Chapter 1—Understanding the Financial Planning Process TRUE/FALSE 1. Standard of living is defined as the necessities, comforts, and luxuries desired by an individual or group. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
2. Your average propensity to consume is the percentage of each dollar of income, on the average, that is spent for current needs rather than savings. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
3. A good financial plan completed when one is in their 30s will typically last a lifetime. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
4. Financial planning is a continuing, life-long process. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
5. Financial planning can improve your standard of living. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
6. Current consumption is inversely related to saving for the future. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
7. About 20% of Americans say retirement planning is their most pressing financial concern. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
8. The most effective way to achieve financial objectives is through financial planning. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
KEY: Bloom's: Comprehension 9. Defining financial goals is an important first step in personal financial planning process. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
10. Two persons with equal average propensities to consume will not necessarily have equal standards of living because of differences in income. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
11. The need for financial planning declines as your income increases. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
12. Current consumption effects future consumption. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
13. A person who has $2,000 monthly income and spends $1,800 monthly has an average propensity to consume of 90%. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
14. A person making $35,000 and spending $30,800 has an average propensity to consume of 80%. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
15. Most families find it difficult to discuss money matters. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
16. Average propensity to consume refers to how much of your money you plan to save in your financial plan. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
17. Tangible assets are earning assets that are held for the returns they promise.
ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
18. Financial assets are paper assets, such as savings accounts and securities. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
19. Mutual funds are examples of financial assets. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Easy OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
20. Spending for your child's private-school education is an example of deferred consumption. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
21. Wealth can be defined as the total value of all the things you own. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
22. Wealth is the key consideration is establishing financial goals as it is the measure of value in financial transactions. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
23. Financial assets include investments such as stocks and bonds. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Easy OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
24. Utility refers to the amount of satisfaction a person gets from buying certain items. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
25. A successful financial plan will be based on a person's goals. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
26. Your personal value system will shape your attitude toward money and wealth accumulation. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
27. It is possible to draw up one financial plan that will work for most people. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
28. Financial planning is a dynamic process. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
29. The first step in the financial planning process is to develop financial plans and strategies to achieve goals. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
30. Money can be an emotional factor that may affect a person's financial plans. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
31. Long-term goals are typically for periods of over 6 years. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
32. Saving $3,000 for a large, flat-screen TV within the next 3 years is an example of a short-term goal. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Easy OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
33. Short-term goals include things one wants to achieve in a year or less. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
34. Debt is another word for liability. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Easy OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
35. Insurance provides a way to make money on unfortunate events. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
36. Employee benefits can typically be transferred to a new job when one changes employers. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
37. Your house is an example of a tangible asset. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Easy OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
38. For most people working in large firms, employee benefits are an important part of their financial planning. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Easy OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
39. A personal computer can be very useful in assisting one with their financial planning. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Easy OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
40. A financial goal that would be important in all stages of the life cycle is creating and maintaining an emergency fund. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
41. Government controls consumers and businesses by regulation and taxation. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
42. Businesses are a key part of the circular flow of income that sustains our free enterprise system. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
43. Consumer choices ultimately determine the kinds of goods and services businesses will provide. ANS: T
PTS: 1
DIF: Challenging
OBJ: LO: 1-4
NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
STA: DISC: Financial Markets and Interest Rates
44. GDP refers to the total earnings of American workers during a year. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
45. Consumers affect businesses by their choices of what goods and services to purchase and by choosing whether they will spend or save their incomes. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
46. How long you invest is not nearly as important as the rate of interest you can earn on your investments. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
47. The longer you wait to begin retirement planning, the less you will likely have in your retirement fund. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Easy OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
48. Inflation means price levels have declined. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
49. The Consumer Price Index (CPI) is the amount of goods and services each dollar buys at a given point in time. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
50. Typically, higher levels of education are rewarded with higher income over the lifetime. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 1-5 STA: DISC: Financial Markets and Interest Rates
51. Cities with higher costs of living also experience higher rates of inflation. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 1-5 STA: DISC: Financial Markets and Interest Rates
52. Accumulating wealth for later years is called estate planning. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
53. High interest rates after the financial crisis of 2008-2009 reflect the Federal Reserve’s efforts to tighten, or reduce, the money supply. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 1-4 KEY: Bloom's: Knowledge
54. The government employs monetary and fiscal policy to ensure the economy always remains stable. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 1-4 KEY: Bloom's: Analysis
55. A strong economy leads to higher levels of employment. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 1-4 KEY: Bloom's: Analysis
56. An economic contraction usually begins after a trough is reached. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 1-4 KEY: Bloom's: Knowledge
57. The financial crisis of 2008 and 2009 was the first depression the U.S. has experienced in 75 years. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 1-4 KEY: Bloom's: Synthesis
MULTIPLE CHOICE 1. Personal financial management is important because it a. controls inflation. b. limits consumption. c. uses money as an end. d. makes personal financial goals easier to achieve. e. lessens economic differences among individuals. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
2. Financial planning can help us to a. control inflation. b. spend wisely. c. control unemployment rates. d. a and b. e. a, b, and c. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
KEY: Bloom's: Comprehension 3. The last step in the financial planning process is to a. develop financial plans and strategies to achieve goals. b. use financial statements to evaluate results of plans and budgets, taking corrective action as required. c. implement financial plans and strategies. d. redefine goals and revise plans and strategies as personal circumstances change e. periodically develop and implement budgets to monitor and control progress toward goals. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
4. The term most closely associated with quality of life is a. wealth. b. consumption. c. education. d. standard of living. e. money. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Easy OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
5. A primary determinant of your quality of life is a. a tax bill. b. tangible property. c. wealth. d. motivation. e. income potential. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
6. The average propensity to consume refers to the a. dollars of income spent for current consumption. b. percentage of income saved. c. expenditures for the minimum necessities of life. d. percentage of income spent for current consumption. e. fact that people with higher incomes spend more for the necessities of life. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
7. Becky graduated with a master degree in Personal Financial Planning. After working two years in a small financial planning firm, Becky earns $60,000 annually and saves $10,000 a year. What is her average propensity to consume? a. 16.7% b. 25.5% c. 75.7% d. 83.3% e. 95.5%
ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
8. When setting financial goals, one should typically start by setting a. short-term goals. b. Intermediate-term goals. c. long-term goals. d. a and b e. b and c ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
9. Which of the following goals is stated in a way that is most useful for developing a financial plan? a. Make a $12,000 down payment on an automobile in 4 years b. Retire with a comfortable lifestyle in 25 years c. Buy a $125,000 house in 6 years d. Purchase a $40,000 boat e. Join the country club when retired in 20 years ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
10. Generally, as income rises, the average propensity to consume a. stabilizes. b. drops to zero. c. increases. d. becomes erratic. e. decreases. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
11. The amount of money we set aside for future consumption will be determined by a. our level of current wealth. b. how much we currently earn and spend. c. our education level. d. the current needs of our family. e. the cost of life's necessities. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis 12. Money is a. the reason for all transactions. b. a medium of exchange. c. the purpose of our economy. d. a medium of consumption. e. a measure of propensity to consume.
DIF: Moderate OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
13. Family financial goals should be a. very general in nature. b. realistically attainable. c. individually determined. d. set once for a lifetime. e. reserved for retirement planning. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
14. Utility refers to a. the satisfaction you receive from purchasing something. b. how much money you receive during the year. c. the total of your spending for the year. d. the value of your investments at any given time. e. none of these. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
15. The main reason to do personal financial planning is to a. minimize overall costs. b. minimize overall utility. c. assign monetary value to consumption. d. maximize overall utility. e. stabilize overall utility. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
16. The most important financial planning for young people concerns a. career. b. insurance. c. investment. d. taxes. e. retirement. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
17. Martha is 80 and has a very high net worth. Her most important financial concern is probably her a. career. b. employee benefits. c. estate. d. insurance. e. savings.
ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
18. Sam and Lele are in their late 20s with 3 young children. Their most important financial planning concerns would probably include all of the following except a. asset acquisition planning. b. liability and insurance planning. c. retirement and estate planning. d. savings and investment planning. e. employee benefit planning. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
19. Employee benefits may include a. retirement plans b. health insurance c. employee discounts d. tuition reimbursements e. all of the above ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
20. Employee benefits may include a. health insurance b. disability insurance c. life insurance d. only a and b above e. all of the above ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
21. Tax planning is most commonly done to a. reduce debt balances. b. change income patterns to avoid taxes. c. minimize taxes. d. pay extra taxes. e. learn the tax code. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
22. Investments are distinguished from savings on the basis of a. length of time held. b. initial dollar outlay. c. depreciation. d. voting rights. e. level of risk and expected return.
ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
23. Estate planning involves a. considering how your wealth can be most effectively passed on to heirs. b. payment of all back taxes. c. dissolution of all privately held corporations. d. valuation and auctioning of your valuables. e. planning retirements. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
24. While you are still working, you should be managing your finances for retirement planning. Which of the following is not a goal of your retirement planning? a. maintaining your standard of living b. effectively passing wealth on to heirs c. a vacation home or boat d. travel ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
25. The three key groups in the economic environment are a. government, regulation, and business. b. government, consultants, and business. c. consumers, economists, and business. d. consumers, business, and managers. e. government, consumers, and business. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
26. Government places controls on the personal financial environment by use of a. taxation and fiscal policy. b. taxation and regulation. c. taxation and competition. d. regulation and competition. e. regulation and fiscal policy. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge 27. Businesses provide a. stores. b. money payments. c. land and capital. d. labor. e. goods and services.
DIF: Easy OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
28. The individual consumer is a. a member of the business group. b. the party around which the personal financial environment is centered. c. an important force in government. d. an advocacy group. e. relatively unimportant to business or government. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
29. The four stages of an economic cycle would not include a. depression. b. expansion. c. recession. d. recovery. e. stagnation. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
30. Inflation refers to a. rising prices. b. declining interest rates. c. the opposite of wealth. d. the opposite of stagflation. e. declining prices. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
31. As the rate of inflation increases, a. the cost of living goes down. b. interest rates decrease. c. pay checks decrease. d. retirement plans have more difficulty meeting their goals. e. purchasing power of a dollar increases. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
32. The amount of goods and services each dollar buys at a given point in time is: a. inflation b. consumer price index (CPI) c. purchasing power d. none of the above ANS: C
PTS: 1
DIF: Easy
OBJ: LO: 1-4
NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
STA: DISC: Financial Markets and Interest Rates
33. This is a measure of inflation based on changes in the cost of a market basket of consumer goods and services: a. inflation b. consumer price index (CPI) c. purchasing power d. none of the above ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
34. Your income is directly related to your a. geographic location. b. age. c. education. d. all of these e. none of these ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-5 STA: DISC: Financial Markets and Interest Rates
35. Typically people with the lowest incomes tend to be a. educated. b. very old. c. very young or very old. d. middle aged. e. childless. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 1-5 STA: DISC: Financial Markets and Interest Rates
36. ____ tends to increase and then decrease over the life cycle. a. Debt b. Income c. Emergency funds d. a and b e. a, b, and c ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 1-5 STA: DISC: Financial Markets and Interest Rates
37. Financial goals should be a. specific. b. attainable. c. prioritized. d. all of these e. none of these ANS: D
PTS: 1
DIF: Easy
OBJ: LO: 1-2
NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
STA: DISC: Financial Markets and Interest Rates
38. Ideally, retirement planning should begin a. during the year before retirement. b. when the last child has left home. c. as soon as the mortgage is paid off. d. when you get married. e. none of these. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
39. A personal computer could not be used to a. prepare detailed budgets. b. analyze investment possibilities. c. store and retrieve financial information efficiently. d. make financial decisions. e. keep insurance coverage inventories. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
40. ____ is the financial goal most people think is least important. a. Living well now b. Being financially independent c. Sending children to college d. Providing for retirement e. Leaving a large estate ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
41. Professional financial planners a. help by establishing personal financial goals. b. are only for wealthy investors. c. are skilled at offering simple solutions to complex financial problems. d. make financial decisions for investors. e. are best utilized during retirement years. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
42. A ____ is a designation earned by financial planners after completing required courses of study. a. MBA b. LUTCF c. CFP d. E.A. e. CLU ANS: C
PTS: 1
DIF: Easy
OBJ: LO: 1-3
NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
STA: DISC: Financial Markets and Interest Rates
43. Low interest rates after 2008 and 2009 reflect the Federal Reserve’s desire to a. Stimulate economic growth d. a and b b. Reduce unemployment e. a, b, and c c. Reduce inflation ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 1-4 KEY: Bloom's: Analysis
44. What policies can the government utilize to help stabilize the economy? a. Price stabilization policy d. b and c b. Monetary policy e. a, b, and c c. Fiscal policy ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking 45. A strong economy leads to a. lower inflation b. lower interest rates c. higher employment ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 1-4 KEY: Bloom's: Knowledge d. lower productivity e. higher unemployment DIF: Moderate OBJ: LO: 1-4 KEY: Bloom's: Analysis
46. An economy will usually go into a _________ after a peak. a. Convolution d. Recession b. Expansion e. Depression c. Contraction ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 1-4 KEY: Bloom's: Knowledge
47. The financial crisis of 2008 and 2009 is best characterized as a ______________ a. Recession d. Business trough b. Depression e. Meltdown c. Downturn ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 1-4 KEY: Bloom's: Synthesis
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 1. The best way to achieve your financial objectives is to [save every extra dollar you can | develop a sound financial plan]. ANS: b PTS: 1
DIF: Easy
OBJ: LO: 1-1
NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
STA: DISC: Financial Markets and Interest Rates
2. Financial planning [does | does not] guarantee a sound financial future. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
3. [Putting money into a retirement fund | Buying a car] would be an example of current consumption. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
4. [Vacations | Education] would be considered a necessity of life. ANS: c PTS: 1 DIF: Challenging NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
5. The average [self employed | retired] household has higher income. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-5 STA: DISC: Financial Markets and Interest Rates
6. The average [self employed | retired] household has higher levels of assets. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-5 STA: DISC: Financial Markets and Interest Rates
7. The average American's [home equity | home mortgage] is higher. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
8. [More than | less than] the majority of Americans believe that money cannot buy happiness. ANS: a
PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
9. [Disney stock | Your car] would be considered a financial asset. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
10. [Stocks | Your house] would be considered to be real property. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
11. [Money | Inflation] is the common denominator for gauging all financial transactions. ANS: a PTS: 1 DIF: Challenging NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
12. [Inflation | Consumer Price Index] is the amount of goods and services each dollar buys at a given point in time. ANS: c PTS: 1 DIF: Challenging NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
13. [Utility | Propensity to consume] refers to the satisfaction you receive from buying certain items. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
14. It is [fairly simple | impossible] to find a financial plan that will work for everyone. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
15. Most families find it [easy | difficult] to discuss money matters. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
16. "1 want to accumulate a comfortable retirement fund" [would | would not] be a specific financial goal. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 1-2 STA: DISC: Financial Markets and Interest Rates
17. Income tends to [increase | decrease] between the ages of 55 and 75. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
18. Your level of formal education is a [controllable | non controllable] factor that has a considerable effect on your income. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
OBJ: LO: 1-5 STA: DISC: Financial Markets and Interest Rates
19. For most people, debts [increase constantly | increase and then decrease] during their lifetimes. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
20. Most people graduate from college with [no | some] debts. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
21. The two principal constraints which government places upon us are regulations and [tariffs | taxes]. ANS: b PTS: 1
DIF: Easy
OBJ: LO: 1-4
NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
STA: DISC: Financial Markets and Interest Rates
22. The Consumer Price Index is a measure of [unemployment | inflation]. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
23. Two key indicators of economic activity in the U.S. are production levels and [employment levels | cost of living]. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
24. A decrease in the gross domestic product would indicate that our economy is [growing | stagnating]. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
25. [Tax | Liability and insurance] planning is introduced early in the life cycle. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
26. During the expansion phase of the business cycle, the unemployment rate will [increase | decrease]. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
27. As the rate of inflation increases, the purchasing power of your dollars will [increase | decrease]. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
28. The primary determinant of your standard of living is your [wealth | propensity to consume].
ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
OBJ: LO: 1-1 STA: DISC: Financial Markets and Interest Rates
29. Your [level of education | age] will usually have no effect on your earning capacity. ANS: c PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
OBJ: LO: 1-5 STA: DISC: Financial Markets and Interest Rates
30. After reaching adulthood, your financial goals will [stabilize | continue to change]. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
31. For most people, employee benefits are of [little | major] importance. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-3 STA: DISC: Financial Markets and Interest Rates
32. Typically, your salary will be [higher | lower] if you live in a large metropolitan area rather than a small town or rural area. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-5 STA: DISC: Financial Markets and Interest Rates
33. [GDP | CPI] is the total of all goods and services produced by workers located within the country. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-4 STA: DISC: Financial Markets and Interest Rates
34. The average income of household heads increase until age [55 | 65] then income starts decreasing. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 1-5 STA: DISC: Financial Markets and Interest Rates
35. The Federal Reserve’s actions after the financial crisis of 2008 and 2009 resulted in [reduced interest rate | higher interest rates]. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 1-4 KEY: Bloom's: Knowledge
36. The government employs monetary and fiscal policy to help foster a [fast growing economy | no growth economy]. ANS: c PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 1-4 KEY: Bloom's: Analysis
37. A stronger economy leads to [higher employment | lower employment]. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 1-4 KEY: Bloom's: Analysis
38. Following an economic trough, the economy will often enter a period of [expansion | contraction]. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 1-4 KEY: Bloom's: Knowledge
39. The financial crisis of 2008 and 2009 is best characterized as a [recession | depression]. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking
OBJ: LO: 1-4 KEY: Bloom's: Comprehension
Chapter 2—Using Financial Statements and Budgets TRUE/FALSE 1. A balance sheet shows your financial condition as of the time the statement is prepared. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
2. One could use statements from their various financial institutions to help complete a balance sheet. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
3. The income statement includes information on your latest paycheck. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
4. The income and expenditures statement provides a measure of financial performance over a period of time. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
5. Financial planning is necessary only if you earn a lot of money. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
6. Assets listed on your balance sheet must have monetary value. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
7. A budget is a detailed statement of what income and expenses occurred over a past period. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
8. A budget is a detailed financial forecast. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
9. Financial assets are intangible assets acquired to achieve long-term personal financial goals. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
10. Assets purchased on credit should be included on the asset side of the balance sheet. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
11. Jewelry, furniture and computers are examples of personal property. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
12. A house and land are examples of financial property. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
13. Most types of personal property depreciate, or decline in value, shortly after being put into use. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
14. Investment assets include items such as boats or automobiles. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
15. All assets are recorded on the balance sheet at their original cost. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
16. The financial planning process is regulated by state governments when done by professionals. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
17. Money I loaned to a friend is a liability on my balance sheet. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
18. A charge made on your credit card becomes a liability as soon as the charge is incurred. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
19. You are more likely to achieve your goals if a definite goal date is set. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
20. Your auto loan payments would be listed as an expense on the income statement. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
21. Only the current month's payment on your mortgage loans would be listed on the balance sheet as a liability. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
22. Inability to reach short-term goals will significantly affect your ability to reach long-term goals. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
23. Your net worth and your equity in owned assets are the same basic concept. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
24. The balance sheet equation is assets plus liabilities equals net worth. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
25. A budget is an orderly estimate of income and expenditures. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
26. Mary and Tom purchased their home for $150,000, and it is now worth $175,000. Its asset value is $150,000. ANS: F
PTS: 1
DIF: Moderate
OBJ: LO: 2-2
NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
STA: DISC: Financial Analysis and Cash Flows
27. The equity in your home is the difference between the loan balance and the purchase price. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
28. The income and expenditures statement is a summary of actual income and expenditures over a specific point of time. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
29. Interest you earned on your savings account would be an entry on the balance sheet. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
30. If you obtain a loan to purchase a car in June, this loan amount would be included as income for June. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
31. If you listed your gross salary in the income portion of the budget, the expenditures section must include income taxes and social security. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
32. If you use net salary as income on your budget, the expenditures section must include income and social security taxes. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
33. An income statement deficit would increase net worth. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
34. When the income statement indicates a surplus, this may be used to increase net worth by increasing assets or decreasing liabilities. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
35. A cash deficit decreases net worth. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
36. Balance sheets and income statements are most useful if prepared at least annually. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
37. The savings ratio is useful in the evaluation of the balance sheet. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
38. A cash surplus will typically produce a positive savings ratio. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Easy OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
39. A family could have a positive savings ratio at the same time its debt service ratio is increasing. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
40. The liquidity ratio is an indicator of a family's ability to pay current debts if there is an interruption in income. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
41. The savings ratio indicates the percentage of after-tax income that is saved. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
42. The level of the debt service ratio would indicate your ability to meet loan payments out of current income. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
43. You have a balanced budget when total income for the year equals or exceeds total expenditures for the year.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
44. You may be under-budgeting for food if you continually have monthly deficits in the food category. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
45. The best way to balance your budget is to increase borrowing. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Easy OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
46. A solvency ratio shows how much "cushion" you have as a protection against insolvency. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
47. Budgeting and record keeping are really the same activity. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
48. The best place to keep a budget is in a safe deposit box. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
49. Monthly statements and pay stubs can be shredded when year-end statements are received. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Easy OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
50. When preparing a cash budget, estimating expenses using actual expenses from previous years and by tracking current expenses makes the task easier. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
51. A cash budget has value only if you use it, review it regularly, and keep careful records of income and expenses. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
52. One should quickly make important financial decisions soon after a financial shock, such as death or divorce. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
53. Using the future value calculations to estimate the funds needed to meet a goal takes compounding into account. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 2-6 STA: DISC: Financial Analysis and Cash Flows
54. Using time value of money is important when planning for long-term goals. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Easy OBJ: LO: 2-6 STA: DISC: Financial Analysis and Cash Flows
55. Using time value of money is most important when planning for short-term goals. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Easy OBJ: LO: 2-6 STA: DISC: Financial Analysis and Cash Flows
56. Net income (after taxes) should be used when developing an income and expense statement. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
57. In a budget, "fun money" is a budget category used for family members to spend as they like without having to account for how it is spent. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
58. Net worth peaks at about age 65 and then diminishes throughout retirement years. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 2-6 KEY: Bloom's: Knowledge
59. Only four categories of spending account for almost 90% of all consumer spending. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 2-5 KEY: Bloom's: Knowledge
60. Net worth is greatest for those in their prime working years, about age 55. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 2-6 KEY: Bloom's: Knowledge
61. Net worth achieves is highest level beginning at age 65 and increases throughout retirement years. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 2-6 KEY: Bloom's: Knowledge
62. Personal financial software is widely available, much of which is free. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 2-6 KEY: Bloom's: Knowledge
63. Most personal financial software is available at a reasonable cost. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 2-6 KEY: Bloom's: Knowledge
MULTIPLE CHOICE 1. The balance sheet describes a family's wealth a. at a certain point in tine. b. as an annual summary. c. as a time period less than one year. d. at a future time. e. none of these ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
2. The three parts of your balance sheet are a. income, liabilities, balance. b. assets, expenditures, balance. c. assets, liabilities, balance. d. assets, liabilities, net worth. e. income, liabilities, net worth. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
3. A(n) ____ would not be listed as an asset on your balance sheet. a. mortgaged home b. savings account c. owned automobile d. checking account e. leased automobile ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
4. When Phil lists his house on his balance sheet, he should record the a. actual purchase price. b. replacement value. c. insured value.
