E) Statutory will.

45) A will that is usually prepared with the help of an attorney is known as a(n): A) Formal will.

B) "I love you" will.

C) Holographic will.

D) Ordinary will.

E) Statutory will.

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46) A will prepared on a pre-printed form from a stationery store is called a(n): A) Formal will.

B) "I love you" will.

C) Holographic will.

D) Ordinary will.

E) Statutory will.

47) Your will must be signed by: A) The lawyer who prepares it.

B) You in front of two witnesses.

C) Three unbiased witnesses.

D) One beneficiary.

E) All of these are correct.

48) If you have children and are writing your will, you need to do all of the following except: A) Select a guardian.

B) Write the will with the help of an attorney.

C) Select an executor.

D) Sign the will in front of two witnesses.

E) Select beneficiaries.

49) A codicil is: A) A document that explains, adds, or deletes provisions in an existing will.

B) A handwritten will.

C) Another name for the first will an individual writes.

D) A will written in legal code.

E) None of these are correct.

50) Multiple copies of a ______________ should be distributed to those closest to you as well as

to your family doctor.

A) formal will B) guardian C) living will D) Statutory will E) trust

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51) The letter of last instruction is: A) Another name for a will.

B) Legally binding.

C) Another name for a trust.

D) A document that identifies whether you want to be kept alive by artificial means if

you become terminally ill and unable to make such a decision.

E) A non-legally binding document that provides information regarding your death such as funeral arrangements.

52) A legal arrangement that helps manage the assets of your estate for your benefit or that of

your beneficiaries is called a: A) Formal will.

B) Trust.

C) Holographic will.

D) Guardian.

E) Statutory will.

53) A(n) ______ administers a trust.

A) beneficiary B) executor C) grantor D) guardian E) trustee

54) A(n) ______ is the creator of a trust.

A) beneficiary B) executor C) grantor D) guardian E) trustee

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55) A(n) ____ allows you to end the trust or change its terms during your lifetime.

A) irrevocable trust B) living will C) power of attorney D) revocable trust E) will

56) A(n) ____ cannot be changed or ended.

A) irrevocable trust B) living will C) power of attorney D) revocable trust E) will

57) Gladys wants to set up a trust that is also known as a bypass trust, family trust, "residuary"

trust, A/B trust, and exemption equivalent trust. She should set up a(n): A) Credit-shelter trust.

B) Revocable trust.

C) Irrevocable trust.

D) Living trust.

E) Testamentary trust.

58) This trust is designed to allow married couples to take full advantage of the federal estate tax

exemption.

A) Credit-shelter trust B) Revocable trust C) Irrevocable trust D) Living trust E) Testamentary trust

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59) This is also known as an inter vivos trust.

A) Credit-shelter trust B) Disclaimer trust C) Irrevocable trust D) Living trust E) Testamentary trust

60) This allows the trustor to receive benefits during his or her lifetime.

A) Credit-shelter trust B) Disclaimer trust C) Irrevocable trust D) Inter vivos trust E) Testamentary trust

61) This trust is established by your will and becomes effective upon your death.

A) Credit-shelter trust B) Disclaimer trust C) Irrevocable trust D) Living trust E) Testamentary trust

62) This is the best option if you or your beneficiaries are inexperienced in financial matters and

if your estate taxes will be high.

A) Revocable trust B) Disclaimer trust C) Irrevocable trust D) Living trust E) Testamentary trust

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63) As of 2020, the maximum gift that can be given to another person without incurring gift

taxes is: A) $0.

B) $1,000.

C) $10,000.

D) $15,000.

E) $16,500.

64) When you die, this tax will be based on the fair market value of your investments, property,

and bank accounts less an exemption (of $11.58 million in 2020).

A) Estate tax B) Gift tax C) Inheritance tax D) Trust federal income tax E) Will tax

65) Trusts and estates must pay quarterly estimated taxes based on taxable income for: A) Estate tax.

B) Gift tax.