d. sale price. e. fair market value. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
5. Your ____ is an example of a liquid asset. a. home b. car c. checking account d. charge account e. life insurance cash value ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
6. Kathy purchased new furniture for $10,000. She put $1,000 down and financed $9,000. She will pay $350 per month until the loan is paid off. Which of the following are true? a. The furniture should be recorded as an asset of $10,000 on Kathy's balance sheet. b. The $9,000 is entered as a liability on Kathy's balance sheet. c. The furniture should be recorded as a $1,000 expenditure on Kathy's balance sheet. d. The $350 payments are expenditures on Kathy's income and expenditure statement. e. All are correct except c ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
7. Sam and his wife Ann purchased a home in Lubbock, Texas in 1980 for $100,000. Their original home mortgage was for $90,000. The house has a current market value of $175,000 and a replacement value of $200,000. They still owe $55,000 on their home mortgage. Sam and Sally are now constructing their balance sheet. How should their home be reflected on their current personal balance sheet? a. $200,000 asset and $55,000 liability b. $200,000 asset and $90,000 liability c. $175,000 asset and $55,000 liability d. $175,000 asset and $90,000 liability e. $100,000 asset and $55,000 liability ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
8. ____ is an example of an personal asset. a. Jewelry b. Recreational equipment c. Corporate bond d. Charge account balance e. Auto insurance premium ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
9. A budget is a a. purchase plan. b. line of credit. c. financial statement. d. detailed financial forecast. e. set of personal financial objectives. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
10. The main purpose of a budget is to a. develop goals. b. develop a financial plan. c. give feedback to the plan. d. monitor and control financial outcomes. e. revise goals. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
11. Budgets are a. restrictive. b. complicated. c. are forward looking. d. permanent. e. unnecessary. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
12. ____ would not be listed as a liability on your balance sheet. a. Taxes owed b. Loan balances c. Bank credit card charges d. Savings accounts e. Rent due ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
13. ____ would not be a long-term financial goal. a. Purchasing a new car b. Providing adequate life insurance c. Reducing income taxes d. Paying your phone bill e. Planning for retirement ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
14. Net worth is measured by a. bank card balances. b. house mortgage balances. c. amount owed on an automobile loan. d. assets minus liabilities. e. insurance premium. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
15. Balance sheet liabilities should be recorded at their a. original outstanding balance. b. year-end outstanding balance. c. average outstanding balance. d. current outstanding balance. e. none of these. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
16. On the balance sheet, a mortgage loan is recorded as the a. interest only. b. sum of interest paid and the outstanding balance. c. sum of interest due and the outstanding balance. d. principal portion only. e. none of the above. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
17. Another term sometimes used instead of net worth is a. assets. b. net debts. c. long-term liabilities d. equity. e. liquid assets. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
18. The balance sheet equation is: a. Total Assets / Total Liabilities = Net Worth. b. Total Assets Total Liabilities = Net Worth. c. Total Assets - Total Liabilities = Net Worth. d. Total Assets + Total Liabilities = Net Worth. e. Total Liabilities - Total Assets = Net Worth. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
19. Mandy and Jeff have a net worth of $25,000 and total assets of $140,000. If their revolving credit and unpaid bills total $2,200, what are their total liabilities? a. $115,000 b. $140,000 c. $142,200 d. $165,000 e. $167,200 ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
20. Sonny and Cher have a net worth of $35,000 and total assets of $200,000. If their revolving credit and unpaid bills total $2,200, what are their long-term liabilities? a. $115,000 b. $140,000 c. $142,200 d. $162,800 e. $165,000 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
21. You are solvent if your a. total liabilities exceed total assets. b. total assets exceed total liabilities. c. total assets exceed net worth. d. total liabilities exceed net worth. e. none of these. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
22. The income and expenditures statement examines your financial a. level. b. performance. c. position. d. assets. e. objectives. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
23. The income statement is specific to a. one point in time. b. a specific period of time. c. last year. d. next year. e. none of these. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
KEY: Bloom's: Knowledge 24. The income statement includes a. income, liabilities, net worth. b. income, expenditures, surplus or deficit. c. expenditures, net worth, surplus or deficit. d. net worth, surplus, income or expenditures. e. savings, surplus, income or expenditures. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
25. On an income statement covering January 1 to June 30, ____ would not be included as income. a. wages and salaries received in that six months b. interest received on June 30 c. auto sold with payment received May 15 d. inheritance granted in April, to be paid in September e. income tax refund received April 14 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
26. You are more likely to achieve your goals when a. your income is high. b. goal dates are inflexible. c. short- and long-term goals are established separately. d. goals are reassessed and revised periodically. e. one person controls all goals in the household. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
27. You would not include ____ on an income and expenditures statement. a. the value of your stock portfolio b. taxes withheld c. utilities paid d. mortgage payments e. charitable payments ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
28. I should not record ____ on an income/expense statement covering January 1 to June 30. a. an $800 refrigerator bought on credit May 30 b. a paid March telephone bill c. health insurance premiums deducted from monthly pay checks d. checking account service charges e. groceries bought and paid for in June ANS: A PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
KEY: Bloom's: Knowledge 29. ____ would be an example of a periodic expense. a. Food b. Vacation c. Utilities d. Taxes e. none of these ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
30. The most common budgeting period is a a. week. b. month. c. quarter. d. semi-annually. e. bi-weekly. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
31. A cash budget should help you to a. achieve your short-term financial goals. b. implement disciplined spending. c. eliminate impulse spending. d. allocate funds to savings and investments. e. do all of these ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
32. All of the following are stages in preparing a cash budget except: a. estimating income b. estimating expenses c. calculating depreciation expense d. finalizing the cash budget ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
33. A cash budget helps you: a. Monitor and control your finances. b. Decide how to allocate your income to reach your financial goals. c. Achieve your long-term financial goals. d. All of the above. e. A & B only. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
34. When a cash surplus exists on your income and expenditure statements, you can a. acquire assets. b. pay off existing debts. c. increase your savings. d. increase your investments. e. do any of the above. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
35. Russ buys his wife a valuable painting for $20,000. He purchases it using $15,000 from his savings and a $5,000 loan. How does this transaction affect Russ' balance sheet? a. His assets increase b. His liabilities increase c. His net worth stays the same d. a and b e. a, b and c ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
36. If your statement of income and expenditures shows a deficit, you may have a. increased your debts. b. increased your assets. c. added to savings. d. bought additional insurance. e. paid off some of your debts. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
37. If your ____, your net worth on the balance sheet would have increased from one period to the next. a. liabilities increased and assets remained constant b. liabilities increased and assets decreased c. assets increased and liabilities remain constant d. income increased e. none of these ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
38. The Wilson family's short-term goals might include a. setting up an emergency fund of three months' income b. buying a house c. sending the kids to college d. planning to retire at age 60 e. all of these ANS: A PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
KEY: Bloom's: Application 39. If your total assets equal $50,000 and your total liabilities equal $15,000; your debt ratio is a. 30%. b. 70%. c. 143%. d. 233%. e. 333%. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
40. If your total assets equal $87,000 and your total liabilities equal $10,000; your solvency ratio is a. 11.5%. b. 13.0%. c. 77.0%. d. 87.0%. e. 88.5%. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
41. Using balance sheet information, the ____ ratio indicates your ability to meet current debt payments. a. solvency b. liquidity c. cash d. savings e. debt service ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
42. Kim's net worth is $85,000 and her total assets are $100,000. What is Kim's solvency ratio? a. 15% b. 25% c. 65% d. 85% e. 100% ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
43. A savings ratio expresses the a. percentage of gross income saved. b. ability to cover immediate debt when there is an interruption in income. c. percentage of after-tax income saved. d. percentage of tax-deferred income earned annually. e. none of the above. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
KEY: Bloom's: Knowledge 44. Your total cash income is $40,000. You pay $5,000 in taxes and $30,000 in other expenses. Your savings ratio is a. 7.5% b. 10.0% c. 12.5%. d. 13.3%. e. 14.3%. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
45. Your total cash income is $80,000. You pay $8,000 in taxes and $60,000 in other expenses. Your savings ratio is a. 10.0% b. 14.3% c. 15.0%. d. 16.7%. e. 17.5%. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
46. Mindy and Lou had liquid assets of $10,000 and current debts of $30,000. What is their liquidity ratio? a. 25% b. 33% c. 67% d. 150% e. 300% ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
47. Jacque's total monthly loan payments are $1,020 while her gross income is $3,000 per month. What is her debt service ratio? a. 34% b. 43% c. 50% d. 75% e. 82% ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
48. In order to minimize the difficulty associated with meeting monthly loan payments, the debt service ratio should be a. above 50%. b. below 50%. c. at 35%. d. below 35%.
e. above 20%. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
49. Mike and Teresa Garza have a monthly gross income of $5,000, but they pay $1,000 per month in taxes. They also pay $2,000 per month in various loan payments. What is their debt service ratio? a. 20% b. 30% c. 40% d. 50% e. 60% ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
50. When estimating income for the income and expense statement, you should a. use gross income. b. include expected pay increases. c. adjust for inflation. d. use net income. e. none of these ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
51. The expenditure categories for your budget should be determined by a. the BLS Urban Family Budget categories. b. purchased budget book headings. c. those used in previous years. d. current and expected future spending. e. itemized tax deductions. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
52. The need for budget adjustments is indicated when a. income is stable. b. account deficits and surpluses balance out. c. account deficits are more than surpluses. d. a new calendar year begins. e. short-term financial goals are achieved. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
53. The best approach to solving the problem of an annual budget deficit is generally to a. liquidate enough savings to make up the deficit. b. sell stock to make up the deficit. c. reduce flexible expenditures.
d. reduce fixed expenses. e. get a part time job. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
54. What can you do if your budget shows an annual budget deficit? a. Liquidate enough savings and investments to meet the total budget shortfall for the year. b. Borrow enough to meet the total budget shortfall for the year. c. Cut low-priority expenses from the budget. d. Increase Income. e. All of the above. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
55. To determine how effectively the budget is working, you can use a. the balance sheet. b. the income statement. c. income and expenditure records. d. year-end financial statements. e. financial goals. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
56. Dual-income families often face a. reduced employee benefit options. b. increased complexity in their money management systems. c. reduced expenditures as a result of the second job. d. reduced taxes due to tax breaks. e. increased time to spend with the family. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
57. Which of the following has been determined to be the best way for dual-income families to handle their money management? a. Place all income into a single, joint account. b. Have each spouse contribute equal amounts to a joint account for family expenses. c. Have each spouse contribute an equal proportion of their incomes to a joint account for family expenses. d. Have one spouse make all the financial decisions e. None of the above. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
58. Your investment advisor wants you to purchase an annuity that will pay you $25,000 per year for 10 years. If you require a 7% return, what is the most you should pay for this investment?
a. b. c. d. e.
$ 49,179 $175,590 $201,000 $225,682 $250,000
ANS: B PMT = 25,000 PTS: 1 DIF: Challenging OBJ: LO: 2-6 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
59. Theresa invested $5,000 in an account she expects will earn 7% annually. Approximately how many years will it take for the account to double in value? a. 8 b. 9 c. 10 d. 11 e. 12 ANS: C 72/7 = 10 PTS: 1 DIF: Moderate OBJ: LO: 2-6 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
60. Jamil invested $9,500 in an account he expects will earn 5% annually. Approximately how many years will it take for the account to double in value? a. 8.8 b. 9.7 c. 10.8 d. 11.4 e. 14.4 ANS: E 72/5 = 14.4 PTS: 1 DIF: Moderate OBJ: LO: 2-6 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
61. Phil has $2,000 and he needs it to grow to $4,000 in 8 years. Assuming he adds no more money to this fund, what rate of return would he need to earn? a. 6% b. 7% c. 8% d. 9% e. 10% ANS: D 72/x = 8, 72 = 8x, 72/8 = x, 9% = x PTS: 1 DIF: Challenging OBJ: LO: 2-6 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
62. Michael and Sandy purchased a home for $100,000 five years ago. If it appreciated 6% annually, what is it worth today? a. $100,000 b. $106,000 c. $130,000 d. $133,823 e. $135,603 ANS: D PV = 100,000, N = 5, i = 6, FV = 133,823 PTS: 1 DIF: Challenging OBJ: LO: 2-6 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
63. Elena purchased a stamp collection for $5,000 thirty years ago. If it appreciated 8% annually, what is it worth today? a. $ 17,000 b. $ 36,400 c. $ 50,313 d. $123,023 e. $150,000 ANS: C PV = 5,000, N = 30, i = 8, FV = 50,313 PTS: 1 DIF: Challenging OBJ: LO: 2-6 STA: DISC: Financial Analysis and Cash Flows 64. Net worth is highest at about what age? a. 45 b. 55 c. 65 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
d. 75 e. 85 DIF: Easy OBJ: LO: 2-6 KEY: Bloom's: Knowledge
65. Which of the following is not among the four categories accounting for almost three-quarters of consumer spending? a. Utilities d. Housing b. Food e. Personal insurance and pensions c. Transportation ANS: A PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 2-6 KEY: Bloom's: Knowledge
66. Which of the following are not among the four categories accounting for three-quarters of consumer spending? a. Utilities d. a and b b. Clothing e. a, b, and c c. Food ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 2-6 KEY: Bloom's: Knowledge
67. Which of the following is among the four categories accounting for almost three-quarters of consumer spending? a. Personal insurance and pensions d. Entertainment b. Clothing e. Medical c. Utilities ANS: A PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 2-6 KEY: Bloom's: Knowledge
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 1. A balance sheet provides a statement of your financial [position | performance]. ANS: a PTS: 1 DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
2. The primary function of financial statements is to provide a picture of your [actual | projected] financial position. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
3. An asset must have [market | monetary] value to be included on a balance sheet. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
4. A [savings account | retirement account] would be an example of a liquid asset. ANS: a PTS: 1 DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
5. A [house | certificate of deposit] is an example of a tangible asset. ANS: a PTS: 1 DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
6. Investment assets are required to [earn a return | provide a service].
ANS: a PTS: 1 DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
7. A [credit card bill | credit card balance] would be an example of a current liability. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
8. Another term sometimes used for net worth is [collateral | equity]. ANS: b PTS: 1 DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
9. A liability would be listed on a balance sheet as the [amount originally borrowed | amount of the next loan payment to be made | none of these]. ANS: c PTS: 1 DIF: Challenging OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
10. When your liabilities exceed your assets, you are [solvent | insolvent]. ANS: b PTS: 1 DIF: Easy OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
11. When your assets exceed your liabilities, you are [saving | solvent]. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
12. If your expenses exceed your income, the bottom line of your income/expense statement will show a [surplus | deficit]. ANS: b PTS: 1 DIF: Easy OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
13. The total amount of salary you earn before taxes are deducted is called your [gross | net] pay. ANS: a PTS: 1
DIF: Easy
OBJ: LO: 2-3
NAT: BUSPROG: Analytic skills
STA: DISC: Financial Analysis and Cash Flows
KEY: Bloom's: Knowledge
14. You bought a $500 stereo on the installment plan and made two payments of $75 during the year. On your income/expense statement for the year, you will show an expense of [$150 | $500]. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
15. [Medical expenses | Rent payments] would be more difficult to estimate for the coming year. ANS: a PTS: 1 DIF: Easy OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
16. Your car has a market value of $4,000 while the balance of the loan against it is now $2,500. You will list this car as net worth of [$4,000 | $1,500]. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
17. Your car has a market value of $10,000 while the balance of the loan against it is now $2,500. You will list this car as an asset worth of [$7,500 | $10,000]. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
18. A deficit on your income/expense statement will have [an | no] effect on your balance sheet. ANS: a PTS: 1 DIF: Easy OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
19. If you pay off your debt but make no changes in your assets, your net worth will [increase | decrease]. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
20. Total assets on your balance sheet are $6,000 and liabilities are $2,000. Your solvency ratio would be [67% | 33%]. ANS: a PTS: 1 DIF: Challenging OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
21. The liquidity ratio is designed to show the percentage of [your annual credit obligations | next months credit obligations] you could cover with your current assets. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
22. Your gross income was $32,000; your net income was $25,000; you saved $1,000. Your savings ratio was [3% | 4%]. ANS: b PTS: 1 DIF: Challenging OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
23. The purpose of the debt service ratio is to show the amount of your income needed to pay your [current liabilities | monthly loan payments]. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
24. Payments made on your loan obligations should [increase | decrease] your net worth. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 2-4 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
25. Financial planning and budgeting [do | do not] mean the same thing. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
26. The first step in financial planning is to [define financial goals | set up a budget.] ANS: a PTS: 1 DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
27. A detailed forecast used to monitor and control expenses is called a [financial plan | income/expenditures statement]. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
28. If your budget shows a deficit, [increase income | increase expenses] to regain balance. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
29. The short-term goals you put into your financial plan [will | will not] affect the achievement of long-term goals. ANS: a PTS: 1 DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
30. Putting specific target dates on your goals [will not | will] increase the likelihood of their being accomplished. ANS: b PTS: 1 DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
31. Short-term goals are usually based on a maximum period of [one year | five years]. ANS: a PTS: 1 DIF: Easy OBJ: LO: 2-1 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
32. Another word for take-home pay is [gross | disposable] income. ANS: b PTS: 1 DIF: Easy OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
33. It is most important to balance your budget over a [monthly | yearly] period. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
34. If you liquidate assets or borrow to make your budget balance, this will [increase | decrease] your net worth. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
35. The most difficult approach to handle a budget deficit is to [find a second job | borrow money].
ANS: a PTS: 1 DIF: Moderate OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
36. A budget will have value only if it is actually used and [records are kept of actual income/expenses | spending never deviates from the budgeted amount]. ANS: a PTS: 1 DIF: Easy OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
37. [Borrowing money from relatives | cutting low-priority expenses] is the preferable way to deal with budget deficits. ANS: b PTS: 1 DIF: Easy OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
38. Once you define your [short-term | long-term] financial goals, you can prepare a cash budget for the upcoming year. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 2-5 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
39. [Present | Future] value is the value today of an amount to be received in the future. ANS: a PTS: 1 DIF: Easy OBJ: LO: 2-6 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
40. Net worth is highest for those about [age 65 | age 85]. ANS: a PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 2-6
NAT: BUSPROG: Analytic skills
41. Four categories, accounting for 75% of consumer spending, include [utilities | clothing]. ANS: c PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 2-6
NAT: BUSPROG: Analytic skills
42. Four categories, accounting for 75% of consumer spending, include [clothing | housing]. ANS: b
PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 2-6
NAT: BUSPROG: Analytic skills
43. Four categories, accounting for 75% of consumer spending, include [entertainment | food]. ANS: b PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 2-6
NAT: BUSPROG: Analytic skills
44. Personal financial software is mostly available for [free | a fee]. ANS: a PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 2-6
NAT: BUSPROG: Analytic skills
PROBLEM 1. Jean and Jim have liquid assets of $3,600 and other assets of $42,800. Their total liabilities equal $26,000. What is their net worth? (Show all work.) ANS: Total Assets Less: Total Liabilities Equal: Net Worth
$46,400 26,000 $20,400
PTS: 1 DIF: Challenging OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
2. Rosa and Jose have liquid assets of $5,000 and other assets of $50,000. Their total liabilities equal $26,000. What is their net worth? (Show all work.) ANS: Total Assets Less: Total Liabilities Equal: Net Worth
$50,000 26,000 $29,000
PTS: 1 DIF: Challenging OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
3. The Hart family spends 30 percent of their disposable income on housing, 5 percent on medical expenses, 25 percent on food, 10 percent on clothing, 14 percent on loan repayments, and 8 percent on entertainment. How much of their disposable income is available for savings and investment? (Show all work.) ANS: 100%- [30 + 5 + 25 + 10 + 14+8%] =100% - 92% = 8%for savings PTS: 1 DIF: Moderate OBJ: LO: 2-3 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
4. Construct a balance sheet from the following information. Be sure the format is correct. (Show all work.) Cash on hand Bank credit card balance Utility bill (over due) Auto loan balance Mortgage Primary residence Jewelry Stocks Coin collection 2001 Toyota ANS: Assets: Cash on hand Primary residence 2001 Toyota Jewelry Stocks Coin Collection Total Assets Net Worth
$
75 1,200 100 3,500 75,000 105,000 2,000 17,500 2,500 7,500
$
75 105,000 7,500 2,000 17,500 2.500 $134,575 $ 54,775
Liabilities: Utilities Bank credit cards Auto loan Mortgage
$
Total Liabilities
PTS: 1 DIF: Challenging OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
100 1,200 3,500 75.000 $79,800
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
5. Construct a balance sheet from the following information. Be sure the format is correct. (Show all work.) Cash on hand Bank credit card balance Taxes due Utility bills (over due) Auto loan balance Mortgage Primary residence Jewelry Stocks Coin collection 2001 Toyota Auto payment ANS: Assets: Cash on hand Primary residence 2001 Toyota Jewelry Stocks Coin Collection Total Assets
$
500 750 500 120 6,000 45,000 60,000 1,200 6,000 2,500 7,500 250
$
500 60,000 7,500 1,200 6,000 2.500 $77,700
Liabilities: Utilities Taxes Bank credit cards Auto loan Mortgage Total Liabilities
$
120 500 750 6,000 45.000 $52,370
Net Worth
$25,330
PTS: 1 DIF: Challenging OBJ: LO: 2-2 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
6. Inflation this coming year is expected to be 4 percent. If Mr. Gonza earned $37,000 this year, how much must he earn the following year just to keep up with inflation and maintain the balance between his income and his increasing expenditures? (Show all work.) ANS: $37,000 + .04($37,000) $37,000 + $1,480 = $38,480 OR $37,000 1.04 = $38.480 PTS: 1 DIF: Moderate OBJ: LO: 2-6 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
7. Inflation this coming year is expected to be 3 percent. If Mr. Gonza earned $45,000 this year, how much must he earn the following year just to keep up with inflation and maintain the balance between his income and his increasing expenditures? (Show all work.) ANS: $45,000 + .03($45,000) $45,000 + $1,350 = $46,350 OR $45,000 1.03 = $46,350 PTS: 1 DIF: Moderate OBJ: LO: 2-6 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
8. Jamie wants to have $1,000,000 for her retirement in 25 years. How much should she save annually if she thinks she can earn 10% on her investments? ANS: FV = 1,000,000 N I PMT
= = =
25 10 10,168.07
PTS: 1 DIF: Challenging OBJ: LO: 2-6 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
9. The Hamptons want to have $1,750,000 for their retirement in 30 years. How much should they save annually if they think they can earn 8% on their investments? ANS: FV = 1,750,000 N I PMT PTS: 1
= = =
30 8 15,448 DIF: Challenging
OBJ: LO: 2-6
NAT: BUSPROG: Analytic skills
STA: DISC: Financial Analysis and Cash Flows
KEY: Bloom's: Evaluation
10. The Flemings will need $80,000 annually for 20 years during retirement. How much will they need at retirement if they can earn a 4% rate of return? ANS: PMT = 80,000 N I PV
= = =
20 4 1,087,226
PTS: 1 DIF: Challenging OBJ: LO: 2-6 STA: DISC: Financial Analysis and Cash Flows
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
Chapter 3—Preparing Your Taxes TRUE/FALSE 1. The Federal personal income tax is a progressive tax. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
2. The Federal personal income tax is a flat tax. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
3. Tax avoidance is legal, tax evasion is illegal. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-6 STA: DISC: Taxes
4. One's marginal tax rate is typical lower than one's average tax rate. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
5. One's average tax rate is typically lower than one's marginal tax rate. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
6. If you have any earned income, you are required to file a tax return. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
7. The main objective of tax planning is to maximize the amount of money you keep by minimizing the amount of taxes you pay. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 3-6 STA: DISC: Taxes
8. If you are eligible to receive a tax refund, you will have to file a tax return to get the refund. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
9. Income tax refunds are automatically sent to those who qualify for refunds no later than April 15. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
10. As a single taxpayer with no dependents, one is generally eligible to file as "head of household." ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
11. Russ and Lois got married December 30. Since they were single for most of the year, however, they can legally file as married taxpayers in the year of the wedding. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
12. Dwayne and Gayle were divorced September 29, have not remarried, and have no dependents. Their filing status for the year will each be "married" since they were married for more than half of the year. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
13. If you are married, you can legally file a single tax return. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
14. A husband and wife would be the only couple combination that could file a joint return. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
15. A couple will usually incur a lower tax liability if they choose "married, filing jointly" rather than "married, filing a separately." ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
16. The Internal Revenue Service is responsible for writing the federal income tax codes. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
17. The Congress writes and passes the Internal Revenue Code.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
18. Social security taxes are deducted from all wages and salaries earned in a year. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
19. Social security taxes are paid on earned income but not on investment income. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
20. There is no limit on the amount of Social Security withheld annually. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
21. The Medicare portion of the Social Security tax is paid on 100% of earnings. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
22. Your marital status will affect the amount of social security you must pay in a year. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
23. Social Security taxes are paid on earned income and investment income. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
24. Child support received is included in gross income. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
25. Alimony received is included in gross income for the receiver and a tax deduction for the payer. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
26. Gifts received from family and friends are included in gross income.
ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
27. Gross income minus tax exempt income equals adjusted gross income. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
28. Dividends received from the stock you own will be taxable income. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
29. Qualified dividends are taxed at the same rates as long-term capital gains. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
30. Portfolio-related expenses can be written off against passive income. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
31. A short-term capital gain would be taxed at the same rate as your salary. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
32. A long-term capital gain, a investment held for more than 6 months, would be taxed at the same rate as earned income. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
33. The sale of your home will rarely result in a taxable capital gain. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
34. An investment must be owned over one year in order to qualify for long-term capital gains treatment. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
35. An investment must be owned over two years in order to qualify for long-term capital gains treatment. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
36. One's home must typically be owned at least three years to receive the most favorable capital gains treatment. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
37. Adjustments to income will decrease your taxable income. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
38. Itemized deductions could include certain taxes, medical expenditures, and home mortgage interest. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
39. You should itemize deductions when total itemized deductions exceed the standard deduction. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
40. You should itemize deductions when total itemized deductions are less than the standard deduction. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
41. Mortgage interest and paid home property taxes are both itemized deduction items. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
42. Qualifying interest on a student loan can be written off as an itemized deduction. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
43. State income taxes and real estate taxes are both itemized deduction items. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
44. State income taxes and state sales taxes paid can both be included as itemized deductions in the same tax year. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
45. Federal income taxes paid can be deducted the following year. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
46. Personal exemptions are tax deductions based on the number of taxpayers and dependents in the taxpayer's household. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
47. The personal exemption for a student can be taken both by the parent and by the child. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
48. When a child qualifies as a dependent on her parent's return, the child cannot take a personal exemption for herself. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
49. The alternative minimum tax is an issue only for high-income taxpayers. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-3 STA: DISC: Taxes
50. Tax credits are dollar-for-dollar reductions in taxable income. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-3 STA: DISC: Taxes
51. Estimated tax payments must be made by those who do not have taxes deducted from their earnings. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-3 STA: DISC: Taxes
52. A person with a significant amount of investment income would have a high probability of needing to make estimated tax payments.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 3-3 STA: DISC: Taxes
53. All taxpayers have an equal probability of having their tax returns audited. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-4 STA: DISC: Taxes
54. You have up to three years after mailing your tax return to file an amended tax return (1040X). ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-4 STA: DISC: Taxes
55. If your AGI is less than $100,000 and you do not itemize deductions, the IRS will compute your taxes for you. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-4 STA: DISC: Taxes
56. A married couple filing a joint return has Ms. Cindy Cook, a CPA, complete their return. The IRS will hold only Ms. Cook responsible for any errors on the return. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-4 STA: DISC: Taxes
57. Tax preparers must be licensed by either the state of federal government. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-5 STA: DISC: Taxes
58. Anyone can legally prepare tax returns and charge a fee for that service. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-5 STA: DISC: Taxes
59. Marginal tax and average tax rate refer to the same thing. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
60. If you earn less than $15,000, you probably pay more in social security taxes than in federal income taxes. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 3-1 STA: DISC: Taxes
61. Opening a traditional IRA would allow you to defer taxes on the earning. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 3-6 STA: DISC: Taxes
62. Opening a traditional IRA would allow you to take advantage of tax free earnings. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 3-6 STA: DISC: Taxes
63. Tax-deferred income is better than tax-free income. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 3-6 STA: DISC: Taxes
64. Municipal bond investments typically provide tax-free interest income. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-6 STA: DISC: Taxes
65. Most states generate the majority of their revenues from property taxes. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 3-1 STA: DISC: Taxes
66. Tax avoidance is a legal means to minimize tax liabilities. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-6 STA: DISC: Taxes
67. Tax evasion is a legal means to avoid tax liabilities. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-6 STA: DISC: Taxes
68. Persons who work for more than one employer in any year will owe more Social Security taxes than if all their income was earned from a single employer. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 3-1 STA: DISC: Taxes
69. The amount of one personal exemption in 2011 was $3,700. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
KEY: Bloom's: Knowledge 70. The regular income tax filing deadline is April 1 of each year. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-4 STA: DISC: Taxes
71. By filing a tax extension, one does not have to pay his income tax liability until August 15. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-4 STA: DISC: Taxes
72. Income shifting refers to the process of transferring income from the taxpayer to the IRS. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 3-6 STA: DISC: Taxes
73. The standard deduction in 2011 for a single filer is $5,800 and for married persons filing jointly is $11,600. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
74. A special tax provision reduced the social security portion for the individual taxpayer by 2%
in 2011 and 2012. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 3-1 KEY: Bloom's: Knowledge
75. Most major software providers have free online versions for preparing federal taxes for all
taxpayers. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 3-5 KEY: Bloom's: Knowledge
76. You are more likely to have your tax return audited if you work for a for-profit company, compared to a non-profit organization. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 3-4 KEY: Bloom's: Knowledge
77. The tax year corresponds to the April 15 filing deadline, with a new tax year beginning April
16th. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 3-4 KEY: Bloom's: Knowledge
78. The AMT includes in taxable income certain types of deductions otherwise allowed, such as
state and local income and property taxes.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 3-2 KEY: Bloom's: Knowledge
MULTIPLE CHOICE 1. The federal government gets the majority of its revenue from the ____ tax. a. sales b. property c. excise d. income e. estate ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
2. Over 75% of the revenue received by the federal government is from ____ and ____ taxes. a. sales and income b. income and excise c. Social Security and estate d. estate and sales e. income and Social Security ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
3. The federal income tax is a. integrative. b. regressive. c. progressive. d. flat rate. e. none of the above. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
4. A progressive tax system is one in which higher-income people pay ____ than lower-income people. a. a higher dollar amount in taxes b. tax at a higher rate c. a lower dollar amount in taxes d. tax at a lower rate e. tax at the same rate ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
5. Henry is married to Lillian, and they have two dependent children. Henry can legally file using which of the following filing statuses? a. Single b. Married filing jointly
c. Head of household d. Qualifying widow e. Any of the above ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
6. Pete and Pam are married with four dependent children. Pete and Pam can legally file using which of the following filing statuses? a. married filing separately b. married filing jointly c. head of household d. a and b e. a, b, and c ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
7. Mandi and Thomas were married and had one child, age 7. Mandi died in 2011 leaving Thomas a single parent. In 2012, the most favorable filing status for Thomas will be a. single b. married filing separately c. head of household d. qualifying widow e. any of the above ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 3-1 STA: DISC: Taxes
8. Molly and Jason were married. Their only "dependent" was Spot, their black standard poodle. Jason died in 2011. Assuming she does not remarry, in 2012 the only legal filing status for Molly will be a. single b. married filing separately c. head of household d. qualifying widow e. any of the above ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
9. For tax purposes, head-of-household refers to a. the person with the larger income when a couple is filing a joint return. b. a single individual with dependents. c. a single individual who owns a home. d. the spouse who has the only income for a couple filing a joint return. e. a widow(er) with no dependents but with debts from death of spouse three years earlier. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
10. Your take-home pay is what you are left with after subtracting withholdings from your a. gross earnings. b. net earnings. c. taxable income. d. adjusted gross income. e. tax exempt income. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
11. ____ income is gross income less tax deductions and payments for insurance and retirement savings. a. Take-home b. EBIT c. Adjusted gross d. Taxable e. Tax-exempt ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
12. Your income tax withholding is dependent on a. income level and deductions. b. deductions and age. c. income level and number of withholding allowances. d. number of withholding allowances and deductions. e. number of withholding allowances and dependents. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
13. The standard deduction is a blanket deduction that depends on the taxpayers a. filing status b. age c. vision d. all of the above. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
14. In 2011, the total Social Security tax was a. 6.0%. b. 6.75%. c. 7.25%. d. 11%. e. 13.3%. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
15. Which of the following is NOT one of the three basic categories for individual income?
a. b. c. d.
active income passive income gross income portfolio income
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
16. Ben and Jack both earned $60,000 this year. Ben (age 30) is married with two children, and Jack (age 68) is single with no dependents. Which of the following is true regarding the amount of Social Security taxes they will pay? a. They will pay the same amount of Social Security taxes. b. Ben will pay less Social Security taxes because he is married. c. Ben will pay less Social Security taxes because he has children. d. Jack will pay less Social Security taxes because he is single. e. Jack will pay less Social Security taxes because he is over age 65. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
17. ____ income is subject to federal taxes. a. Gross b. Adjusted gross c. Net d. Take-home e. Taxable ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
18. You would typically not include ____ in your gross income. a. wages and salaries b. life insurance death benefit payments c. interest and dividends d. pension income e. gambling winnings ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
19. ____ would be considered taxable income. a. An inheritance from your grandmother's estate b. A gift from your aunt c. Child support payments d. Alimony received e. A tuition scholarship ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
20. ____ would not be considered taxable income. a. Child support payments b. Proceedings from an employer retirement plan c. Dividend income d. a and b e. a, b, and c ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
21. A capital gain is the result of a. selling an asset for less than purchase price. b. holding an asset that has appreciated. c. selling an asset at the same price of purchase. d. selling an asset for more than purchase price. e. None of these. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
22. The tax rate on capital gains for most people is a. the same as on regular income. b. dependent on the time the asset was owned. c. dependent on the amount of profit earned. d. higher than the rate on regular income. e. None of these. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
23. Tom sold mutual fund shares he had owned 3 years so that he could use the proceeds to return to college. Tom is in the 15% marginal tax bracket and his capital gains from this sale were $11,000. How much tax would Tom owe on those gains? a. $11,000 b. $ 3,080 c. $ 1,650 d. $ 1,100 e. $ 550 ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
24. Diana sold mutual fund shares she had owned 4 years so that she could use the proceeds to travel across Europe with her son. Diana is in the 35% marginal tax bracket and her capital gains from this sale were $30,000. How much tax would Diana owe on those gains? a. $10,500 b. $ 8,400 c. $ 6,000 d. $ 4,500 e. $ 1,500
ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
25. You purchased and lived in your home 8 years. Now you have received an excellent promotion, but you will have to sell your home and move to another community. The capital gains on the home sold will a. be taxable as ordinary income. b. be taxable at the 15% tax bracket. c. be taxable at the appropriate long-term capital gains rate. d. not be taxable because the home was your principal residence. e. not be taxable because this is a job-related move. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
26. Murray (age 68, single) just sold his home of 35 years so that he could relocate nearer his grandchildren. He realized a $400,000 capital gain on the home. How much of this gain will Murray have to pay taxes on? a. $400,000 b. $300,000 c. $250,000 d. $150,000 e. $ 0 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
27. Maria and Ed just sold their home of 20 years so that they could purchase a smaller home. They realized a $400,000 capital gain on the home. How much of this gain will Maria and Ed have to pay taxes on? a. $400,000 b. $300,000 c. $250,000 d. $100,000 e. $ 0 ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
28. Which of the following can be adjustment(s) to gross income on the 1040 form? a. Health insurance premiums paid by self-employed individuals b. Alimony paid c. Moving expenses d. a and b only e. a, b, and c ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-3 STA: DISC: Taxes
29. Which of the following cannot be adjustment(s) to gross income on the 1040 form?
a. b. c. d. e.
Health insurance premiums paid by self-employed individuals Alimony paid Moving expenses Traditional IRA contributions Child care deductions
ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-3 STA: DISC: Taxes
30. Molly and Justin are considering contributing $5,000 to their favorite, tax deductible charity. This contribution will bring their total itemized deductions to $20,000. Assuming they are in the 28% marginal tax bracket, how much will they save in taxes by contributing this $5,000 to charity? a. $ 0 b. $ 840 c. $1,400 d. $2,000 e. $5,000 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 3-3 STA: DISC: Taxes
31. John and Charlotte are considering contributing $1,000 to their church. This contribution will bring their total itemized deductions to $2,000. Assuming they are in the 15% marginal tax bracket, how much will they save in taxes by contributing this $1,000 to their church? a. $ 0 b. $ 150 c. $ 300 d. $ 500 e. $1,000 ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 3-3 STA: DISC: Taxes
32. Medical and dental expenses may be included as itemized deductions a. when they exceed 4% of adjusted gross income. b. up to a maximum of $7,500 per individual per tax year. c. only if they do not exceed 7% of gross income. d. only in the amount in excess of 7.5% of adjusted gross income. e. always. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
33. Mr. and Mrs. Davenport have three children ages 3, 6, and 13. Their financial matters for 2011 are as follows: Adjusted Gross Income Un-reimbursed Medical Expenses
$65,000 $ 5,250
How much would the Davenports' medical expenses contribute to their total itemized deductions? a. $ 0
b. c. d. e.
$ 375 $3,500 $2,750 $4,500
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
34. Mr. and Mrs. Sanborn are retired and have had several medical problems this year. Their financial matters for 2008 are as follows: Adjusted Gross Income Un-reimbursed Medical Expenses
$65,000 $14,500
How much would the Sanborns' medical expenses contribute to their total itemized deductions? a. $ 0 b. $ 4,875 c. $ 7,500 d. $ 9,625 e. $14,500 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
35. Buddy Slaton has only one itemized deduction item, the $3,000 he gave to his church. His standard deduction this year is $5,450, and he is in the 15% marginal tax bracket. How much will his contribution to the church save Buddy in taxes this year? a. $4,400 b. $3,000 c. $ 660 d. $ 450 e. $ 0 ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
36. Itemized non-business expenses do not include a. charitable contributions. b. state income taxes. c. residential mortgage interest. d. medical expenses. e. life insurance premiums. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
37. If you do not wish to itemize deductions, you can use the a. pay-as-you-go amount. b. bracket deduction. c. standard deduction. d. exemption.
e. withholding allowance. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
38. Connie is a 20 year old college student who earned $8,000 and spent it all on her support during the year. Her parents may claim her as a tax dependent as long as a. they contribute more than half her support for the year. b. she is under 21. c. she makes under $10,000. d. she lives at home. e. all these things are true. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
39. Jackson is a 25 year old college student whose parents contribute to his support. His parents may claim him as a tax dependent in 2011 as long as a. they contribute more than half of his support for the year. b. he is under 30. c. he makes under $500. d. a and c. e. a, b, and c. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 3-2 STA: DISC: Taxes
40. For 2011, each personal exemption reduced taxable income by a. $2,800 b. $3,000 c. $3,700 d. $3,900 e. $4,000 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
41. The total amount that you owe for income tax in one year is your tax a. withholdings. b. credit. c. rate. d. refund. e. liability. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge 42. Tax credits reduce your a. tax liability. b. adjusted gross income.
DIF: Easy OBJ: LO: 3-3 STA: DISC: Taxes
c. tax refund. d. tax withholding. e. taxable income. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 3-3 STA: DISC: Taxes
43. Mr. and Mrs. McMurray have three children ages 3, 6, and 12 for which they paid $6,000 in child care expenses this year. Assume the McMurray's tax liability is initially calculated to be $10,000. Then apply a 20% tax credit for child care expenses within limits normally allowed. How much will their final tax liability be? a. $ 8,000 b. $ 8,500 c. $ 8,800 d. $ 9,040 e. $10,000 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 3-3 STA: DISC: Taxes
44. Jamil and Vicki have one child, age 3, for which they paid $2,500 in child care expenses this year. If they are eligible for the 20% dependent care credit plus the child tax credit, how much will these two credits reduce their tax liability? a. $ 500 b. $1,500 c. $2,000 d. $2,500 e. $3,000 ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 3-3 STA: DISC: Taxes
45. You have no employer provided pension plan; your IRA contributions are treated as a. an adjustments to gross income. b. an additional personal exemption. c. part of the standard deduction. d. an itemized deduction. e. a tax credit. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
46. A ____ would be most likely to have to pay estimated taxes. a. school teacher b. manager for a major industrial firm c. self-employed plumber d. union worker e. corporate attorney ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 3-4 STA: DISC: Taxes
KEY: Bloom's: Application 47. On which of the following types of income would you normally have income tax withheld? a. Tips b. Interest c. Dividends d. Capital gains e. Self-employment income ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 3-2 STA: DISC: Taxes
48. A declaration of estimated taxes is made by filing a. Schedule B. b. Form 1040 EZ. c. Schedule Z. d. Form 1040 ES. e. Form 1040 A. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-4 STA: DISC: Taxes
49. You made an error when you filed your tax return last year. You can correct this error by filing Form a. 1040ES. b. 1040X. c. 1040E. d. Schedule A. e. Schedule D. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-4 STA: DISC: Taxes
50. A tax audit is a(n) a. IRS revision of previously filed return. b. IRS attempt to verify accuracy of return. c. IRS charge of illegal action. d. U.S. Tax Court action. e. U.S. Tax Court decision. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-4 STA: DISC: Taxes
51. Which of the following offer tax preparation services? a. National and local tax services b. Certified Public Accountants (CPAs) c. Enrolled Agents (EAs) d. Tax Attorneys e. All of the above can offer tax preparation services ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 3-5 STA: DISC: Taxes
KEY: Bloom's: Knowledge 52. You are preparing your own tax return. The least costly source for answering your questions would be a. IRS 800 numbers. b. private preparation service. c. tax accountant. d. tax lawyer. e. local post office. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-5 STA: DISC: Taxes
53. Your average tax rate is your a. adjusted gross income divided by tax withheld. b. adjusted gross income divided by tax liability. c. tax liability divided by taxable income. d. taxable income divided by tax withheld. e. gross income divided by tax refund. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-1 STA: DISC: Taxes
54. The proper name of the so-called short form is a. Schedule A. b. Schedule B. c. 1040. d. 1040A. e. 1040EZ. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-4 STA: DISC: Taxes
55. The Robertsons, a couple with an AGI of $28,500, decided to contribute the maximum amount possible towards their IRAs even though Mr. Robertson had a pension plan at work. He named his wife as beneficiary of the IRA. What is such a tax strategy called? a. tax deferral since he'll have to pay taxes later when he withdraws the money b. tax avoidance since he'll never have to pay taxes on the IRA contribution c. tax evasion since this is illegal d. tax ignorance since he can't deduct the contribution anyway due to his pension plan at work e. income shifting to another person in a lower tax bracket ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 3-6 STA: DISC: Taxes
56. Which of the following are legal methods of reducing your current tax liability? a. not reporting taxable income you receive b. investing in a tax deferred annuity c. shifting income to your children d. writing off deductions above the actual amount(s) spent e. b and c
ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 3-6 STA: DISC: Taxes
57. The income shifting tax strategy is least effective when income producing gifts are given to persons a. over age 65. b. over age 50. c. under age 14. d. under age 25. e. Age is not an issue. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 3-6 STA: DISC: Taxes
58. Itemized deductions are listed on Schedule a. A. b. B. c. C. d. D. e. F. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 3-3 STA: DISC: Taxes
59. Local governments get most of their tax revenue from a. property taxes. b. sales taxes. c. licensing fees. d. excise taxes. e. income taxes. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
60. Typically state governments get most of their tax revenue from a. property taxes and excise taxes. b. sales taxes and income taxes. c. licensing fees and income taxes. d. excise taxes and sales taxes. e. income taxes and property taxes. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-1 STA: DISC: Taxes
61. Which of the following state and local taxes are deductible on federal income taxes for those that itemize deductions? a. property taxes and excise taxes. b. sales taxes and income taxes. c. licensing fees and income taxes. d. excise taxes and sales taxes.
e. income taxes and property taxes. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-2 STA: DISC: Taxes
62. Tax practitioners that are Federally licensed are called a. Certified Public Accountants b. Certified Financial Planners c. Tax Attorneys d. Enrolled Agents e. None of the above ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 3-5 STA: DISC: Taxes
63. A special tax provision reduced the social security portion for the individual taxpayer in 2011
and 2012 by a. b. c. d. e.