C) Inheritance tax.

D) Federal income tax purposes.

E) Will tax.

66) This tax is only imposed by state governments.

A) Estate tax B) Gift tax C) Inheritance tax D) Trust federal income tax E) Will tax

67) The best time to begin planning for retirement is at age 27. ⊚ true ⊚ false

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68) Annabelle works at Acme Cleaning Company. When she retires, her employer's health

insurance plan and Medicare should cover all of her medical expenses. ⊚ true ⊚ false

69) Bruce and Christopher are both retiring from Best Conditioning Company. They both should

have the same amount of money in their retirement funds regardless of the lifestyle they expect during retirement. ⊚ true ⊚ false

70) A good goal is to plan for one’s net worth to increase each year as one moves closer to

retirement. ⊚ true ⊚ false

71) Housing and life insurance are so important to your retirement income that other investments

can be ignored as you review your assets. ⊚ true ⊚ false

72) When Don retires, his transportation expenses will likely increase. ⊚ true ⊚ false

73) Because of the potential effect of inflation, individuals should underestimate the amount of

money needed for retirement. ⊚ true ⊚ false

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74) The four primary sources of retirement income are employer pension plans, personal

retirement plans, annuities, and public pension plans. ⊚ true ⊚ false

75) A benefit of an employer pension plan is that taxes are eliminated. ⊚ true ⊚ false

76) An example of a defined-contribution plan is a stock bonus plan. ⊚ true ⊚ false

77) A salary-reduction plan for a non-profit organization is called a 401(k) plan. ⊚ true ⊚ false

78) A defined-benefit plan specifies the benefits that you will receive at retirement age. ⊚ true ⊚ false

79) When Social Security was established, it was never intended to provide 100 percent of one's

retirement income. ⊚ true ⊚ false

80) Social Security covers 97 percent of all workers in America. ⊚ true ⊚ false

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81) About one out of every three Americans currently collects some form of Social Security

benefit. ⊚ true ⊚ false

82) Only people who are retired can receive a benefit from Social Security. ⊚ true ⊚ false

83) If you were born in 1960 or later, you will first become eligible to receive Social Security

benefits at age 67. ⊚ true ⊚ false

84) Eight years ago, Thomas began investing in his Roth IRA. He is now purchasing his first

home. He may withdraw some money from his Roth IRA tax-free and penalty-free for this purchase. ⊚ true ⊚ false

85) The SEP IRA is the simplest type of retirement plan if a person is self-employed. ⊚ true ⊚ false

86) When Paul leaves his job at Acme Bending Company, he may choose to move his 401(k)

balance to a plan called a rollover IRA. ⊚ true ⊚ false

87) The longer money accumulates tax-deferred in an IRA, the bigger the benefit. ⊚ true ⊚ false

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88) Retirement means that you will never work again. ⊚ true ⊚ false

89) People should never dip into their savings during retirement. ⊚ true ⊚ false

90) Your estate consists of everything you own. ⊚ true ⊚ false

91) Estate planning is important for financial planning but not for retirement planning. ⊚ true ⊚ false

92) If you are single, you should not have beneficiaries. ⊚ true ⊚ false

93) Every adult should have a written will. ⊚ true ⊚ false

94) If you die intestate, your property will be distributed according to your wishes. ⊚ true ⊚ false

95) A traditional marital share will leaves everything to your spouse. ⊚ true ⊚ false

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96) An exemption trust will has all of your assets going to your spouse except for a certain

amount of assets, which goes into a trust. ⊚ true ⊚ false

97) A stated amount identifies the amount that will not go to your spouse. ⊚ true ⊚ false

98) If a will is found to be invalid, the result is called in-probate. ⊚ true ⊚ false

99) Probate is a short, quick process. ⊚ true ⊚ false

100)

A holographic will has a holographic seal to prove its authenticity. ⊚ true ⊚ false

101)

A holographic will is legal in all states. ⊚ true ⊚ false

102)