1.0% 2.0% 3.0% 4.0% 5.0%
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 3-1 KEY: Bloom's: Knowledge
64. All major software providers have online versions for preparing federal taxes. This software
is a. b. c. d. e.
free to all tax filers free to qualified tax filers for a fee for all tax filers available on a free trial to all tax filers available on a free trial to qualified tax filers
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 3-5 KEY: Bloom's: Knowledge
65. Who would be most likely to have to pay estimated taxes? a. insurance salesman b. teacher c. corporate manager d. state worker e. state police ANS: A PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 3-4 KEY: Bloom's: Analysis
66. A taxpayer can file for an automatic extension of ___ months. a. 2 b. 4 c. 6 d. 9 e. 12
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 3-4 KEY: Bloom's: Knowledge
67. To qualify for the capital gain exclusion on a home sale, the seller must have resided in the residence for ___ of the previous 5 years. a. 1 b. 2 c. 3 d. 4 e. 5 ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 3-2 KEY: Bloom's: Knowledge
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 1. Tax [avoidance | evasion] is a perfectly legal practice. ANS: a PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
2. Tax [avoidance | evasion] focuses on reducing taxes in ways that are legal and compatible with the intent of Congress. ANS: a PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
3. Tax [avoidance | evasion] involves failure to accurately report income or deductions, and, in extreme cases, a failure to pay taxes altogether. ANS: b PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
4. The major source of revenue for the federal government is [income | Social Security] taxes. ANS: a PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
5. Tax planning is [confined to the first quarter of the year | a year-round activity]. ANS: b
PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
6. The lowest marginal tax rate is currently [10% | 35%]. ANS: a PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
7. The highest marginal tax rate is currently [35% | 28%]. ANS: a PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
8. Your income tax filing status is determined primarily by your [income | marital] status. ANS: b PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
9. Federal income taxation is [progressive | regressive]. ANS: a PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
10. Christy lives by herself with her dog, Tex. She [can | cannot] use the Head of Household filing status. ANS: b PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
11. Usually a married couple will pay less income tax if they file [jointly | separately]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
12. The common name for Federal Insurance Contribution Act payments is [income taxes | social security]. ANS: b PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
13. [Both you and your employer | Only your employer] will make social security contributions based on your wages. ANS: a PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
14. When matching Social Security contributions, employers pay [the same | a lesser] amount of Social Security taxes as/than the employee. ANS: a PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
15. Your marital status [will | will not] have an effect on the amount of social security tax you pay. ANS: b PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
16. The IRS definition of [gross | adjusted] income is "all income that is subject to federal taxes." ANS: a PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
17. [Alimony | Child support] would be reported as taxable income. ANS: a PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
18. Dividends received from stocks are known as [passive | portfolio] income. ANS: b PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
19. Earnings from real estate investments are an example of [active | passive] income. ANS: b PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
20. Qualified dividends are taxed at the same rates as [earned income | long-term capital gains]. ANS: b
PTS: 1 DIF: Challenging STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
21. You will have to list and be able to prove [standard | itemized] deductions if audited. ANS: b PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
22. [All | Some] of your medical expenses during the year could be taken as an itemized deduction. ANS: b PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
23. Interest you paid on your [car | house] loan could be deducted. ANS: b PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
24. Interest you paid on your [vacation home | stereo] loan could be deducted. ANS: a PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
25. Your tax filing status [would | would not] be a factor in determining the amount of standard deduction you could take. ANS: a PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
26. My son, age 21, earned $5,000 last year. He still lives at home, and I provide over 50% of his support. I [can | cannot] claim him as a dependent on my tax return if he is a full time college student. ANS: a PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
27. My son, age 26 and a full-time college student, earned $5,000 last year. He still lives at home, and I provide over 50% of his support. I [can | cannot] claim him as a dependent on my tax return. ANS: b PTS: 1
DIF: Moderate
OBJ: LO: 3-1
NAT: BUSPROG: Analytic skills
STA: DISC: Taxes
KEY: Bloom's: Application
28. If you are claimed as a dependent on your parents' tax return, you [may also | may not] claim yourself on your tax return. ANS: b PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
29. A tax credit would result from [an IRA contribution | child care expenses]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
30. A tax credit could result from [owning a home | adopting a child]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
31. A tax credit is subtracted from your [taxable income | tax liability]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
32. You are single with no dependents, age 30. Based on this information, you [could | could not] use the 1040EZ. ANS: a PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
33. You will itemize your deductions. You [could | could not] use the 1040A. ANS: b PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
34. There is a [high | low] chance that one's tax return will be audited in a given year. ANS: b PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
35. The higher your income, the [greater | smaller] the probability you will be audited.
ANS: a PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
36. If you ask the IRS a tax question and are given an incorrect answer, [you will still have to pay any additional tax owed | the IRS will forgive any additional taxes]. ANS: a PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
37. If you pay a professional to prepare your taxes, any errors on the return will be [your | the preparer's] responsibility. ANS: a PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
38. The terms "tax free" and "tax deferred" [do | do not] mean the same thing. ANS: b PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
39. The date by which your tax liability must be paid in order to avoid late payment penalties and/or interest is [April 15 | August 15]. ANS: a PTS: 1 DIF: Easy STA: DISC: Taxes
OBJ: LO: 3-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
40. When one gives a child an income producing asset, one is [maximizing their deductions | income shifting]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
41. Excise taxes are similar to [real estate | sales] taxes. ANS: b PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
42. Tax credits directly reduce a taxpayer's [taxes due | taxable income].
ANS: a PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
43. The standard or itemized deduction, reduces the taxpayer's [taxable income | taxes due]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
44. A special tax provision reduced the social security portion for the individual taxpayer in 2011
and 2012 from [6.2% to 4.2% | 4.2% to 2.2%]. ANS: a PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 3-1
NAT: BUSPROG: Analytic skills
45. Major software providers have online versions for preparing federal taxes which is [free to all
tax filers | free to qualified tax filers]. ANS: b PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 3-5
NAT: BUSPROG: Analytic skills
46. A special tax provision reduced the social security portion for the individual taxpayer by [1% |
2%] in 2011 and 2012. ANS: b PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 3-1
NAT: BUSPROG: Analytic skills
47. If you earn less than $15,000, you likely pay more in [federal income tax | social security taxes]. ANS: b PTS: 1 DIF: Moderate KEY: Bloom's: Analysis
OBJ: LO: 3-1
NAT: BUSPROG: Analytic skills
48. The tax year corresponds to the [April 15 filing deadline | calendar year]. ANS: b PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge PROBLEM
OBJ: LO: 3-4
NAT: BUSPROG: Analytic skills
1. Jamie has taxable income of $45,000. She is single and her tax rates are 10% on the first $7,000 of taxable income, 15% of the amount over $7,000 up to $28,400 of taxable income and 25% on the remainder. What is Jamie's tax liability, her marginal tax rate, and her average tax rate? (Show all work.) ANS: Tax liability = .10 ($7,300) + .15($29,700 - $7,300) + .25($45,000-$29,700) = $730+ $3,360 + $3,825 = $7,915 Marginal tax rate = 25% Average tax rate =
= .1759 or 17.59%
PTS: 1 DIF: Challenging STA: DISC: Taxes
OBJ: LO: 3-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
2. Shawn earned $65,000. If the total Social Security tax rate is 15.3% then how much was his social security tax? How much would his employer pay in social security taxes for Shawn? (Show all work.) ANS: Alex paid social security tax of $4,973 (.0765 $65,000). Alex's employer would also pay $4,973. PTS: 1 DIF: Moderate STA: DISC: Taxes
OBJ: LO: 3-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
3. From the information given below, determine Marcie's gross income for tax purposes: salary interest (checking account) cash received as birthday gift dividends (mutual funds) inheritance received on father's death cash received from insurance for accident claim settlement cash dividend from stock
$ 40,000 50 900 500 $ 22,000 $ 3,200 $ 750
$ $ $
ANS: $40,000 + 50 + 500 + 750 = $41,300 PTS: 1 DIF: Challenging STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
4. From the information given below, determine Steve's gross income for tax purposes: salary interest (checking account) cash received as birthday gift dividends (mutual funds) child support payments received from ex-wife life insurance benefits received from aunt's death
$
$ 32,000 25 $ 1,000 $ 5,500 $ 24,000 $ 50,000
ANS: $32,000 + 25 + 5,500 = $37,525 PTS: 1 DIF: Challenging STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
5. Sue and Tim are married taxpayers in the 33% marginal tax bracket. In 2011, they sold common stock shares for a long-term capital gain of $3,800. They also sold some technology stock for a long-term capital loss of $9,000. In addition, they sold the home they had lived in for the past 10 years and experienced a $75,000 gain on the house. How much will their net capital gains (or losses) be for 2011? How much will they pay (or save) in taxes as a result of these transactions? ANS: $3,000 capital loss this year with a $2,200 capital loss carryover for next year. The capital gain on the house is tax-free, and they are limited to a $3,000 net loss/year. $3,000 .33 = $990 tax savings in 2011 as a result of the loss PTS: 1 DIF: Challenging STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
6. Hector is a single taxpayer in the 28% marginal tax bracket. In 2011, he sold stock shares for a long-term capital gain of $8,500. He also sold some financial services stock for a long-term capital loss of $2,000. In addition, he sold the home that he had lived in for the past 3 years and experienced a $15,000 gain on the house. How much will his net capital gains (or losses) be for 2011? How much will he pay (or save) in taxes as a result of these transactions? ANS: $6,500 long-term capital gain this year. The capital gain on the house is tax-free. $6,500 .15 = $975 tax liability in 2011 as a result of the gain PTS: 1 DIF: Challenging STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
7. George has the following expenses that he wants to include as itemized deductions for the year. His adjusted gross income is $60,000. What is the total itemized deduction he can take? (Show all work.) Medical expenses Home mortgage interest Credit card interest Charitable contributions State property taxes Job related expenses ANS: Medical expenses {$4,500 - (.075 $60,000)} Home mortgage interest Credit card interest (not allowed) Charitable contributions State property tax Job related expenses
$4,500 8,000 450 1,500 2,400 1,900
$
0 8,000 1,500 2,400 700
{$1,900 - (.02 $60,000)} $12,600 PTS: 1 DIF: Challenging STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
8. George, from the previous problem, is single and his standard deduction for the year is $5,800. If he is in the 25% marginal tax bracket, how much tax would he save by using his itemized deductions? ANS: ($12,600 - 5,800) .25 = $1,700.00 PTS: 1 DIF: Challenging STA: DISC: Taxes
OBJ: LO: 3-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
Chapter 4—Managing Your Cash and Savings TRUE/FALSE 1. One could expect to earn a higher rate of interest on a certificate of deposit than on a checking account. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-1 STA: DISC: Banking and Interest
2. A passbook savings account may be a useful tool in managing everyday household transactions. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 4-3 STA: DISC: Banking and Interest
3. Saving accounts are sometimes referred to as demand deposits. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-3 STA: DISC: Banking and Interest
4. Specialization within the financial institutions industry continues to increase. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-2 STA: DISC: Banking and Interest
5. The rate of return on liquid assets is relatively high compared to other types of investments. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 4-3 STA: DISC: Banking and Interest
6. NOW accounts are appropriate for people who need to keep substantial amounts of money in a checking account. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 4-3 STA: DISC: Banking and Interest
7. Credit unions typically pay higher rates of return on savings than banks and savings and loan associations. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-2 STA: DISC: Banking and Interest
8. There is a penalty for early withdrawal of funds from CDs purchased from brokerage firms. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 4-3 STA: DISC: Banking and Interest
KEY: Bloom's: Knowledge 9. Certificates of deposit can be purchased only at banks, savings and loan associations, and credit unions. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
10. One can avoid early withdrawal penalties on CDs by purchasing them through brokerage firms. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
11. Money market mutual funds are insured up to $250,000 by the FDIC if purchased at an insured bank. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 4-3 STA: DISC: Banking and Interest
12. Money market deposit accounts are insured by the FDIC if purchased at an insured bank. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-3 STA: DISC: Banking and Interest
13. FDIC covers stocks, bonds, and mutual funds purchased at banks. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 4-2 STA: DISC: Banking and Interest
14. Asset management accounts are protected by the Federal Deposit Insurance Corporation. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 4-3 STA: DISC: Banking and Interest
15. There are some limitations on check writing for both MMDAs and MMMFs. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-3 STA: DISC: Banking and Interest
16. Asset management accounts combine many cash management services into one account. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-3 STA: DISC: Banking and Interest
17. S&Ls represent the largest segment of the financial institutions industry. ANS: F
PTS: 1
DIF: Moderate
OBJ: LO: 4-2
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
STA: DISC: Banking and Interest
18. Another term for the interest paid by credit unions on deposits is dividends. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-2 STA: DISC: Banking and Interest
19. The main business of an S&L is to provide home mortgage and home improvement loans. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-2 STA: DISC: Banking and Interest
20. Savings and loan associations (S & Ls) channel the savings of depositors primarily into automotive loans. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-2 STA: DISC: Banking and Interest
21. Savings and loan associations usually offer non-interest bearing checking accounts. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-2 STA: DISC: Banking and Interest
22. The annual percentage yield (APY) formula considers compounding when determining an interest rate. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 4-5 STA: DISC: Banking and Interest
23. Savings banks are mainly found in the northeastern U.S. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-2 STA: DISC: Banking and Interest
24. Credit unions are mainly found in the northeastern U.S. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-2 STA: DISC: Banking and Interest
25. Credit union members are expected to have some common bond. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-2 STA: DISC: Banking and Interest
26. The prime candidate for using an Internet bank is a person who rarely visits their bank.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Easy OBJ: LO: 4-3 STA: DISC: Banking and Interest
27. From the bank's perspective, ATM transactions are more costly than on-line banking transactions. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 4-3 STA: DISC: Banking and Interest
28. EFTS allow you to make payments that occur on a regular basis. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-3 STA: DISC: Banking and Interest
29. Convenience and improved record keeping are two advantages sited for on-line bill payment. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-3 STA: DISC: Banking and Interest
30. Money Market Mutual Funds invest in long-term treasury securities and other types of bonds. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 4-3 STA: DISC: Banking and Interest
31. A regular savings account is a demand deposit. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-3 STA: DISC: Banking and Interest
32. As of 2012, the FDIC insures depositor's funds up to $250,000 at member banks. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-2 STA: DISC: Banking and Interest
33. Banks and other financial institutions insure the contents of safe-deposit boxes. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 4-3 STA: DISC: Banking and Interest
34. Financial institutions expect demand deposits to remain on deposit for a longer period of time than time deposits. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 4-3 STA: DISC: Banking and Interest
35. A money market mutual fund is one way to participate indirectly in the purchase of money market securities. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-3 STA: DISC: Banking and Interest
36. If one wanted to make monthly deposits to accumulate funds for future expenditures, a money market account would be an appropriate savings vehicle. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 4-3 STA: DISC: Banking and Interest
37. Asset management accounts are offered by most banks and are typically FDIC insured. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-3 STA: DISC: Banking and Interest
38. Most credit unions provide their members with deposit insurance. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-2 STA: DISC: Banking and Interest
39. As of 2012, if your account balances at a bank are $115,000, you will have depositor's insurance for up to $250,000. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-2 STA: DISC: Banking and Interest
40. Mary Young has a checking account in her name and a joint savings account with her husband at her bank. The maximum amount of deposit insurance she has is $100,000. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 4-2 STA: DISC: Banking and Interest
41. If Suzie has $2,000 in checking, $50,000 in a money market account, and $75,000 in certificates of deposit (all individual accounts) at her local bank, her accounts would be completely insured through FDIC. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 4-2 STA: DISC: Banking and Interest
42. If Lois has $2,000 in checking, $50,000 in a money market account, and $75,000 in certificates of deposit (all individual accounts) at her local bank, her accounts would be insured through FDIC for $100,000. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 4-2 STA: DISC: Banking and Interest
KEY: Bloom's: Application 43. Debit and ATM card transactions are linked to your checking account. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-3 STA: DISC: Banking and Interest
44. Although there are no legal minimum balances for a NOW account, many institutions impose their own requirement, often between $500 and $1,000 before they pay any interest. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-3 STA: DISC: Banking and Interest
45. ATM transactions require the use of a PIN. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-3 STA: DISC: Banking and Interest
46. Internet-only banks typically pay lower interest rates on savings than traditional banks. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-3 STA: DISC: Banking and Interest
47. Stop-payment services are easier with electronic funds transfers than with traditional check payments. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
48. Treasury bills are sold at their face value. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-6 STA: DISC: Banking and Interest
49. Treasury bills are sold at a discount of their maturity value. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-6 STA: DISC: Banking and Interest
50. The minimum denomination for Treasury bills is now $1,000. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-6 STA: DISC: Banking and Interest
51. If your bank states that it compounds monthly, the effective interest rate (APY) will be greater than the nominal interest rate.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
52. Your savings will grow faster with monthly interest compounding than with quarterly interest compounding. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
53. Compound interest means that a savings account earns interest on the interest previously earned. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
54. A certified check is a personal check that the bank guarantees the funds are available. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-4 STA: DISC: Banking and Interest
55. A bank could advertise as "free" a checking account that requires a minimum balance of $3,000 to avoid monthly service charges. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 4-4 STA: DISC: Banking and Interest
56. Joint checking accounts typically imply the right of survivorship if one party should die. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
57. You can stop payment when you purchase an item with your debit card. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
58. The rate of return on a Series EE savings bond will be constant over the life of the bond. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 4-6 STA: DISC: Banking and Interest
59. The rate of return on a Series EE savings bond changes semiannually. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 4-6 STA: DISC: Banking and Interest
60. Series EE Savings bonds are now called Patriot Bonds. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-6 STA: DISC: Banking and Interest
61. The key to a successful savings program is to save regularly. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 4-5 STA: DISC: Banking and Interest
62. You should invest in long-term CDs when you expect interest rates to fall. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 4-6 STA: DISC: Banking and Interest
63. The nominal rate of interest will be lower than the effective rate of interest when an account compounds monthly. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
64. You put $1,000 into a 12-month certificate of deposit. After seven months, you really need the money. The bank will let you have it before 12 months, but you will pay a penalty. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 4-6 STA: DISC: Banking and Interest
65. A major reason for overdrafts is the inability of a check writer to keep an accurate check ledger. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
66. A stop payment results in an absolute promise by the bank not to pay the indicated check. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 4-4 STA: DISC: Banking and Interest
67. A cashier's check is written on the bank's account rather than on a customer's account. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
68. A certified check is written on the bank's account rather than on a customer's account. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
KEY: Bloom's: Comprehension 69. Low interest rates that have persisted since the financial crisis of 2008-09 have been a net benefit to retirees. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 4-5 KEY: Bloom's: Analysis
70. Lower borrowing costs encourage the substitution of debt for equity in corporate capital structures, which increases financial risk. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 4-1 KEY: Bloom's: Synthesis
71. Low interest rates encourage the substitution of capital for labor, thereby depressing employment. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 4-1 KEY: Bloom's: Analysis
72. Low interest rates have increased the supply of credit. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 4-1 KEY: Bloom's: Analysis
73. With low interest rates, savers have begun investing in stock where higher yields can be found. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills 74.
DIF: Moderate OBJ: LO: 4-1 KEY: Bloom's: Analysis
In the wake of the recent financial crisis, the U.S. personal saving rate decreased. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 4-1 KEY: Bloom's: Knowledge
MULTIPLE CHOICE 1. Factors typically influencing the choice of where to maintain a checking account are: a. convenience and cost b. convenience and services c. cost and services d. convenience, services, and cost ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 4-3 STA: DISC: Banking and Interest
2. Money Market Deposit Accounts a. allow unlimited check writing. b. are typically federally insured. c. have stated maturity dates. d. are offered only by credit unions. e. all of these. ANS: B
PTS: 1
DIF: Moderate
OBJ: LO: 4-3
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
STA: DISC: Banking and Interest
3. Money Market Mutual Funds a. allow check writing. b. are typically federally insured. c. have stated maturity dates. d. are offered by banks, S & Ls, and credit unions. e. all of these. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-3 STA: DISC: Banking and Interest
4. Which of the following would be an appropriate savings vehicle if you expected interest rates to fall over the next few months? a. money market deposit account b. money market mutual fund c. certificate of deposit d. Series EE US savings bond e. a and b ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 4-6 STA: DISC: Banking and Interest
5. Janice Sanders plans on saving $12,000 for 3 years until she returns to college for her master's degree in personal financial planning. She would like to receive a fixed rate of return over that period. Which of the following would you recommend? a. money market deposit account b. 1-year certificate of deposit c. 3-year certificate of deposit d. Series EE US savings bond e. b or c ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-6 STA: DISC: Banking and Interest
6. When an S & L is a mutual association, it means that it is owned by the a. borrowers. b. creditors. c. depositors. d. management. e. local government. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-2 STA: DISC: Banking and Interest
7. Historically, the primary purpose of savings and loan associations was to a. provide passbook accounts paying interest above that of commercial banks. b. compete directly with commercial banks. c. provide NOW accounts. d. provide demand deposits.
e. channel savings into mortgages. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-2 STA: DISC: Banking and Interest
8. Credit unions are a. mutual associations. b. mortgage lenders. c. available to the general public. d. special commercial lenders. e. not providers of insured deposits. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-2 STA: DISC: Banking and Interest
9. Compared to other depository financial institutions, credit unions a. are run to benefit their members. b. pay higher interest on savings. c. charge lower rates on loans. d. all of the above are true. e. none of the above are true. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 4-2 STA: DISC: Banking and Interest
10. Which of the following are important safeguards when using on-line banking? a. guarantees to protect you against losses b. FDIC insurance c. 128-bit encryption d. firewall to protect data e. all of the above ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 4-3 STA: DISC: Banking and Interest
11. There are numerous advantages and disadvantages of on-line bill payment systems. Which of the following is a potential advantage? a. privacy b. FDIC insurance c. round-the-clock help d. efficient start-up e. use of float ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-3 STA: DISC: Banking and Interest
12. The minimum denomination of T-bills you can buy is a. $1,000. b. $5,000. c. $10,000.
d. $20,000. e. none of these. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-6 STA: DISC: Banking and Interest
13. Share draft accounts are commonly offered by a. commercial banks. b. savings and loan associations. c. mutual savings banks. d. credit unions. e. insurance companies. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-2 STA: DISC: Banking and Interest
14. A(n) ____ is not an interest-bearing account. a. money market mutual fund b. money market deposit account c. NOW account d. asset management account e. regular checking account ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-3 STA: DISC: Banking and Interest
15. A ____ is an interest-bearing checking account. a. certificate of deposit b. Treasury bill c. NOW account d. Series EE US savings bond e. regular checking account ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 4-3 STA: DISC: Banking and Interest
16. Connie Shockey wants to put funds in an account that does not offer checking privileges because she has a tendency to overspend. Which of the following would fit her criteria? a. NOW account b. A DDA with overdraft protection c. money market mutual fund d. money market deposit account e. certificate of deposit ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 4-3 STA: DISC: Banking and Interest
17. The more frequently a bank compounds interest, ____ will be. a. the higher the stated interest rate b. the lower the stated interest rate
c. the higher the APY d. the lower the APY e. a and c ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-5 STA: DISC: Banking and Interest
18. Commercial banks are insured by the a. Financial Deposit Insurance Association. b. Federal Depositors Assurance Corporation. c. Federal Deposit Insurance Corporation. d. Financial Deposit Insurance Company. e. Federal Demand Deposit Corporation. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 4-2 STA: DISC: Banking and Interest
19. Which of the following would be best suited to using an Internet bank? a. Nancy Johnson, a young businesswoman who uses bank financing regularly for her business b. Milan Sosa, an older gentleman who enjoys visiting his local banker c. Molly Peterson, a woman who uses multiple bank services including a safe-deposit box d. Fred Longoria, a man who uses checking and savings but never goes to his bank e. All of the above would be good candidates because the cost of Internet banking is lower than other types of banks. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-3 STA: DISC: Banking and Interest
20. Janie Long has checking and savings accounts in a federally insured financial institution. The maximum amount of her insurance coverage is a. $ 50,000 per account. b. $250,000. c. $100,000 per account. d. $200,000. e. $200,000 per account. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-2 STA: DISC: Banking and Interest
21. Christina works at a company that offers direct deposit of her paycheck. This service is called a. an ATM service. b. a FDIC service. c. a money market service. d. an EFT service e. an overdraft service. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 4-3 STA: DISC: Banking and Interest
22. Vicki Vasquez owns a six-month treasury bill that is four months from maturity. She recently encountered medical problems and needs the money now. She a. can request in writing for the treasury to pay her early. b. can sell the T-bill in the open market. c. will have to wait until the maturity date to get your money. d. can call a toll-free number to request the money. e. can go to the bank and withdraw the funds needed. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 4-6 STA: DISC: Banking and Interest
23. The most important rule for establishing a savings plan is to a. set realistic goals. b. take advantage of compounding. c. pay yourself first. d. keep it simple. e. try some gimmicks. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 4-5 STA: DISC: Banking and Interest
24. Which of the following is not a strategy to building your nest egg: a. make savings a priority b. reinvest interest and dividends c. splurge once in a while d. set up a retirement plan e. all the above are strategies. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
25. A lump sum deposit of $8,000 left in the bank for 12 years at 9% compounded annually will result in an ending balance of (select the closest answer) a. $11,600. b. $16,640. c. $22,480. d. $52,938. e. $96,000. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
26. Harry just received $2,000 for graduation. He plans on investing this money for five years at 8% compounded annually. If he accomplishes this, Harry will have in an ending balance of (Use time value tables or financial calculator) a. $2,160. b. $2,520. c. $2,608. d. $2,938. e. $3162.
ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
27. A deposit of $6,000 saved in a CD for 10 years at 3% will be worth (select the closest answer) a. $7,340. b. $7,800. c. $8,040. d. $8,678. e. $9,005. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
28. John Anderson deposited $10,000 in a CD for 3 years at 5%. It should now be worth (Use time value tables or financial calculator) a. $10,500. b. $10,725. c. $11,400. d. $11,580. e. $12,400. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
29. The Annual Percentage Yield is the same as the a. compound rate. b. real rate. c. simple rate. d. effective rate. e. nominal rate. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
30. If interest on a savings account is compounded semiannually, the effective rate of interest will be a. higher than the nominal rate. b. lower than the nominal rate. c. the same as the simple rate. d. equal to the nominal rate. e. lower than the simple rate. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
31. The stated interest rate on your account is 7.12%, interest paid semi-annually. Your effective rate of interest (APY) will be a. lower than 7.12% b. equal to 7.12%. c. greater than 7.12% d. depends if the compounding takes place within the same year.
e. none of these. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
32. The stated interest rate on your account is 5%, interest compounded monthly. If you deposit $50 each month, how much will you have in your account in 5 years? (Use time value tables or financial calculator) a. $3,000 b. $3,050 c. $3,200 d. $3,400 e. $4,350 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
33. The stated interest rate on your account is 3.5%, interest compounded monthly. If you deposit $100 each month, how much will you have in your account in 8 years? (Use time value tables or financial calculator) a. $ 9,600 b. $ 9,936 c. $11,060 d. $12,288 e. $12,350 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
34. If you invest $100 at 8% for one year, compounded semiannually, at the end of the year your balance will be (Use time value tables or financial calculator) a. $104.08. b. $108.00. c. $108.16. d. $112.12. e. none of these. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
35. If you invest $1,200 per year at the end of each year for 40 years at an 8% rate of return, you will have accumulated (Use time value table or financial calculator.) a. $ 48,000. b. $ 51,840. c. $310,862. d. $379,000. e. $384,000. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
36. Sandy wants to go on a trip in 10 years. If she invests $1,000 per year at the end of each year for 10 years at a 12% interest rate, she will accumulate ____ to spend on her trip (Use time value table or financial calculator.) a. $10,610. b. $12,130. c. $15,105. d. $16,710. e. $17,549. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
37. Gordon started saving $25 a month at age 20 in an account earning 4% compounded monthly. At age 40 he would have ____ in this account. (Use time value tables or financial calculator) a. $6,000 b. $7,170 c. $9,169 d. $9,255 e. $9,890 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
38. Terry started saving $50 a month at age 25 in an account earning 6% compounded monthly. At age 40 she would have ____ in this account. (Use time value tables or financial calculator) a. $ 5,252 b. $ 9,000 c. $ 9,540 d. $13,962 e. $14,541 ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-5 STA: DISC: Banking and Interest
39. Higher interest rates on certificates of deposit are associated with a. higher account balances. b. shorter maturities. c. longer maturities. d. a and b e. a and c ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 4-6 STA: DISC: Banking and Interest
40. Lower interest rates on certificates of deposit are associated with a. higher account balances. b. shorter maturities. c. longer maturities. d. a and b e. a and c
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 4-6 STA: DISC: Banking and Interest
41. Funds in a ____ must remain on deposit for a stated time period in order to avoid an interest penalty. a. certificate of deposit b. U.S. Treasury bill c. checking account d. mutual fund e. passbook savings ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 4-6 STA: DISC: Banking and Interest
42. An Asset Management Account provides a a. checking account. b. money market deposit account. c. brokerage account. d. line of credit. e. all of the above. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 4-3 STA: DISC: Banking and Interest
43. Joe Gustafson is a very busy person who likes to handle all his financial services needs with one account if possible. Which of the following types of accounts would best serve this need? a. b. c. d. e.
checking account. money market deposit account. brokerage account. asset management account. all of the above.
ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 4-3 STA: DISC: Banking and Interest
44. Whenever you write a check or make a deposit, an entry should be made on your a. deposit slip. b. checkbook ledger. c. check. d. ATM account. e. personal check. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 4-4 STA: DISC: Banking and Interest
45. The interest on your Series EE savings bonds a. will be taxable every year as it accrues. b. will be tax deferred until redemption. c. will be subject to both federal and state income taxes upon redemption. d. is tax free of both federal and state income taxes upon redemption.
e. None of these. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 4-6 STA: DISC: Banking and Interest
46. Which of the following accounts has special tax advantages under certain conditions when used to fund qualified college education expenses? a. certificate of deposit b. U.S. Treasury bill c. US EE savings bonds d. money market mutual fund e. passbook savings ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 4-6 STA: DISC: Banking and Interest
47. If you write a check for an amount greater than your account balance, the result will be a. an endorsement. b. a reconciliation. c. an overdraft. d. a share draft. e. a stop payment. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
48. When reporting errors or unauthorized transactions, it is best to notify your bank a. by telephone b. by letter, keeping a copy for your files. c. by telephone and follow up with a letter and keep a copy for your files d. none of the above ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
49. A check you issued last week has been stolen. You can prevent it from being withdrawn from your account by an unauthorized person by a. writing a new check. b. depositing the correct amount of money. c. requesting a stop payment. d. tearing up the check. e. properly endorsing the check. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
50. When doing a DDA reconciliation, interest earned on your account should be a. deducted from your checkbook ledger. b. added to your checkbook ledger. c. ignored because the bank has already recorded it.
d. listed as outstanding. e. compared to your interest calculations. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 4-4 STA: DISC: Banking and Interest
51. A check you wrote to buy shoes last week has not yet been processed by the bank. It is said to be a. outstanding. b. in transit. c. endorsed. d. certified. e. subtracted. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
52. You are going on an overseas trip and you want to have checks that are easily converted into local currency. You should purchase a. cashier's checks. b. certified checks. c. conditional checks. d. traveler's checks. e. guaranteed checks. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
53. You have $450 in your checking account when your ATM card and PIN are stolen. You could lose up to ____ if you report the lost ATM card within 2 business days. a. $ 0 b. $ 25 c. $ 50 d. $450 e. $500 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
54. You have $450 in your checking account when your ATM card and PIN are stolen. You could lose up to ____ if you report the lost ATM card within 8 business days. a. $ 0 b. $ 25 c. $ 50 d. $450 e. $500 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
55. You have $900 in your checking account when your ATM card and PIN are stolen. You could lose up to ____ if you report the lost ATM card within 60 business days. a. $ 0 b. $ 50 c. $450 d. $500 e. $900 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
56. Within how many business days must a bank make proceeds of deposited checks available? a. 3 days for all checks b. 3 days for local and 7 days for non-local checks c. 2 days for local and 5 days for non-local checks d. 5 days for all checks e. 7 days for all checks ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
57. Alice lost her ATM card at the lake and forgot it was missing until her monthly statement came 26 days later. She found that $800 had been withdrawn from her savings account. The most Alice will be legally liable for assuming she notifies the bank at this point is a. $ 0. b. $ 25. c. $ 50. d. $500. e. $800. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
58. Alice lost her ATM card at the lake and reported it missing the next day. She found that $800 had been withdrawn from her savings account. The most Alice will be legally liable for is a. $ 0. b. $ 25. c. $ 50. d. $500. e. $800. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 4-4 STA: DISC: Banking and Interest
59. Mandy has $2,000 she would like to start a savings program. She will add to it regularly by investing $50 per month in a liquid account. Which of the following types of accounts would be most appropriate in this situation? a. Series EE US savings bonds b. Money market deposit account c. Certificates of deposit d. US Treasury bills
e. NOW account ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 4-3 STA: DISC: Banking and Interest
60. Low interest rates that have persisted since the financial crisis of 2008-09 have been a net benefit to a. pension funds d. savers b. retirees e. Bond investors c. banks ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 4-1 KEY: Bloom's: Evaluation
61. Which of the following is not true of low interest rates? a. It encourages investors to search out d. Low rates penalized savers. investments like high dividend stock. b. It encourages the substitution of debt for e. Low rates may discourage paying down equity. the national debt. c. Low interest rates have increased the supply of credit. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 4-1 KEY: Bloom's: Evaluation
62. Low interest rates are helpful in a. facilitating a greater supply of money for borrowers. b. reducing the service cost on our national debt. c. encouraging a higher savings rate ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
d. a and b e. None of the above
DIF: Easy OBJ: LO: 4-1 KEY: Bloom's: Evaluation
63. The least expensive method for banks to interact with their customers is a. in person d. ATM machine b. on the phone e. self service kiosks c. on-line ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 4-4 KEY: Bloom's: Analysis
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 1. Interest rates will be lower on your [savings | checking] accounts. ANS: b PTS: 1 DIF: Easy STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
2. Liquid assets would include your savings account and your [money market deposit account | stock mutual fund]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
3. Today the differences between a commercial bank and an S&L are [minor | major]. ANS: a PTS: 1 DIF: Easy STA: DISC: Banking and Interest
OBJ: LO: 4-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
4. Credit unions are more likely to be paying [much | slightly] higher interest rates on their accounts than a commercial bank. ANS: b PTS: 1 DIF: Easy STA: DISC: Banking and Interest
OBJ: LO: 4-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
5. Credit unions are generally [small | large] institutions when compared with commercial banks and savings and loans. ANS: a PTS: 1 DIF: Easy STA: DISC: Banking and Interest
OBJ: LO: 4-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
6. A [checking | savings] account is called a demand deposit account. ANS: a PTS: 1 DIF: Easy STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
7. Many people choose a bank solely on [services | convenience]. ANS: b PTS: 1 DIF: Easy STA: DISC: Banking and Interest
OBJ: LO: 4-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
8. A bank customer would expect to be able to write checks on his regular checking account and on his [certificate of deposit | money market fund]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
9. A bank customer would typically expect to receive higher interest rates on her [certificate of deposit | money market deposit account]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
10. Banks must notify customers [30 | 60] days before lowering rates on deposit accounts or certificates of deposit. ANS: a PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
11. Money market deposit accounts [are | are not] insured by an agency of the federal government. ANS: a PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
12. [Money market deposit accounts | money market mutual funds] are protected by the Federal Deposit Insurance Corporation. ANS: a PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
13. [Money market deposit accounts | Asset management accounts] are protected by the Securities Investor Protection Corporation. ANS: b PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
14. Financial institutions [must pay at least a federally mandated minimum interest rate | may pay any interest rate they want] on their various accounts. ANS: b PTS: 1 DIF: Easy STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
15. [More than | Fewer than] half the banking institutions in the U.S. are federally insured. ANS: a PTS: 1 DIF: Easy STA: DISC: Banking and Interest
OBJ: LO: 4-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
16. The FDIC insures each [depositor | account] up to a stated maximum dollar amount at any given financial institution. ANS: a PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
17. During the past few years, the number of financial institution failures per year has [risen | dropped]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
18. You are planning to deposit $5,000 in a bank. At the end of one year, you will have more money in this account if interest is compounded [semiannually | quarterly]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
19. Your bank pays 3% interest, compounded quarterly. At the end of one year, your $5,000 will have earned [$150 | over $150] interest. ANS: b PTS: 1 DIF: Challenging STA: DISC: Banking and Interest
OBJ: LO: 4-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
20. Natalie is faced with two savings choices: Making a single deposit of $5,000 or making five annual deposits of $1,000. The interest rate on both is 4%, compounded monthly. The [lump sum deposit | annual deposits] plan will result in a higher balance at the end of five years. ANS: a PTS: 1 DIF: Challenging STA: DISC: Banking and Interest
OBJ: LO: 4-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
21. Your bank does not levy a service charge on your checking account as long as a $1,000 minimum balance is maintained. Your bank [can | cannot] advertise this as free checking. ANS: b PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
22. You make a promise to keep funds on deposit for a stated period of time when you open a [MMDA | CD]. ANS: b PTS: 1
DIF: Moderate
OBJ: LO: 4-3
NAT: BUSPROG: Analytic skills
STA: DISC: Banking and Interest
KEY: Bloom's: Knowledge
23. Interest earned on your [credit union account | treasury bill holdings] would be free of state income taxes. ANS: b PTS: 1 DIF: Easy STA: DISC: Banking and Interest
OBJ: LO: 4-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
24. Interest earned on your [US EE savings bonds | municipal bond holdings] would be free of federal income taxes. ANS: b PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
25. [Both Treasury bills and Series EE savings bonds | Only Treasury bills] are bought at a discount. ANS: a PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
26. You [would | would not] expect to receive a cash flow of interest from your Series EE bonds. ANS: b PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
27. EE savings bonds may be redeemed [any time after the first 12 months | only at the maturity date]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
28. EE savings bonds are also called [War Bonds | Patriot Bonds]. ANS: b PTS: 1 DIF: Easy STA: DISC: Banking and Interest
OBJ: LO: 4-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
29. You would expect to find an asset management account at a [commercial bank | brokerage firm]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
30. An asset management account is likely to require a minimum investment of at least [$1,000 | $5,000].
ANS: b PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
31. The most common type of joint checking account would require the [signature of either party | signatures of both parties] on all checks. ANS: a PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
32. Joe and Mary have a tenants in common savings account. When Joe dies, his portion of the account [will | will not] automatically go to Mary. ANS: b PTS: 1 DIF: Challenging STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
33. Dottie and Jasper have a joint checking account with rights of survivorship. If Jasper dies, his portion of the account [will | will not] automatically go to Dottie. ANS: a PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
34. "For deposit only" would indicate a [blank | restricted] endorsement. ANS: b PTS: 1 DIF: Challenging STA: DISC: Banking and Interest
OBJ: LO: 4-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
35. [Both the depositor and writer | Only the writer] of a "bad" check will likely be charged a fee by their/his banks/bank. ANS: a PTS: 1 DIF: Challenging STA: DISC: Banking and Interest
OBJ: LO: 4-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
36. Having some type of overdraft protection with your bank will end up costing [more | less] than having a check bounce. ANS: b PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
37. Errors discovered during the reconciliation process are most likely to have been made by the [depositor | bank]. ANS: a PTS: 1 DIF: Easy STA: DISC: Banking and Interest
OBJ: LO: 4-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
38. [All | Some] banks must return canceled checks with the monthly statement although most are abandoning this practice. ANS: b PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
39. You are buying a large amount of merchandise through the mail from a dealer several hundred miles from you with whom you have never dealt before. The dealer will probably require that you pay him with a cashiers or [travelers | certified] check. ANS: b PTS: 1 DIF: Easy STA: DISC: Banking and Interest
OBJ: LO: 4-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
40. [Anyone | Only those with an account at the bank] can purchase cashiers' checks. ANS: a PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
41. [Anyone | Only those with an account at the bank] could get a check certified. ANS: b PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
42. Your bank probably [will | will not] levy a transaction fee if you use a "foreign" ATM to make a withdrawal. ANS: a PTS: 1 DIF: Moderate STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
43. Banks [may | must] state interest rates they pay as Annual Percentage Yields. ANS: b PTS: 1 DIF: Easy STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
44. It costs financial institutions more for their customers to perform [ATM transactions | Internet transactions.] ANS: a PTS: 1 DIF: Easy STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
45. Low interest rates that have persisted since the financial crisis of 2008-09 have been a net benefit to [borrowers | retirees]. ANS: a PTS: 1 DIF: Challenging KEY: Bloom's: Analysis
OBJ: LO: 4-1
NAT: BUSPROG: Analytic skills
46. Lower borrowing costs encourage the substitution of [debt for equity | equity for debt] in corporate capital structures. ANS: a PTS: 1 DIF: Challenging KEY: Bloom's: Analysis
OBJ: LO: 4-1
NAT: BUSPROG: Analytic skills
47. A low interest rate economic environment is more likely to be accompanied by [lower unemployment | higher unemployment]. ANS: b PTS: 1 DIF: Challenging KEY: Bloom's: Analysis
OBJ: LO: 4-1
NAT: BUSPROG: Analytic skills
48. Low interest rates have [increased | decreased | not impacted ] the supply of credit. ANS: c PTS: 1 DIF: Challenging KEY: Bloom's: Analysis
OBJ: LO: 4-1
NAT: BUSPROG: Analytic skills
49. With low interest rates, savers have begun investing in [bonds | stocks] where higher yields can be found. ANS: b PTS: 1 DIF: Challenging KEY: Bloom's: Analysis
OBJ: LO: 4-1
NAT: BUSPROG: Analytic skills
50. In the wake of the recent financial crisis, the U.S. personal saving rate has [increased | decreased]. ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge
OBJ: LO: 4-1
NAT: BUSPROG: Analytic skills
51. The least expensive method for banks to interact with their customers is [in person | ATM | online]. ANS: c PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 4-3
NAT: BUSPROG: Analytic skills
PROBLEM 1. Maggie wants to open a checking account that will be the least expensive given her normal financial transactions. She typically writes 15 checks a month and uses an ATM 35 times a month. Her minimum checking balances falls to about $350 in an average month. Which of the following accounts would be least expensive for Maggie? (Show all your work.) Account A: No monthly fee is charged if a minimum balance of at least $300 is maintained. A $5.00 fee is charged in any month the minimum balance falls below $300. An ATM fee of $0.10 per transaction is charged on all transactions. Account B: No monthly fee is charged if a minimum balance of at least $500 is maintained. A $3.00 fee plus $0.10/check is charged in any month the minimum balance falls below $500. There is no ATM fee on transactions. ANS: Account A Cost of Account A = $0 + ($0.10 35) = $3.50/month Cost of Account B = $3 + ($0.10 15) = $4.50/month PTS: 1 DIF: Challenging STA: DISC: Banking and Interest
OBJ: LO: 4-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
2. Gordon and Susan have a regular savings plan and have accumulated $8,000. How much will this be worth in 10 years if they can earn 2% on the money. They are not planning to add to this savings account. (Show all work.) ANS: $9,752 Future value = $8,000 1.219 = $9,752
or
PTS: 1 DIF: Challenging STA: DISC: Banking and Interest
OBJ: LO: 4-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
PV=8,000, N=10, I=2, FV=9,752
3. You have a savings plan into which you put $3,000 per year. How much will you accumulate in the account in 25 years if the interest rate is 10%? (Show all work.) ANS: $295,038 or $295,041
Future value = $3,000 98.346 = $295,038 PTS: 1 DIF: Challenging STA: DISC: Banking and Interest
or
PMT=3,000, N=25, I=10, FV=295,041
OBJ: LO: 4-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
4. Sammi and Jason have $4,000 to deposit in a money market fund earning 5%. If they add $2,000 to that account annually, how much will they have accumulated in 15 years? (Show all work.) ANS: $51,472 or $51,473 Future value = ($4,000 2.079) + ($2,000 21.578) = $51,472 or PV=4,000, PMT=2,000, N=15, I=5, FV=51,473 PTS: 1 DIF: Challenging STA: DISC: Banking and Interest
OBJ: LO: 4-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
5. Your checkbook balance shows $706.50. The bank statement shows $772.77. The bank paid $2.50 interest. Checks 1501 ($85), 1507 ($50.16), 1511 ($20.50) are not shown on the statement. A service charge of $5 was levied by the bank. You made a $85 deposit yesterday that is not on the statement. What is the reconciled balance? (Show all work.) ANS: The balance is off by $1.89. Bank balance minus outstanding checks plus outstanding deposit equals
$772.77 155.66 85.00 $702.11
Check book balance plus interest minus service charge equals
$706.50 2.50 5.00 $704.00
PTS: 1 DIF: Challenging STA: DISC: Banking and Interest
OBJ: LO: 4-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
Chapter 5—Making Automobile and Housing Decisions TRUE/FALSE 1. An automobile is a personal use asset for most buyers. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills TOP: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-1 STA: DISC: Investments
2. The greatest fixed cost involved with owning an automobile is usually the monthly loan payments. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-1 STA: DISC: Investments
3. The greatest fixed cost involved with owning an automobile is usually the auto insurance payments. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-1 STA: DISC: Investments
4. Gasoline is a variable cost of automobile ownership. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-1 STA: DISC: Investments
5. Automobiles tend to decrease in value over time. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-1 STA: DISC: Investments
6. Fixed automobile costs increase as the number of miles driven increase. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills TOP: Bloom's: Analysis
DIF: Moderate OBJ: L): 5-1 STA: DISC: Investments
7. Most new car warranties cover a minimum of the first 36,000 miles or 3 years of ownership. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills TOP: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-1 STA: DISC: Investments
8. Most new car warranties cover a minimum of the first 72,000 miles or 6 years of ownership. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-1 STA: DISC: Investments
9. A closed-end automobile lease is the most popular type of lease. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-1 STA: DISC: Investments
10. Terminating a car lease before expiration is often difficult and costly. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-1 STA: DISC: Investments
11. The largest single investment you will undertake in your lifetime will probably be the purchase of an automobile. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 5-1 STA: DISC: Investments
12. Less rapid depreciation is one advantage of buying a new car rather than a used car. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 5-1 STA: DISC: Investments
13. Low-balling is a sales technique where the salesperson quotes a low price for a car then tries to get you to purchase a different, more expensive vehicle. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-1 STA: DISC: Investments
14. Low-balling is a sales technique where the salesperson quotes a low price for a car to get you to make an offer, and negotiates the price upward prior to signing the sales agreement. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-1 STA: DISC: Investments
15. You should secure the trade in value of your current automobile before you start negotiating the final price on the car you are purchasing. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 5-1 STA: DISC: Investments
16. Capitalized cost on an auto lease is similar to the interest rate on a loan. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 5-2 STA: DISC: Investments
17. Capitalized cost on an auto lease is the same as the price of the car.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 5-2 STA: DISC: Investments
18. The money factor on an auto lease is similar to the interest rate on a loan. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 5-2 STA: DISC: Investments
19. Early termination clauses on an auto lease typically apply to cars that are stolen or totaled in an accident as well as when you just want to return the vehicle before the end of the lease. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-2 STA: DISC: Investments
20. When buying a used car, it is very important to have it checked by a reputable mechanic. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-1 STA: DISC: Investments
21. The sales contract on an automobile purchase contractually binds you to purchase the car at the price you offered in the contract. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-1 STA: DISC: Investments
22. To make a legally binding offer on a car, you must sign a sales contract that specifies the offering price and all the conditions of your offer. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-1 STA: DISC: Investments
23. One who leases an automobile is typically responsible for early termination costs, even when early termination is due to theft or auto accidents. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 5-2 STA: DISC: Investments
24. The largest single investment you will undertake in your lifetime will probably be the purchase of a house. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
25. The term condominium refers to a style of architecture. ANS: F
PTS: 1
DIF: Easy
OBJ: LO: 5-3
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
STA: DISC: Investments
26. Townhome, condominium and co-op owners can deduct real estate taxes and mortgage interest on their federal income taxes. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
27. Condominium and Townhome owners can deduct real estate taxes and mortgage interest on their federal income taxes but co-op owners cannot take these deductions. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
28. A condominium or townhome buyer will make monthly mortgage payments as well as pay a fee for services and maintenance of common areas. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
29. In a co-op, the buyer receives title to a unit and joint ownership of the common areas. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
30. In a condominium and townhome, the buyer receives title to an individual unit and joint ownership of the common areas. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
31. A significant legal difference between a cooperative and a condominium is that the condominium owner normally holds a title to the property. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 5-3 STA: DISC: Investments
32. As a homeowner, the federal government may allow you to deduct interest expenses and taxes paid on the property. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-4 STA: DISC: Investments
33. There are large regional differences in the price of housing. ANS: T
PTS: 1
DIF: Easy
OBJ: LO: 5-3
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
STA: DISC: Investments
34. Condominiums and townhomes are generally less costly than single-family, detached homes. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-3 STA: DISC: Investments
35. You can deduct mortgage interest and property taxes on your home to reduce your federal income taxes only if you itemize deductions. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
36. The federal income tax advantage gained from home ownership will depend on the amount of deductible interest and property taxes and your total income. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
37. The difference between the market value of your home and the balance of the mortgage is your equity in the property. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-4 STA: DISC: Investments
38. A loan-to-value ratio of 80 percent would require a buyer to make a 20% down payment. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
39. A loan-to-value ratio of 90 percent would require a buyer to make a 90% down payment. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-4 STA: DISC: Investments
40. A lender will generally require mortgage insurance if the down payment is less than 20 percent. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-4 STA: DISC: Investments
41. Points paid to secure a mortgage to purchase a primary residence will generally be tax deductible as interest in the year they are paid. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
42. A 5 percent down payment will result in larger monthly mortgage payments than a 10 percent down payment on the same house for the same maturity mortgage. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Easy OBJ: LO: 5-4 STA: DISC: Investments
43. The monthly mortgage payment divided by your monthly gross income equals an affordability ratio. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
44. The market price of a house is $125,000 and the homebuyer will borrow $100,000. Two points will equal $2,000. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
45. The market price of a house is $125,000 and the homebuyer will borrow $100,000. Two points will equal $2,500. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
46. You will need to purchase homeowners insurance equal to the purchase price of the house you are buying. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 5-4 STA: DISC: Investments
47. An inflation hedge is an asset that increases in value at a rate equal to or greater than the rate of inflation. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
48. The down payment is typically the only substantial housing cost that must be paid at the time of the purchase. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-4 STA: DISC: Investments
49. First-time homebuyers can withdraw up to $10,000 from an IRA without penalty regardless of their age. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
KEY: Bloom's: Knowledge 50. First-time homebuyers can withdraw up to $25,000 from an IRA without penalty if they are 30 years of age or less. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
51. A PITI payment is composed of principal, interest, real estate taxes, and insurance. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-4 STA: DISC: Investments
52. Private Mortgage Insurance (PMI) protects the lender from loss on a loan. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-4 STA: DISC: Investments
53. Security deposits are controlled by the tenant. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
54. A real estate sales contract contains the terms and provisions which establish the sale's transaction. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO:5-5 STA: DISC: Investments
55. Points paid when a home is refinanced can all be deducted as interest in the year they are paid. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-6 STA: DISC: Investments
56. The cost of a title search and title insurance are typically part of the closing costs on a housing transaction. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-5 STA: DISC: Investments
57. Earnest money deposits and contingency clauses are usually specified in the sale contract. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-5 STA: DISC: Investments