A statutory will is one that is prepared with the help of an attorney. ⊚ true ⊚ false

103)

If you are married, all of your assets will automatically pass to your spouse. ⊚ true ⊚ false

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104)

Only one will may legally be written during a person's lifetime. ⊚ true ⊚ false

105)

Changes to a will should be written in ink on the will and initialed. ⊚ true ⊚ false

106)

A power of attorney should perform the tasks involved in carrying out the will of a deceased person. ⊚ true ⊚ false

107)

A copy of your living will should be distributed to your family doctor to be placed in your medical file. ⊚ true ⊚ false

108)

Another name for a will is a letter of last instruction. ⊚ true ⊚ false

109)

A revocable trust cannot be changed or ended. ⊚ true ⊚ false

110)

A disclaimer trust is appropriate for couples who do not yet have enough assets to need a credit-shelter trust. ⊚ true ⊚ false

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111)

An inter vivos trust takes effect while you're alive. ⊚ true ⊚ false

112)

A testamentary trust takes effect while you're alive. ⊚ true ⊚ false

113)

As of 2020, an individual can give away up to $15,000 per year before paying an inheritance tax to the IRS. ⊚ true ⊚ false

114)

It is a fact that you will spend less money when you retire. ⊚ true ⊚ false

115)

Saving on a regular basis is not recommended since you will not have money to pay your bills, make major purchases, meet your living expenses during your retirement, and cope with emergencies. ⊚ true ⊚ false

116)

If you subtract your liabilities from your assets, you get your net worth. ⊚ true ⊚ false

117)

Kiplinger.com’s retiree tax map is a state-by-state guide that can help determine the most tax-friendly states for you and your assets in retirement. ⊚ true ⊚ false

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118)

Legal fees for drafting a standard will range between $300 and $400. ⊚ true ⊚ false

119)

It is never too early to start planning for retirement. ⊚ true ⊚ false

120)

Social Security covers half of all workers in America. ⊚ true ⊚ false

121)

About one out of every six Americans currently collects some form of Social Security benefit. ⊚ true ⊚ false

122)

Probate is expensive, lengthy, and public. ⊚ true ⊚ false

123)

It is a myth that you will spend less money when you retire. ⊚ true ⊚ false

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Answer Key Test name: ch 14 1) D 2) E 3) B 4) B 5) D 6) C 7) D 8) A 9) D 10) C 11) E 12) A 13) B 14) A 15) E 16) D 17) A 18) A 19) A 20) A 21) A 22) D 23) B 24) D 25) C 26) D 27) B 28) E 29) A 30) B 31) A 32) E 33) D 34) C 35) B 36) E 37) E

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38) D 39) C 40) A 41) A 42) D 43) E 44) C 45) A 46) E 47) B 48) B 49) A 50) C 51) E 52) B 53) E 54) C 55) D 56) A 57) A 58) A 59) D 60) D 61) E 62) E 63) D 64) A 65) D 66) C 67) FALSE 68) FALSE 69) FALSE 70) TRUE 71) FALSE 72) FALSE 73) FALSE 74) TRUE 75) FALSE 76) TRUE 77) FALSE

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78) TRUE 79) TRUE 80) TRUE 81) FALSE 82) FALSE 83) FALSE 84) TRUE 85) TRUE 86) TRUE 87) TRUE 88) FALSE 89) FALSE 90) TRUE 91) FALSE 92) FALSE 93) TRUE 94) FALSE 95) FALSE 96) TRUE 97) FALSE 98) FALSE 99) FALSE 100) FALSE 101) FALSE 102) FALSE 103) FALSE 104) FALSE 105) FALSE 106) FALSE 107) TRUE 108) FALSE 109) FALSE 110) TRUE 111) TRUE 112) FALSE 113) FALSE 114) FALSE 115) FALSE 116) TRUE 117) TRUE

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118) 119) 120) 121) 122) 123)

TRUE TRUE FALSE TRUE TRUE TRUE

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