58. If you are buying a house that is for sale by the owners, the earnest money goes directly to the seller.
ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 5-5 STA: DISC: Investments
59. The job of a mortgage banker is to locate conventional loans for clients. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 5-6 STA: DISC: Investments
60. If a buyer withdraws from a transaction without a valid reason after signing a sales contract, he typically loses his earnest money. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-5 STA: DISC: Investments
61. To be legally binding, real estate buy-sell agreements must be in writing, but leases may be oral. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 5-5 STA: DISC: Investments
62. The interest rate charged on adjustable-rate mortgages will change from time to time based on a specified index. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-6 STA: DISC: Investments
63. Negative amortization is possible with a fixed-rate mortgage. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-6 STA: DISC: Investments
64. Negative amortization is possible with an adjustable-rate mortgage. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-6 STA: DISC: Investments
65. A FHA loan is insured by the federal government. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-6 STA: DISC: Investments
66. The Veterans Administration guarantees mortgage loans given to qualified veterans. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-6 STA: DISC: Investments
67. The affordability ratios used to qualify applicants for FHA and VA loans are more stringent than those used for conventional loans. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
68. To refinance a mortgage, the lender typically requires at least 20% equity in the home. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-6 STA: DISC: Investments
69. Other factors being equal, fixed-rate mortgages will have higher interest rates initially than adjustable-rate mortgages. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 5-6 STA: DISC: Investments
70. Adjustable-rate mortgages with monthly payment caps can lead to negative amortization. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 5-6 STA: DISC: Investments
71. Adjustable-rate mortgages with interest rate caps can lead to negative amortization. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 5-6 STA: DISC: Investments
72. Graduated payment mortgages and growing equity mortgages are both examples of adjustable-rate mortgages. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 5-6 STA: DISC: Investments
73. Commercial banks are an important source of both mortgage loans and interim construction loans. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-6 STA: DISC: Investments
74. One can increase the tax benefits of homeownership by selecting a shorter term mortgage, for example 15 years rather than 30 years. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 5-6 STA: DISC: Investments
75. Balloon payment mortgages generally must be refinanced.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-6 STA: DISC: Investments
76. According to federal law, private mortgage insurance on most loans currently made ends automatically once the mortgage is paid down to 78% of the original value of the house. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-6 STA: DISC: Investments
77. According to federal law, private mortgage insurance on most loans currently made ends automatically once the mortgage is paid down to 80% of the original value of the house. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
78. An adjustable rate mortgage with a baseline rate of 4%, a margin of 1%, and an annual cap of 1% would have an initial mortgage rate no higher than 6%. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 5-6 STA: DISC: Investments
79. An adjustable rate mortgage with a baseline rate of 5%, a margin of 2%, and an annual cap of 1% would have an initial mortgage rate of 7%. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 5-6 STA: DISC: Investments
80. The interest rate is lower on a 6-year auto loan than on a 3-year auto loan ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 5-2 KEY: Bloom's: Analysis
81. The monthly payment is lower in a 6-year auto loan than on a 3-year auto loan. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 5-2 KEY: Bloom's: Analysis
82. The “rent ratio” has fallen as home prices have fallen. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 5-3 KEY: Bloom's: Knowledge
83. An increase in the “rent ratio” indicates that renting is more affordable relative to housing prices. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 5-3 KEY: Bloom's: Knowledge
84. Renting affords more flexibility than home ownership.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 5-3 KEY: Bloom's: Analysis
85. A short sale does not affect a distressed homeowner’s credit score as much as a foreclosure. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 5-4 KEY: Bloom's: Evaluation
MULTIPLE CHOICE 1. Variable auto ownership costs are most dependent on a. driver behavior. b. mileage driven. c. city lived in. d. down payment. e. hours driven. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-1 STA: DISC: Investments
2. ____ is a fixed auto ownership cost. a. Gasoline b. Installment loan payment c. Auto insurance d. Maintenance e. b and c ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-1 STA: DISC: Investments
3. The loss of value in a car over time is called a. maintenance. b. loan payments. c. sales payments. d. commissions. e. depreciation. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-1 STA: DISC: Investments
4. The first step in the auto-buying process should be a. test drive several cars. b. begin negotiations. c. consider alternative buying strategies. d. decide whether to trade in your used car or to sell if yourself. e. analyze how much car you can afford. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-1 STA: DISC: Investments
5. Henry has $2,500 for a down payment and thinks he can afford monthly payments of $400. If he can finance a vehicle with an 8%, 3-year loan, what is the maximum amount Henry can spend on the car? a. $12,765 b. $14,400 c. $14,079 d. $15,265 e. $16,879 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 5-1 STA: DISC: Investments
6. Kurt has $4,500 for a down payment and thinks she can afford monthly payments of $300. If he can finance a vehicle with a 7%, 4-year loan, what is the maximum amount Kurt can afford to spend on the car? a. $13,528 b. $14,400 c. $16,028 d. $17,028 e. $18,028 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 5-1 STA: DISC: Investments
7. Jana has $1,500 for a down payment and thinks she can afford monthly payments of $300. If she can finance a vehicle with a 7%, 4-year loan, what is the maximum loan amount Jana can afford? a. $12,528 b. $14,208 c. $16,028 d. $17,900 e. $18,028 ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 5-1 STA: DISC: Investments
8. Advantages of buying a used car rather than a new car include a. good mechanical condition. b. will depreciate more quickly. c. more choices available. d. less expensive. e. all of the above. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Easy OBJ: LO: 5-1 STA: DISC: Investments
9. Advantages of buying a used car rather than a new car include a. good mechanical condition. b. will depreciate less quickly. c. more choices available. d. cost. e. all of the above.
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Easy OBJ: LO: 5-1 STA: DISC: Investments
10. One can arrange auto loans through a. auto dealers. b. banks. c. credit unions. d. consumer finance companies. e. all of the above. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-1 STA: DISC: Investments
11. Leasing accounts for about ____ percent of all vehicles sold today. a. 10 b. 14 c. 19 d. 23 e. 37 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-2 STA: DISC: Investments
12. Which of the following are reasons people lease vehicles? a. Leasing is generally less expensive than buying. b. Monthly payments for leases are generally less expensive than loan payments. c. One can afford a more expensive car with the same monthly payment by leasing rather than buying. d. b and c only e. a, b, and c ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-2 STA: DISC: Investments
13. To research used car prices, you can check one of the popular price guides including: a. National Automobile Dealers Association (NADA) b. Official Used Car Guide c. Edmunds Used Car Prices d. All of the above. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-1 STA: DISC: Investments
14. At the end of your car lease period, you intend to turn in the car, and you will not pay extra at that time based on the residual value of the car. You have ____ lease. a. a residual b. an open-end c. a purchase option d. a closed-end e. none of these
ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-2 STA: DISC: Investments
15. The price of the car you are leasing is called the a. money factor. b. capitalized cost. c. residual value. d. purchase option. e. capitalized cost reduction. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-2 STA: DISC: Investments
16. The financing rate on the car you are leasing is called the a. money factor. b. capitalized cost. c. residual value. d. purchase option. e. capitalized cost reduction. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-2 STA: DISC: Investments
17. The down payment on the car you are leasing is called the a. money factor. b. capitalized cost. c. residual value. d. purchase option. e. capitalized cost reduction. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-2 STA: DISC: Investments
18. In which of the following situations would you have to pay additional money when returning a vehicle using a closed-end lease? a. residual value is less than expected b. residual value is more than expected c. mileage limits were exceeded d. a and c e. b and c ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 5-2 STA: DISC: Investments
19. In which of the following situations would you have to pay additional money when returning a vehicle using an open-end lease? a. residual value is less than expected b. residual value is more than expected c. mileage limits were exceeded
d. a and c e. b and c ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 5-2 STA: DISC: Investments
20. Anna purchased a vehicle six years ago for $25,000. She recently sold it for $5,000. Over the years, she paid a total of $5,800 on auto insurance, $4,800 on gas and maintenance, and $2,500 in interest. What was her depreciation cost on this vehicle? a. $ 5,000 b. $10,800 c. $15,000 d. $20,000 e. $25,000 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 5-1 STA: DISC: Investments
21. Reasons why auto leasing is so popular include all of the following except: a. lower monthly payments b. lower down payment c. lower total cost d. getting more expensive car for the same monthly payment e. rising new car prices ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 5-2 STA: DISC: Investments
22. The capital cost reduction on a vehicle lease is a. like the down payment on a loan. b. the rate of interest on a lease. c. the residual value at the end of the lease. d. the depreciation on a lease. e. the same as the purchase option on a lease. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 5-2 STA: DISC: Investments
23. When shopping for a lease, you want a a. high capitalized cost b. low capitalize cost c. high money factor d. low residual value e. a and d ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-2 STA: DISC: Investments
24. A money factor of 0.00360 on a lease is equivalent to an annual percentage rate of a. 1.80.
b. c. d. e.
3.60. 4.32. 8.64. 10.80.
ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 5-2 STA: DISC: Investments
25. A money factor of 0.00280 on a lease is equivalent to an annual percentage rate of a. 2.80. b. 3.60. c. 6.72. d. 8.64. e. 10.80. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 5-2 STA: DISC: Investments
26. At the end of the lease period, you may be required to a. purchase the vehicle at its residual value. b. pay for unreasonable wear and tear. c. pay for additional mileage. d. b and c. e. a, b, and c. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-2 STA: DISC: Investments
27. At the end of the lease period, you are never required to a. purchase the vehicle at its residual value. b. pay for unreasonable wear and tear. c. pay for additional mileage. d. b and c. e. a, b, and c. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-2 STA: DISC: Investments
28. The first choice in housing in the United States is a. single-family home. b. condominium. c. cooperative apartment. d. manufactured home. e. rental apartment. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-3 STA: DISC: Investments
29. The highest average cost housing to purchase would be a a. cooperative apartment.
b. c. d. e.
condominium. single-family detached home. row house. manufactured home.
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-3 STA: DISC: Investments
30. When you receive title to an individual unit and joint ownership of any common areas and facilities, you have purchased a a. single family home. b. cooperative. c. condominium. d. row house. e. mobile home. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
31. When you lease your apartment from the corporation that owns the building and your lease is an ownership share, your apartment is a. expensive. b. a cooperative. c. a condominium. d. a duplex. e. permanent. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
32. ____ is a reason for owning your own home. a. Pride of ownership b. A feeling of permanence c. A sense of stability d. A tax shelter e. All of these are reasons. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-3 STA: DISC: Investments
33. For most homeowners, the most important financial reason for owning a home is a. security for loans. b. an inflation hedge. c. a tax shelter. d. a cash flow item. e. psychic income. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
34. ____ is an ongoing cost of home ownership. a. The down payment b. Closing costs c. Property taxes d. Sales taxes e. Points ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-3 STA: DISC: Investments
35. ____ is an up-front, one-time cost of home ownership. a. The down payment b. Closing costs c. Property taxes d. Insurance e. a and b ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-3 STA: DISC: Investments
36. Which of the following is true regarding cooperative apartments? a. They are essentially the same as condominiums. b. It may be more difficult to get a home mortgage than for other types of housing. c. They tend to be more expensive than single-family dwellings. d. They produce more tax advantages than other types of homes. e. All of the above ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
37. Phil and Christina are recently married and are unsure of where they will be relocated after Christina finishes her residency in 9 months. Based on this information, which of the following housing recommendations would be most appropriate for them? a. Rent a home b. Buy a condominium c. Buy a single-family dwelling d. Buy a cooperative apartment e. Lease a car ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
38. ____ could be deducted on your Federal income taxes. a. Rent payments b. Mortgage interest c. Homeowner's insurance d. Utility bills e. None of these ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 5-3 STA: DISC: Investments
KEY: Bloom's: Knowledge 39. ____ could be deducted on your Federal income taxes. a. Rent payments b. Homeowner's insurance c. Real estate taxes d. Utility bills e. None of these ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-3 STA: DISC: Investments
40. Jackie is in the 28% marginal tax bracket and has no other itemized deductions except those related to her home. If her standard deduction is $4,750 and she incurs the following costs related to housing, how much tax savings will she receive as a result of her home purchase? Mortgage interest Principal repayment Homeowner's insurance Real estate taxes Homeowner's association fees a. b. c. d. e.
$14,000 $ 800 $ 1,000 $ 4,000 $ 1,200
$13,250 $ 5,040 $ 3,710 $ 2,800 none
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 5-4 STA: DISC: Investments
41. If the maximum loan-to-value ratio that a lender will accept on a $100,000 loan is 90 percent, then the borrower must make a. a minimum down payment of $10,000 plus closing costs. b. a minimum down payment including closing costs of $10,000. c. closing costs plus points of $10,000. d. a maximum down payment of $10,000. e. none of these. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 5-4 STA: DISC: Investments
42. If the maximum loan-to-value ratio that a lender will accept on a $100,000 loan is 80 percent, then the borrower must make a down payment of at least a. $100,000. b. $ 80,000. c. $ 50,000. d. $ 20,000. e. none of these. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
KEY: Bloom's: Evaluation 43. If you made a down payment of $11,000 on a $110,000 house, the lender no doubt will require ____ as a result of the size of the down payment. a. closing points b. a bond c. mortgage insurance d. application fees e. homeowner's insurance ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
44. A lender will usually require a loan-to-value ratio of ____ or less for you to avoid having to pay private mortgage insurance (PMI). a. 75% b. 80% c. 85% d. 90% e. 95% ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-4 STA: DISC: Investments
45. What is the maximum amount a first-time home buyer who is not 59 an IRA without penalty? a. $25,000 b. $15,000 c. $10,000 d. $ 5,000 e. $ 2,000 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
years old can withdraw from
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
46. Which of the following is not associated with buying a home with a lower-than-typical down payment? a. Adjustable-rate mortgage b. Fannie 3/2 c. Fannie 97 d. FHA mortgage e. VA mortgage ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 5-4 STA: DISC: Investments
47. The following is/are major source(s) of home mortgages: a. Commercial Banks b. Thrift Institutions c. Mortgage Bankers and Brokers d. Credit Unions
e. All of the above ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-6 STA: DISC: Investments
48. A fee charged by lenders as a condition of a mortgage loan that effectively raises the interest rate is called a. mortgage points. b. a down payment. c. a commission. d. an add-on charge. e. loan fee. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-4 STA: DISC: Investments
49. If you purchase a $110,000 and make a 10% down payment, how much would 1 point cost at closing? a. $ 765 b. $ 990 c. $1,100 d. $1,530 e. $1,800 ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
50. One would be more likely to pay discount points if she expected a. to live in the house a short period of time. b. to live in the house a long period of time. c. interest rates to go up. d. interest rates to go down. e. interest rates to remain constant. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 5-4 STA: DISC: Investments
51. Points can be deducted from federal income taxes in the year paid when they are used to a. finance a first home. b. finance a second home. c. refinance a first home. d. refinance a second home. e. a and c only ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension 52. The seller of the house typically pays the a. loan application fee. b. real estate agent's commission. c. appraisal fee.
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
d. points. e. title search and insurance. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
53. The majority of each monthly payment at the beginning of the loan goes to pay a. principal. b. interest. c. real estate taxes. d. homeowner's insurance. e. private mortgage insurance. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
54. Most lenders do not want mortgage payments to exceed ____ percent of your gross monthly income. a. 10-15 b. 15-18 c. 25-30 d. 30-33 e. 33-38 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-4 STA: DISC: Investments
55. Most lenders do not want mortgage payments plus other debt payments to exceed ____ percent of your gross monthly income. a. 10-15 b. 15-18 c. 25-30 d. 30-33 e. 33-38 ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-4 STA: DISC: Investments
56. An escrow account is used to collect ____ from one's monthly mortgage payment. a. interest b. principal c. real estate taxes d. homeowner's insurance e. c and d only ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-4 STA: DISC: Investments
57. Homeowner's insurance will cost about ____ percent of the market value of the home. a. 1/4 b. 1/4 to 1/2
c. 1/2 d. 1/2 to 3/4 e. 3/4 ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-4 STA: DISC: Investments
58. A financial advantage of renting compared to purchasing housing is a. income tax treatment. b. no need for a down payment. c. required security deposit. d. the legal obligation. e. stable monthly payments. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
59. Terms of renting a housing unit may be contained in a contract called a a. deposit requirement. b. renewal option. c. lease. d. housing code. e. housing standard. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-3 STA: DISC: Investments
60. The ____ would be included in a rental contract or lease agreement. a. amount of the monthly payment b. payment date c. length of lease agreement d. deposit required e. all of these would be included ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-3 STA: DISC: Investments
61. ____ is a reason for preferring to rent rather than to buy. a. Mobility b. No maintenance worries c. Lower monthly cash flows d. Down payment money better used elsewhere e. All of these are reasons ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
62. Generally, renting would be preferred to buying when a. you have no money to make a down payment. b. you know your job will be temporary.
c. you have just gone through a divorce. d. all of these. e. none of these. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 5-3 STA: DISC: Investments
63. A real estate sales contract will include a. the amount you are willing to pay for the property. b. the terms of the mortgage loan. c. deed restrictions. d. market value of the property. e. none of the above. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-5 STA: DISC: Investments
64. Earnest money is the sum of money the home buyer deposits with the a. realtor to view homes. b. realtor for finding the desired home. c. lender to originate the loan. d. seller to indicate intent of purchase. e. lender to guarantee the purchase. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-5 STA: DISC: Investments
65. The most popular mortgage loan for financing a home purchase is a(n) a. conventional fixed-rate loan. b. FHA loan. c. VA loan. d. adjustable-rate loan. e. Fannie Mae loan. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-6 STA: DISC: Investments
66. The interest rates and monthly mortgage payments will not change over the life of your mortgage; you have a(n) a. reverse-annuity mortgage. b. fixed-rate mortgage. c. adjustable rate mortgage. d. rollover mortgage. e. graduated-payment mortgage. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 5-6 STA: DISC: Investments
67. The monthly interest on your mortgage was $690; you paid $650. The result is a. growing equity.
b. c. d. e.
negative amortization. fixed interest expense. shrinking principal. indexed equity.
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-6 STA: DISC: Investments
68. The FHA ____ high loan-to-value ratio mortgages. a. guarantees b. insures c. subsidizes d. grants e. allows ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-6 STA: DISC: Investments
69. The act requiring mortgage lenders to give borrowers HUD booklets and good faith estimates of the closing costs is called the a. Equal Credit Opportunity Act. b. Truth-in-Lending Act. c. Real Estate Settlement Procedures Act. d. Mortgage Lenders Act of 1980. e. None of the above. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 5-6 STA: DISC: Investments
70. When refinancing your mortgage, you should consider a. the interest rates of the old and new mortgages. b. the years you expect to remain in the home. c. any prepayment penalties on the old mortgage. d. closing costs of the new mortgage. e. all of these. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-6 STA: DISC: Investments
71. Sean and Lisa (age 25 and 28, respectively) are purchasing their first home for $200,000 with a 5% down payment. They will withdraw the down payment from Lisa's IRA. They will have to pay ____ on the IRA withdrawal. a. federal income taxes b. an early withdrawal penalty c. Social Security taxes d. a and b e. a, b, and c ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 5-6 STA: DISC: Investments
72. Mike (age 40) is purchasing his second home for $200,000 with a 25% down payment. He will withdraw some of the down payment from his IRA. He will have to pay ____ on the IRA withdrawal. a. federal income taxes b. an early withdrawal penalty c. Social Security taxes d. a and b e. a, b, and c ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 5-6 STA: DISC: Investments
73. Which of the following is tax deductible if one itemizes deductions? a. Principal, interest, real estate taxes, and insurance b. Principal, interest, and real estate taxes c. Principal and interest d. Interest, real estate taxes, and insurance e. Interest, PMI, and real estate taxes ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 5-6 STA: DISC: Investments
74. ____ and ____ are often paid as part of one's house payment and held in an escrow account. a. Closing costs; interest b. Insurance; real estate taxes c. Principal; interest d. Insurance; utilities e. Utilities; real estate taxes ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 5-6 STA: DISC: Investments
75. Barb and Bob want to purchase a new home but don't know how much mortgage they can qualify for. The lender requires total installment loan payments not exceed 35% of gross monthly income. Based on Barb and Bob's financial data below, what is the maximum monthly mortgage payment for which they can qualify? Monthly Gross Income Car payment Student loan payment a. b. c. d. e.
$4,000 350 200
$1,400 $1,208 $1,050 $ 850 $ 500
ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 5-4 STA: DISC: Investments
76. Pete and Pam want to purchase a new home but don't know how much mortgage they can qualify for. The lender requires total installment loan payments not exceed 32% of gross monthly income. Based on Pete and Pam's financial data below, what is the maximum monthly mortgage payment for which they can qualify? Monthly Gross Income Car payment Student loan payment Current rent payment a. b. c. d. e.
$5,000 400 300 1,000
$1,700 $1,600 $ 900 $ 600 $ 500
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 5-4 STA: DISC: Investments
77. The type of mortgage that will most likely need to be refinanced is the ____ mortgage. a. fixed-rate b. adjustable-rate c. balloon-payment d. graduated-payment e. growing-equity ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 5-6 STA: DISC: Investments
78. Which of the following is true regarding auto loans? a. Longer term, lower rate, lower payment b. Shorter term, lower rate, lower payment c. Longer term, higher rate, lower payment d. Shorter term, higher rate, higher payment ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 5-1 KEY: Bloom's: Comprehension
79. As home prices have fallen in recent year, the rent ratio a. has increased and rent affordability has increased b. has decreased and rent affordability has decreased c. has increased and rent affordability has decreased d. has decreased and rent affordability has increased ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 5-3 KEY: Bloom's: Evaluation
80. Homeowners may be allowed to deduct the following on their taxes a. homeowners insurance b. mortgage interest c. home improvements d. mortgage principal
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 5-3 KEY: Bloom's: Knowledge
81. A declining rent ratio indicates a. lower housing prices relative to renting b. lower rent relative to housing prices c. higher housing prices relative to renting d. none of the above ANS: A PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 5-3 KEY: Bloom's: Analysis
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 1. The first major expenditure most people make is to buy a [house | car]. ANS: b PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 5-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
2. The biggest fixed cost of owning a car is [the loan payment | insurance]. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 5-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
3. A major variable cost of owning a car is [the loan payment | gasoline]. ANS: b PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 5-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
4. If you drive a lot of miles each year rather than a few, the operating cost per mile will [increase | stay the same | decrease]. ANS: c PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 5-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
5. With a [closed-end | open-end] lease, you turn in the car at the end of the term and have no additional financial obligation as a result of the residual value. ANS: a PTS: 1
DIF: Moderate
OBJ: LO: 5-2
NAT: BUSPROG: Analytic skills
STA: DISC: Investments
KEY: Bloom's: Comprehension
6. The most popular type of lease is the [closed-end | open-end] lease. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
7. Terminating a lease early is typically [difficult | easy]. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 5-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
8. The average cost of owning is typically much less than leasing if you own the vehicle over [two | four] years. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
9. With a(n) [closed-end | open-end] lease, one owes more at the end of the lease if the car is worth less than its projected value at the end of the lease. ANS: b PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 5-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
10. It would make sense to purchase a vehicle at the end of a close-end lease period if the residual value in the lease agreement was [more | less] than the car's market value. ANS: b PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 5-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
11. The term condominium/townhome refers to a type of [architecture | ownership]. ANS: b PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 5-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
12. The condominium/townhome buyer shares joint ownership of [common areas | his living space]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
13. In the same geographic area, the cost of a [detached home | condo] will usually be lower. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
14. When buying a home, the [emotional | financial] factors often carry the greatest weight. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 5-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
15. There is direct ownership of your living space in a [condo | co-op apartment]. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 5-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
16. As a homeowner, you can deduct the mortgage interest and [property taxes | property insurance] if you itemize on your federal taxes. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 5-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
17. A lender gives you a choice of an 80% loan-to-value ratio or a 90% loan-to-value ratio. The interest rate for the 80% loan-to-value ratio loan will typically be [higher | lower] than the 90%. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
18. The purchase price of the house you are buying is $140,000. A loan-to-value ratio of 80% will require a down payment of [$34,000 | $28,000]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
19. The purchase price of the house you are buying is $180,000. A loan-to-value ratio of 90% will produce a mortgage amount of [$162,000 | $180,000]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
20. If your lender charges 1 1/2 mortgage points on a house selling for $100,000 on which there is to be a $90,000 loan, the points will cost you [$1,350 | $1,500]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
21. You have a choice of a 25-year or 30-year mortgage. Your monthly payments will be [more | less] with the 30-year loan. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
22. The total amount of interest you would have to pay would be less with a [25 | 20] year mortgage. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
23. Most lenders do not want your monthly installment loan payments to exceed [36 | 50] percent of your monthly income. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 5-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
24. You are paying on a car loan, a furniture loan, and a student loan. This will have [an | no] effect on the lender's decision to grant you a mortgage loan. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 5-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
25. [Lessor | Lessee] is another term for landlord. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 5-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
26. The choice of the index used with an ARM will make [much | little] difference in the volatility of your payment changes. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
27. A real estate agent will typically be paid by the [buyer | seller] of the house. ANS: b PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 5-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
28. Seeking mortgage preapproval [is | is not] recommended when you begin your house search. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 5-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
29. The earnest money deposit is a payment to the [real estate agent for his services | seller to show good faith when making an offer to buy]. ANS: b PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 5-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
30. With most ARMs, the interest rate over the lifetime of the loan can [increase to any level | increase only up to the pre-stated maximum]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
31. The interest rate on an ARM can be increased [automatically every year | only when a designated index increases]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
32. You made an $800 mortgage payment. The interest on the mortgage for this month was $850. You have just experienced [negative | positive] amortization. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
33. You made an $900 mortgage payment. The interest on the mortgage for this month was $850. You have just experienced [negative | positive] amortization. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
34. Using an FHA mortgage to finance your home would require a [lower | higher] down payment than a conventional loan. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
35. The Real Estate Settlement Procedures Act [limits the amount of closing costs a lender can charge | requires advance disclosure of closing costs]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
36. If you qualify, you might be able to buy a home with no down payment with [an FHA | a VA] loan. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
37. The [longer | shorter] the period of time you expect to live in a house, the more likely refinancing is a sound financial decision. ANS: a PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 5-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
38. Paying mortgage points to get a lower rate of interest makes more sense if you expect to live in a home for a [longer | shorter] period of time. ANS: a PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 5-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
39. The Real Estate Settlement Procedures Act governs [mortgage regulations | mortgage closings]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
40. A convertible ARM will have a [higher | lower] interest rate than a traditional ARM. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 5-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
41. The 11th District Cost of Funds index is much [more | less] volatile than LIBOR and CD-based indexes. ANS: b PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 5-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
42. Shorter term auto loans offer the benefit of [lower payments | lower interest rate] ANS: b PTS: 1 DIF: Moderate KEY: Bloom's: Comprehension
OBJ: LO: 5-2
NAT: BUSPROG: Analytic skills
43. Longer term auto loans have a [lower rate but higher payment | higher rate but lower payment] ANS: b PTS: 1 DIF: Moderate KEY: Bloom's: Comprehension
OBJ: LO: 5-1
NAT: BUSPROG: Analytic skills
44. As home prices have fallen the “rent ratio” has [increased | decreased]. ANS: b PTS: 1 DIF: Moderate KEY: Bloom's: Analysis
OBJ: LO: 5-3
NAT: BUSPROG: Analytic skills
45. A decrease in the “rent ratio” indicates that housing is relatively [more | less] affordable than renting. ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Analysis
OBJ: LO: 5-3
NAT: BUSPROG: Analytic skills
46. Homeowners may be able to deduct from their taxable income [mortgage principal | mortgage interest] ANS: b PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 5-4
NAT: BUSPROG: Analytic skills
47. For most homeowners, the most important financial reason for owning a home is for the [inflation hedge | tax shelter]. ANS: b PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge PROBLEM
OBJ: LO: 5-4
NAT: BUSPROG: Analytic skills
1. Janice wants to buy a new car. The cost is $30,000. At the end of six years, the car is expected to be worth 20% of the original price. (Show all work.) a. b.
What will the car value be in six years? What is the annual depreciation on the car?
ANS: a. Value of car = 0.20 $30,000 = $6,000 b.
Annual depreciation =
= $4,000
or: $30,000 - $6,000 = $24,000/6 = $4,000 PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 5-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
2. Leslie has been offered the choice of either a $1,000 rebate or a 5.5%, 48-month loan for the new car she is purchasing. If Leslie will be financing $15,000 and she can get a 7.5%, 48-month loan at her credit union, should she take the $1,000 rebate or the 5.5% loan? (Show all work.) ANS: 7.5% loan: PV=15,000, I=7.5/12, N=48, PMT=362.68 5.5% loan: PV=15,000, I=5.5/12, N=48, PMT=348.85
362.68 48 = 348.85 48 =
17,408.64 16,744.80 663.84
Take the $1,000 rebate since the 5.5% loan saves only $663.84 over the life of the loan. PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 5-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
3. Patrick would like to know the monthly payments and the total finance charges on the following 2 loans: (Show all work.) a. b.
$30,000, 9%, 36 months $30,000, 9%, 48 months
ANS: a. 36 month loan: PV=30,000, I=9/12, N=36, PMT=953.99 (953.99 36) - 30,000 = 4,344 b. 48 month loan: PV=30,000, I=9/12, N=48, PMT=746.55 (746.55 48) - 30,000 = 5,834 PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 5-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
4. Greg has negotiated a $20,000 price on a new pick-up truck. The manufacturer is offering a $1,500 rebate or 3.9 %, three-year financing. Greg is also able to get 7 %, three-year financing at his credit union. If Greg plans to finance $18,000 over three years, should he take the rebate or the 3.9 % financing? (Show all work.) ANS: 7.9% loan: PV=18,000, I=3.9/12, N=36, PMT=530.63 8.0% loan: PV=18,000, I=7.0/12, N=36, PMT=555.79 Difference: 25.16 36 months =
530.63 555.79 $905.76
Since the 3.9 % financing saves Greg only $905.76 over the loan period, he should take the $1,500 rebate and finance his new truck through the credit union. PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 5-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
5. Judy has $2,000 for a down payment on a vehicle and she can afford monthly payments of $400. She wants to finance a vehicle over no more than 4 years. If lenders are currently offering 6 percent interest on 5-year loans, what is the maximum price Judy can pay for a vehicle? ANS: PMT= $400, I=6/12, N=60, PV = $20,690 + $2,000 = $22,690 PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 5-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
6. Your mortgage payment is $1,500 per month. Of this amount, insurance is $50, property taxes are $200, and interest is about $1,100. Assuming you have other itemized deductions that already exceed your standard deduction and that you are in the 31% marginal tax bracket, what is the reduction in your tax liability as a result of owning a home with this mortgage. (Show all work.) ANS: Monthly tax deduction = $200 + $1,100 = $1,300. Annual tax deduction = $1,300 12 = $15,600. Reduction in taxes = $15,600 .31 = $4,836. PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 5-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
7. Dick and Jane (and their dog Spot) have just purchased a house and are calculating how much money they will need when the closing day rolls around. The purchase price is $200,000. They will make a 20% down payment, and they must pay 2 points on the loan. Closing costs should be 3% of the purchase price. What is the total dollar amount they will need at closing? (Show all work.) ANS: Down payment = .20 $200,000 Points = .02 $160,000 Closing costs = .03 $200,000 Total Needed PTS: 1 DIF: Challenging STA: DISC: Investments
$40,000 3,200 6,000 $49,200 OBJ: LO: 5-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
8. Billy and Suzie want to calculate the difference in monthly payments on a $110,000 home as a result of a $5,000 down payment or a $10,000 down payment. Use your financial calculator to figure the monthly payments, assuming they get a 6.5%, 30-year mortgage. ANS: $ 5,000 down payment: PV = $105,000, I = 6.5/12, N = 30 12, PMT = $663.67 $10,000 down payment: PV = $100,000, I = 6.5/12, N = 30 12, PMT = $632.07
The difference in monthly payments = $31.60 PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 5-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
9. If a lender requires that mortgage payments cannot exceed 30% of gross income and total loan payments cannot exceed 38% of gross income, calculate the monthly payment for which a person with the following financial data could qualify. Gross Income Stereo loan payment Furniture loan payment Auto loan
$5,500 250 200 400
ANS: $5,500 0.3 = $1,650 $5,500 0.38 = $2,090 - $250 - $200 - $400 = $1,240 The maximum monthly payment would be $1,240. PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 5-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
Chapter 6—Using Credit TRUE/FALSE 1. Using credit is the ideal way to provide for financial emergencies. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
2. Saving is the preferred way to provide for financial emergencies. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
3. Paying only the minimum payment each time on a credit card usually enables one to pay off the balance fairly quickly. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
4. One can be overusing credit even though he can afford to make minimum monthly payments on time. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
5. Credit should not consistently be used for non-durable goods. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
6. Credit cards with very low minimum balance requirements are in the consumer's best interest. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
7. One should not use credit to purchase food, clothing, and other non-durables, even if it is only for convenience and the balance will be totally paid upon billing. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
8. Never adding up all one's bills is one of the signs that one may be headed for serious credit problems. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
KEY: Bloom's: Comprehension 9. Using more than 20 percent of one's take-home income to pay off consumer debt is one of the signs that one may be headed for serious credit problems. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
10. Having a checking account tells a creditor that you have some experience in managing your own funds. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
11. Always paying cash is helpful in establishing a high level of creditworthiness. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
12. Having arranged and fully repaid a small loan should help improve creditworthiness. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
13. The purpose of a credit report is to evaluate the kind of risk you pose to the lender. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
14. Credit report is routinely used to predict credit worthiness. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
15. Paying a loan off much quicker than scheduled is one way to build a good credit rating. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
16. A debt safety ratio of 25% might be a signal of financial trouble ahead. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
17. A debt safety ratio of 5% would generally be a signal of financial trouble ahead.
ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
18. It is safe, and often required, to give your Social Security number as a form of identification when using a credit card. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
19. The most common forms of open account credit are bank credit cards and retail charge cards. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
20. The most common forms of open account credit are travel and entertainment cards. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
21. Auto loans are an example of open-end credit since you can add to the debt when you purchase another vehicle. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: East OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
22. A credit limit refers to the maximum amount the cardholder can owe the issuer at any point in time. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
23. The key to credit worthiness is to keep your debt safety ratio as high as possible. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
24. Individuals with better credit ratings usually can secure higher credit limits. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
25. Credit reports on individual borrowers are issued by credit unions reporting agencies. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
26. Credit reports on individual borrowers are issued by credit card issuers. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
27. Being late on credit payments only 2-3 times per year pay label you a "late payer" in your credit file. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
28. The required monthly payment on an open account will be the smaller of a minimum dollar amount or a specified percentage of the balance. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
29. Bank credit cards represent the most common kind of open account credit. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
30. Bank credit card cash advances will begin accruing interest charges immediately. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
31. Bank credit card purchases always begin accruing interest charges immediately. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
32. Advantages of balance transfers can include lower interest rates and the convenience of consolidation. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
33. Balance transfers can be expensive, including fees and eventually high interest rates. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
34. Bank credit cards often offer features such as buyer protection plans for a fee to all customers. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
35. Rebate credit cards work best for those who use the rebates, charge a lot, and do not carry high monthly balances. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
36. Generally speaking, the interest rates on credit cards are lower than any other form of credit. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
37. A revolving charge account requires the customers to pay off the debt 10 to 20 days after the billing date with no interest expense. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
38. Thirty-day or regular charge accounts require the customers to pay off the debt 10 to 20 days after the billing date with no interest expense. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
39. Interest rates on credit cards tend to be lower than most other forms of consumer credit. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
40. Most organizations that issue credit cards have basically the same qualifications for card applicants. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
41. Credit cards often have penalties for late payment and for exceeding credit limits. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
42. Open account credit is a form of credit extended to a consumer in advance of any transaction. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
43. The most common method used by lenders to apply finance charges to credit cards is the average daily balance including new purchases method.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
44. Nearly all credit cards have annual fees. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
45. Credit card users can often avoid finance charges entirely by paying their total balances by the stated due date. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
46. The grace period on a credit card starts on the billing date and ends on the date the lender should receive the payment. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
47. Secured credit cards require that the card holder puts up collateral in order to get the card. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
48. Student credit cards are structured much differently than regular credit cards. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
49. Debit cards are a form of credit that is very convenient to use. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
50. Debit cards look like credit cards, but they work like checks. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO:6-3 STA: DISC: Capital Budgeting and Cost of Capital
51. Prepaid cards are a form of credit that is very convenient to use and do not charge a service fee. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
52. Prepaid cards are used to pay for things, with the purchase amount electronically deducted from the card. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
53. Revolving credit lines are often accessed by writing checks. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
54. An overdraft protection line of credit allows one to routinely bounce checks with little or no adverse consequences. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
55. Unsecured lines of credit provide tax advantages if you itemize deductions. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
56. Unsecured lines of credit are easy to use and often use some form of collateral as default protection. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
57. The proceeds of a home equity loan can be used for just about any purpose, and the interest paid is usually tax deductible. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
58. One can lose his home if he does not repay his home equity line of credit. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
59. Home equity loans are one of the least expensive forms of consumer credit. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
60. For someone with a good credit rating, lenders will typically lend up to 100% of equity in a home using a home equity credit line.
ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
61. A credit applicant will be granted credit only after establishing a complete file at the local credit bureau. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
62. For a fee, credit bureaus can provide credit scores for prospective borrowers. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
63. Credit bureaus provide information about prospective borrowers. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
64. One can and should check his credit bureau file regularly. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
65. Credit bureau files often include information such as political and religious affiliations in addition to financial information. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
66. Credit scoring systems are often used by lenders to determine your creditworthiness. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
67. Chapter 7 bankruptcies remain in your credit file for 7 years. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
68. Your credit limit is determined by a number of factors, such as financial position, earning power, etc. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
69. A credit card user's credit rating will be harmed if she pays only the minimum monthly payment on a credit card. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
70. The more credit cards one has, the better one's credit score. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
71. Generally, finance charges are computed only on the unpaid balance from previous months' purchases. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
72. The most common method of computing finance charges on a credit card is the average daily balance method including new purchases. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
73. The amount of finance charges one pays on a credit card depends only on APR and the amount one charges. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
74. A woman's income can legally be discounted when she applies for credit. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
75. The intent of a Wage Earner Plan is to eliminate most of the debtor's obligations. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
76. A Chapter 13 bankruptcy filing would result in the discharge of most of your debts. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
77. Families who have a source of income and who want to retain their assets above the protected amount would select Chapter 13 rather than Chapter 7 bankruptcy.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
78. The majority of persons filing bankruptcy file Chapter 7 bankruptcy. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
79. The Wage Earner Planner requires debtors to give up most of their assets. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
80. Before filing for bankruptcy, debtors should consider seeking the help of a credit counselor. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
81. Identity theft is a growing problem that could damage your credit rating. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
82. It is recommended that you never give your credit card account number out over the phone. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
83. If you initiated the telephone call, it is okay to give your credit card account number when ordering/purchasing from major catalog houses, airlines, hotels, and so on. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
84. Auto loans and mortgage loans are about equal in terms of their relative share of average household liabilities. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 6-1 KEY: Bloom's: Knowledge
85. The majority of reduction in consumer indebtedness is due to home and consumer loan defaults. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills 86.
DIF: Moderate OBJ: LO: 6-1 KEY: Bloom's: Knowledge
The decline in housing prices made it harder for households to refinance their mortgages. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 6-1 KEY: Bloom's: Analysis
87. Discount store and online sales have dropped in the aftermath of the recession. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 6-1 KEY: Bloom's: Knowledge
88. After the Credit Card Act of 2009 was passed, late payments dropped but defaults increased. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 6-1 KEY: Bloom's: Knowledge
MULTIPLE CHOICE 1. Appropriate reasons to use credit include for a. convenience. b. durable expenses. c. investments. d. emergencies. e. all of the above ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
2. It is not a good idea to use credit for a. convenience. b. durable expenses. c. consumable items. d. investments. e. improving one's credit rating. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
3. It is not a good idea to use credit to a. buy a home. b. live beyond one's means. c. spread payments within a budget. d. purchase expensive items. e. replace a check for small items. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension 4. ____ would be a proper use of credit. a. Purchase of a house
DIF: Easy OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
b. c. d. e.
A financial emergency Shopping convenience Investing All of these
ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
5. ____ is a benefit of borrowing. a. The ability to buy expensive goods while spreading the payments over time b. Providing payments that fit into a budget c. Having a permanent record of transactions d. Being able to purchase goods and services when checks are not acceptable e. All of these are benefits. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
6. To establish creditworthiness you probably should first a. open savings and checking accounts. b. use credit extensively. c. arrange a small loan. d. pay cash for all purchases. e. arrange a large loan from close relatives. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
7. ____ would be an indication of overspending. a. Your checks are bouncing. b. Collection agencies are calling you frequently . c. All your credit cards are charged up to their limits. d. You have no cash reserves and must borrow for incidentals. e. All of the above. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
8. All of the following are useful ways to build a strong credit rating except a. Open checking and savings accounts. b. Open and use a charge account. c. Apply for a long-term loan and occasionally be late with a payment. d. Make payments on time. e. Talk with the lender if you foresee difficulty in making a payment. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
9. As a percent of take-home pay, monthly consumer credit payments should not exceed a. 25%.
b. c. d. e.
20%. 15%. 10%. 5%.
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
10. If your monthly before-tax income is $2,000 and your monthly take-home pay is $1,500, your maximum monthly consumer credit payments should not exceed a. $600. b. $450. c. $400. d. $300. e. $200. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
11. Clare's gross salary is $36,000 annually and her after-tax income is $28,800. What is Clare's maximum recommended monthly consumer credit payment? a. $600. b. $480. c. $450. d. $360. e. $200. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
12. Open account credit is characterized by a. no credit limit. b. a monthly credit statement. c. annual billing. d. minimum balance requirements. e. none of the above. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
13. With open account credit, one can often avoid interest charges if a. the account balance is paid in full every month. b. at least half the account balance is paid every month. c. the minimum payment is made every month. d. the account is a revolving credit account. e. the balance is below the credit limit. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
14. Mike has a MasterCard with an annual fee of $25, 18% interest, and a $1,000 credit limit. He always pays the total outstanding balance monthly. His most recent monthly statement lists last month's payment, new charges this month totaling $1,500, and a $30 fee. That fee is most likely the result of a. interest charges. b. his annual fee. c. an over-the-limit fee. d. a late payment. e. transaction fees on purchases. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
15. ____ are not a type of open account credit. a. Retail charge cards b. 30-day charge accounts c. Travel and entertainment cards d. Bank credit cards e. Bank debit cards ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
16. Interest will almost always begin to accrue immediately when you use a bank credit card to a. make purchases. b. send payments. c. compute finance charges. d. get cash advances. e. all of these. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
17. William uses his bank credit card frequently; however, he always pays off the total balance on the card each month. What should William look for in a credit card given the way he uses a credit card? a. Low annual fee and short grace period b. Low annual fee and low interest rate c. No annual fee and short grace period d. No annual fee and long grace period e. High annual fee and low interest rate ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 6-5 STA: DISC: Capital Budgeting and Cost of Capital
18. Ann Marie accumulated a large balance on her credit card while in college. She is trying to get it paid off as quickly as possible and wants to roll the balance onto a new credit card. She now uses a credit card only for emergencies. What should Ann Marie look for in a credit card given the large balance and the way she plans to use the card? a. low annual fee b. low APR c. long grace period d. average daily balance method excluding purchases
e. two-cycle average daily balance method ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 6-5 STA: DISC: Capital Budgeting and Cost of Capital
19. When comparing credit cards, a person who pays his total outstanding balance off monthly would want a card with a. a low required minimum payment percentage. b. a low interest rate. c. an adequate grace period. d. no annual fee e. c and d ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 6-5 STA: DISC: Capital Budgeting and Cost of Capital
20. Rebate card work best for those who use the rebates and a. charge large amounts on the card. b. pay the total card balance off monthly. c. carry high monthly balances. d. travel internationally e. a and b ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 6-5 STA: DISC: Capital Budgeting and Cost of Capital
21. Interest rates on ____ are typically lower than on any other form of consumer credit. a. travel and entertainment cards b. debit cards c. credit cards d. home equity loans e. unsecured personal credit ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
22. As well as being among the cheapest forms of consumer credit, these offer shelters from taxes: a. Automobile loans b. Home Equity loans c. Credit cards d. Unsecured personal credit ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
23. ____ cards offer the cardholder a way to contribute to a worthy cause, sometimes described as "painless philanthropy." a. Travel and entertainment b. Debit c. Credit
d. Affinity e. Rebate ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
24. Persons with very poor credit ratings can still get ____ credit cards. a. secured b. student c. prestige d. affinity e. rebate ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
25. Student credit cards typically require that one be enrolled in a 2- or 4-year college/university and a. a parent's signature. b. own a vehicle. c. hold a job. d. have some form of income. e. take at least nine hours. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
26. ____ does not represent a line of credit. a. Retail credit card b. Debit card c. Overdraft protection d. Home equity LOC e. Unsecured personal credit ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
27. Theresa is a bit of a spendthrift. She has trouble saying no when it comes to buying things. Which of the following cards would keep her out of debt? a. debit b. credit c. affinity d. rebate e. prestige ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
28. Cards that can be used to pay for selected items and the amount of the transaction is automatically subtracted from the card value are called ____ cards. a. debit
b. c. d. e.
credit affinity prepaid prestige
ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
29. The ____ is really a second mortgage on your home. a. affinity card b. unsecured personal credit line c. home equity line of credit d. preferred Visa card e. platinum American Express card ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
30. Sheldon has a home valued at $108,000 and an outstanding mortgage of $70,000. If his lender is willing to provide a home equity loan of up to 80% of market value, how much could Sheldon borrow using a home equity loan? a. $86,400 b. $80,000 c. $38,000 d. $30,400 e. $16,400 ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
31. Russ and Lois have a home valued at $96,000 and an outstanding mortgage of $60,000. If their lender is willing to provide a home equity loan of up to 75% of market value, how much could they borrow using a home equity loan? a. $ 0 b. $12,000 c. $27,000 d. $28,000 e. $36,000 ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
32. A problem with home equity loans is the a. high rate of interest on these loans. b. difficulty in qualifying for these loans. c. short-term nature of these loans. d. temptation to spread payments over a long term. e. tax disadvantages of these loans. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
KEY: Bloom's: Evaluation 33. The lender uses a credit application to determine whether the borrower has the ____ to handle the debt. a. character and confidence. b. confidence and capacity. c. acumen and capacity. d. character and capacity. e. credit and character. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
34. The quality of your credit rating is maintained by a. only using cash to make purchases. b. making credit payments early. c. seldom questioning billing errors. d. using multiple credit cards. e. meeting credit obligations as contracts require. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
35. A ____ is an agency that provides credit information about individual borrowers to lenders. a. credit bureau b. consumer bureau c. credit statement d. bank e. credit scoring house ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
36. If the information on your credit report is in dispute, you are entitled to a. correct it. b. sue. c. erase it. d. supply your own explanation about the dispute. e. withdraw from the credit bureau. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
37. Borderline credit risks would most likely receive a. delayed reconsideration for credit application. b. a limited line of credit. c. a negative credit rating. d. credit only as applied for. e. credit only in emergency situations. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
KEY: Bloom's: Evaluation 38. Which of the following are true regarding credit scoring systems? a. Lower scores are better than higher scores. b. Scoring systems are based on statistical studies. c. Credit unions calculate and sell credit scores to lenders. d. Females receive higher score than males. e. All of the above. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
39. The following information provides insight to a lender about the applicant's credit worthiness except: a. personal/family matters b. housing c. employment d. income e. all of the above provide insight ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
40. All of the following are key items lenders look at in granting credit except a. income. b. outstanding debt. c. stability in employment and housing. d. religious affiliations. e. credit history. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
41. Finance charges on two credit cards with the same stated APR a. will always be the same. b. by federal law must be calculated the same way. c. will be determined by the type of credit card used. d. will be determined by the method used to calculate balances. e. none of these. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
42. For a person who sometimes pays his entire credit balance and sometimes pays the minimum payment, which calculation method would be the least expensive? a. average daily balance including new purchases b. average daily balance excluding new purchases c. two-cycle average daily balance including new purchases d. two-cycle average daily balance excluding new purchases e. both b and d would produce the same, low finance charge ANS: B
PTS: 1
DIF: Challenging
OBJ: LO: 6-4
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
STA: DISC: Capital Budgeting and Cost of Capital
43. A credit card can provide an interest-free loan if you a. pay for purchases within six months. b. pay the minimum payment. c. pay the entire balance on or before the due date. d. pay the previous balance by the due date. e. receive a cash advance. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
44. A monthly credit card statement need not include information about the a. size of the payment. b. payment due date. c. type of the goods purchased. d. annual percentage rate. e. finance charge if any. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
45. Anna uses her credit card regularly, but she pays the total balance monthly. Anna should look for a credit account with a. no annual fee. b. low interest rates. c. long grace period. d. a and b. e. a and c. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 6-5 STA: DISC: Capital Budgeting and Cost of Capital
46. Joe and Jane have a tendency to build up large balances on their credit cards. Which of the following would be least important for them? a. no annual fee. b. low interest rates on balances. c. long grace period. d. method of calculating balances. e. a and b. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 6-5 STA: DISC: Capital Budgeting and Cost of Capital
47. When canceling a credit card, you should cut up the card and ____ that you are canceling your account. a. inform the issuer in writing b. call the issuer and tell them c. inform the credit bureau in writing d. call the credit bureau and tell them
e. all of the above ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
48. When paying for something with a check, don't give your ____ number. a. Social Security b. credit card c. drivers license d. a and b e. a, b, and c ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
49. Which of the following household appliances could help you protect yourself against identity theft? a. VCR b. cell phone c. shredder d. home computer e. telephone answering machine ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
50. Personal insolvency can be legally satisfied by a. Chapter 13 bankruptcy. b. relinquishing all credit cards. c. Chapter 7 bankruptcy. d. b and c above. e. a and c above. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
51. Chapter 7 bankruptcy will a. eliminate all financial obligations. b. result in the loss of all one's assets. c. stay on one's credit record up to 10 years. d. a and c e. a, b, and c ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
52. Chapter 7 bankruptcy will typically a. eliminate most debt obligations. b. require monthly payments to a bankruptcy trustee. c. stay on one's credit record up to 10 years. d. a and c
e. a, b, and c ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
53. A type of bankruptcy that allows one to wipe out his unsecured debt and restructure his secured debt is called a. the wage earner plan. b. Chapter 11 bankruptcy. c. Chapter 20 bankruptcy. d. Chapter 7 bankruptcy. e. Chapter 13 bankruptcy. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
54. Credit bureaus a. will send you a free copy of your credit report whenever you ask. b. may charge up to $20 for a copy of your credit report. c. are required to correct errors only when a creditor asks them to. d. All of these e. None of these ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
55. The following are methods used to obtain personal information for identity theft except: a. lost or stolen wallet/credit card b. family, friends, acquaintances c. corrupt employees d. stolen mail e. all the above are methods used ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
56. Indebtedness relative to household income decreased due to all but a. home sales d. consumer loan defaults b. home foreclosures e. surge in home mortgage refinancing c. fewer consumer loans ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 6-1 KEY: Bloom's: Analysis
57. Most of the reduction in household indebtedness is due to a. fewer new loans d. loan workout agreements b. loan defaults e. c and d c. accelerated payment schedules ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 6-1 KEY: Bloom's: Knowledge
58. The “deleveraging” by consumers resulted, in part, from all but a. reduced use of installment credit d. looser credit conditions b. reduced use of revolving credit e. voluntary credit restraint c. reduced supply of credit ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 6-1 KEY: Bloom's: Knowledge
59. In the year after the Credit Card Act of 2009 went into effect a. credit card balances rose b. late payments increased c. payment defaults declined ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
d. there was a drop in the use of debit cards relative to credit cards e. a, b, and c are correct. DIF: Challenging OBJ: LO: 6-1 KEY: Bloom's: Knowledge
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 1. Using [credit | savings] to handle financial emergencies is the recommended choice. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
2. An improper use of extended credit would be to buy a [car | vacation]. ANS: b PTS: 1 DIF: Easy OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
3. A proper use of open account credit would be to buy a [food | washing machine]. ANS: b PTS: 1 DIF: Easy OBJ: LO: 6-1 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
4. The first step to take in establishing a credit history is to [get a credit card | open checking and savings accounts]. ANS: b PTS: 1 DIF: Easy OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
5. Most creditors [will | will not] be willing to work something out with you if you are having difficulty meeting your payments. ANS: a PTS: 1 DIF: Easy OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
6. You are likely to have financial difficulty if your personal credit obligations exceed [15% | 20%] of your take home pay. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
7. Nancy's take-home income is $3,000 per month, and she currently has $700 monthly consumer debt. According to the general rules of thumb, Nancy [is | is not] in a position to take on additional consumer debt. ANS: b PTS: 1 DIF: Challenging OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
8. An example of open account credit would be a bank [debit | credit] card. ANS: b PTS: 1 DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
9. Most bank credit cards have interest rates that will [remain the same as long as you hold the card | be adjusted as interest rates in general rise and fall]. ANS: b PTS: 1 DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
10. A major difference between bank credit cards and travel and entertainment credit cards is [the travel and entertainment | the bank] cards expect balances to be paid in full each month. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
11. Rebate cards are most useful for consumers who charge a lot and [maintain | do not maintain] large balances of their cards. ANS: b PTS: 1
DIF: Moderate
OBJ: LO: 6-3
NAT: BUSPROG: Analytic skills
STA: DISC: Capital Budgeting and Cost of Capital
KEY: Bloom's: Analysis
12. Student credit cards usually [do | do not] require parental or guardian guarantees. ANS: b PTS: 1 DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
13. One condition of a secured credit card is that the holder must [pay a higher rate of interest | deposit an amount equal to the credit line in a savings account]. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
14. Interest paid on a [home equity line of credit | credit card] would be deductible if you itemize your deductions on your federal tax return. ANS: a PTS: 1 DIF: Easy OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
15. A person who pays his credit balance off every month should look for a credit card with a [long | short] grace period. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 6-5 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
16. A person who pays her credit balance off every month should look for a credit card with [a low interest rate | no annual fee]. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 6-5 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
17. The decision whether or not to grant you credit will be made by [individual creditors | the credit bureau]. ANS: a PTS: 1 DIF: Easy OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
18. A home equity lines of credit is one of the [most | least] expensive forms of consumer credit. ANS: b PTS: 1
DIF: Easy
OBJ: LO: 6-3
NAT: BUSPROG: Analytic skills
STA: DISC: Capital Budgeting and Cost of Capital
KEY: Bloom's: Knowledge
19. Your chances of being approved for a loan [increase | decrease] the higher your credit score. ANS: a PTS: 1 DIF: Easy OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
20. [The Wage Earner Plan | Straight Bankruptcy] involves some type of debt restructuring. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
21. Most of your debts would be totally discharged under Chapter [7 | 13] of the federal bankruptcy law. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
22. The most expensive method of determining finance charges on revolving credit would be [two cycle ADB w/purchases | ADB excluding purchases]. ANS: a PTS: 1 DIF: Challenging OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
23. A credit scoring system might assign points according to your annual income and [gender | age]. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
24. The "preferred" way of stealing from consumers now is [through your credit card | stealing your car]. ANS: a PTS: 1 DIF: Easy OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
25. The first step to take if you are having credit difficulties would be to [talk to creditors | consult a credit counselor]. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 6-6 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
26. In terms of overall household liabilities, [auto | home] loans comprise the largest share.
ANS: b PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 6-1
NAT: BUSPROG: Analytic skills
27. The majority of reduction in consumer indebtedness is due to [loan defaults | loan repayments] ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge
OBJ: LO: 6-1
NAT: BUSPROG: Analytic skills
28. The decline in housing prices made it [harder | easier] for households to refinance their mortgages. ANS: a PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 6-1
NAT: BUSPROG: Analytic skills
29. Discount store and online sales have [decreased | increased] as consumers look for more bargains. ANS: b PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 6-1
NAT: BUSPROG: Analytic skills
30. In the year after the Credit Card Act of 2009 was passed, there was a(n) [increase | decrease] in the use of debit cards relative to credit cards. ANS: a PTS: 1 DIF: Challenging KEY: Bloom's: Knowledge
OBJ: LO: 6-1
NAT: BUSPROG: Analytic skills
31. In the year after the Credit Card Act of 2009 was passed, there was a(n) [increase | decrease] in defaults. ANS: b PTS: 1 DIF: Challenging KEY: Bloom's: Knowledge
OBJ: LO: 6-1
NAT: BUSPROG: Analytic skills
32. In the year after the Credit Card Act of 2009 was passed, there was a(n) [increase | decrease] in late payments. ANS: b PTS: 1
DIF: Challenging
OBJ: LO: 6-1
NAT: BUSPROG: Analytic skills
KEY: Bloom's: Knowledge PROBLEM 1. Lindsey has a job with monthly take-home pay of $3,500. Using the suggested maximum debt safety ratio, what maximum debt burden per month can she assume? (Show all work.) ANS: The maximum debt safety ratio is 20 percent. Therefore, Lindsey's maximum debt burden is 0.20 $3,500 = $700 per month PTS: 1 DIF: Challenging OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
2. Ted and Karen have a combined take-home income of $4,500. Their total monthly payments on consumer debt are $875. What is their debt safety ratio? Are they exhibiting any sign of approaching credit problems? ANS: $875/$4,500 = 19.4% They are approaching the maximum recommended level of consumer debt so they are exhibiting signs of potential credit problems. Ted and Karen should avoid taking on additional consumer debt. PTS: 1 DIF: Challenging OBJ: LO: 6-2 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
3. You have a $926 balance on your credit card account. The minimum payment on your account is 2 percent of the latest balance or $20, whichever is greater. What will be the minimum payment this month? ANS: $926 .02 = $18.52 Since 2% of the balance is less than $20, the minimum payment is $20. PTS: 1 DIF: Moderate OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
4. The APR on this account is 18%. Assuming the $926 does not include any interest charge, how much of your minimum payment will be used for interest? ANS: $926 .18/12 = $13.89 will be needed for interest PTS: 1 DIF: Challenging OBJ: LO: 6-4 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
5. The market value of your house is $175,000 and you have a first mortgage balance of $100,000. If a lender requires a 80% loan-to-market value ratio, how large could your home equity loan be? ANS: ($175,000 0.80) - $100,000 = $40,000
PTS: 1 DIF: Moderate OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
6. Denise (a single taxpayer) contributes $6,000 annually to her church. In addition, she owns a home in which she has $20,000 equity, and she itemizes deductions. If she pays $1,000 interest on credit cards, $6,000 interest on her home equity loan, and is in the 26% marginal tax bracket, calculate Denise's tax savings from these interest payments. ANS: $6,000 0.26 = $1,560. The credit card interest is not deductible. PTS: 1 DIF: Challenging OBJ: LO: 6-3 STA: DISC: Capital Budgeting and Cost of Capital
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
Chapter 7—Using Consumer Loans TRUE/FALSE 1. Consumer loans are often used by individuals today to purchase nondurable items. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-1 STA: DISC: TVM TOP: Bloom's: Knowledge
2. Consumer loans, like open account credit, result from a rather informal process. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Comprehension
3. Consumer loans are most commonly used to obtain durable goods. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
4. The most common use of consumer loans are to purchase automobiles. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
5. From a financial planning perspective, you should ask yourself how low of a payment you can get when considering using consumer loans. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Analysis
6. A personal, unsecured consumer loan is most frequently used to help borrowers straighten out a critical financial situation. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Analysis
7. Collateral is an item of value used to secure the principal portion of a loan. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
8. The cash value of a whole life insurance policy can be used as a source of loan collateral. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
9. Consolidation loans are used to purchase new furniture and appliances when many items are needed at the same time. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Comprehension
10. Consolidation loans are often used to help borrowers straighten out a critical financial situation. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
11. Borrowing to pay for a college education is a legitimate use of credit. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Comprehension
12. College costs have been escalating faster than the overall rate of inflation. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
13. College costs have been escalating, but not as rapidly as the overall rate of inflation. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
14. The student loans with the lowest rates of interest and the best loan terms are the PLUS loans. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Synthesis
15. The student loans with the best loan terms are the Stafford and the Perkins loans. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Synthesis
16. PLUS loans are made to parents or legal guardians rather than to the student. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
17. Student loans are made by banks and other financial institutions, but students apply for these loans through their universities. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
18. In order to receive student loans, the student must be making satisfactory progress in his academic program. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
19. 529 Plans are the newest type of student loans. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
20. The student loans with the lowest rates of interest and the best loan terms are the PLUS loans.
ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
21. Earnings on 529 college savings plans can be tax free when used for qualifying college education expenses. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
22. Student loan debt can be discharged by filing for bankruptcy. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
23. Single payment loans are used mostly for short-term financing. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Knowledge
24. Installment loans are typically repaid in one payment. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Comprehension
25. Installment loans are typically repaid in monthly payments. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Comprehension
26. The repayment period on most installment loans is six to twelve months. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
27. The majority of consumer loans are set up with fixed interest rates. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
28. When the market interest rate goes up, the rate on variable rate loans goes up. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Analysis
29. Variable rate loans are desirable if interest rates are expected to fall in the future. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Analysis
30. Both single-payment and installment loans can have variable interest rates. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Synthesis
31. Commercial banks are generally more selective in granting loans than finance companies. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
32. Credit unions dominate the consumer loan market. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
33. Savings and loan associations dominate the consumer loan market. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
34. Consumer finance companies usually charge lower rates of interest than commercial banks. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
35. Most loans made by consumer finance companies are for larger amounts and are made to low risk borrowers. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
36. Credit unions grant loans only to members of the credit union. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
37. Credit unions offer some of the most attractive loan terms available. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
38. The primary type of loan made by a savings and loan association is the long-term installment loan used for the purchase of a home. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
39. Savings and loan associations are allowed to make loans for things like cars, boats, and motorcycles. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
40. Sales finance companies commonly purchase the retail installment contracts of businesses that sell big-ticket items such as automobiles, furniture, and appliances. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
41. GMAC is an example of a captive sales finance company.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Application
42. Cash value loans are available from all types of life insurance policies. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
43. Loans from whole life insurance policies are structured so that the interest rate on the loan is set at the time the loan is made. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
44. Life insurance loans are income tax-free. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
45. Because no written contract is usually required, borrowing from friends and relatives is advisable. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Analysis
46. When loaning money to a friend or family member, it is advisable to lend only the amount that you can afford to give away. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Analysis
47. When comparing two installment loans with the same principal and APR, the loan with the longer maturity will have the lower monthly payment and the higher total costs. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Analysis
48. When comparing two installment loans with the same principal and APR, the loan with the shorter maturity will have the lower monthly payment and the lower total costs. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Analysis
49. It is becoming increasingly frequent for longer-term installment loans to carry variable interest rates. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Knowledge
50. Generally speaking, variable rate loans are desirable if interest rates are expected to increase over the course of the loan. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Analysis
51. Rebates are almost always more cost effective than the lower interest rate offered on automobile loans. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Analysis
52. Generally, collateral for an installment loan may be seized and liquidated by the lender if the borrower has paid the loan in full. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Knowledge
53. If a loan has a prepayment penalty, there will be an additional cost to repay the loan early. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Knowledge
54. A chattel mortgage is a legal claim that gives lenders the right to liquidate specific personal property to satisfy their claims in the event of default. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Knowledge
55. When simple interest is used, the stated rate of interest on single payment loans is equal to the annual percentage rate (APR). ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Comprehension
56. With the discount method, the finance charges are calculated and then added to the amount borrowed. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Comprehension
57. An installment purchase agreement typically includes a sales contract, a security agreement, a note, and an insurance agreement. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-5 STA: DISC: TVM KEY: Bloom's: Knowledge
58. Simple interest on an installment loan is charged only against the initial loan principal. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-5 STA: DISC: TVM KEY: Bloom's: Analysis
59. The add-on method is less expensive than the simple interest method when stated rates of interest are identical. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-5 STA: DISC: TVM KEY: Bloom's: Analysis
60. If the add-on method is used to calculate a finance charge of $150.80 on a $2,200 loan, the amount to be repaid is $2,200. ANS: F
PTS: 1
DIF: Challenging
OBJ: LO: 7-5
NAT: BUSPROG: Analytic skills
STA: DISC: TVM KEY: Bloom's: Analysis
61. If the add-on method is used to calculate a finance charge of $100.80 on a $1,800 loan, the amount to be repaid is $1,900.80. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-5 STA: DISC: TVM KEY: Bloom's: Analysis
62. If the discount method is used to calculate a finance charge of $250.60 on a $2,400 loan, the amount to be disbursed to the borrower is $2,400. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Analysis
63. If the discount method is used to calculate a finance charge of $250.60 on a $2,400 loan, the amount to be repaid is $2,400. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Analysis
64. The most accurate method currently available for calculating the annual percentage rate (APR) on an add-on loan is the Rule of 78. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Analysis
65. If a 12-month installment loan is prepaid at the end of 6 months, less than one half of the interest would be saved. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Analysis
66. In most cases, lenders will liquidate the collateral until the loan is paid. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Comprehension
67. The purchase of credit life insurance is highly recommended by most financial planning experts. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Comprehension
68. The average annual cost of a college education at a state school is about $33,000. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-1 KEY: Bloom's: Knowledge
69. About one in four student loans are past due. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-1 KEY: Bloom's: Knowledge
70. The best loan rates for consumer loans are usually from consumer finance companies.
ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 KEY: Bloom's: Synthesis
71. Finance companies are generally more selective in granting loans than credit unions. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 KEY: Bloom's: Synthesis
MULTIPLE CHOICE 1. Long-term financial goals often depend on borrowing funds. The type of loan that does not fulfill the long-term goal achievement is ____ loans. a. consumer b. installment c. automobile d. mortgage e. single payment ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Analysis
2. A characteristic of consumer loans is that they a. include a negotiated contract. b. are arrived at through a formal process. c. include a repayment schedule. d. are used to purchase big-ticket durable goods and other items. e. are all of these. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Analysis
3. A consumer loan probably would not be used to a. purchase an auto. b. pay for college tuition. c. consolidate several loans into one. d. finance a special vacation. e. buy back-to-school clothes. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Comprehension
4. The most popular use of consumer loans is to a. purchase a car. b. finance a college education. c. finance a vacation. d. buy a house. e. buy furniture. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills 5. A personal consumer loan could be used to a. consolidate several loans into one.
DIF: Easy OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
b. c. d. e.
purchase a car. cover a temporary cash shortfall. buy a mobile home. do all these things.
ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
6. Consumers whose debt burden has become very heavy might apply for a(n) a. personal loan. b. single payment loan. c. buy-down loan. d. consolidation loan. e. interim financing. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Application
7. To qualify for a Stafford loan, you must a. demonstrate financial need. b. have a good credit rating. c. make satisfactory academic progress. d. all of the above e. a and c only ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
8. To qualify for a Perkins loan, you must a. demonstrate financial need. b. visit the financial institution. c. apply through your parents. d. all of the above e. a and c only ANS: A PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
9. Regarding student loans, which of the following is not true? a. They are available for both undergraduate and graduate students. b. Applications can be filled out on the Internet. c. There is no limit on how much can be borrowed. d. There is no limit on the number of loans one can have. e. Interest may be tax deductible. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
10. Regarding student loans, which of the following is true? a. They are available only for undergraduate. b. Parents (or legal guardians) must cosign. c. There is a limit on how much can be borrowed. d. There is a limit on the number of loans one can have. e. Interest does not have to be repaid. ANS: C
PTS: 1
DIF: Moderate
OBJ: LO: 7-1
NAT: BUSPROG: Analytic skills
STA: DISC: TVM KEY: Bloom's: Knowledge
11. ____ loans do not have to be repaid until after you graduate from college. a. Stafford and Perkins b. Stafford and PLUS c. Perkins and PLUS d. PLUS and SLS e. Perkins and SLS ANS: A PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
12. Which of the following is accurate concerning 529 college savings plans? a. Contributions are tax deductible for both state and federal income taxes. b. Earnings are tax-free when used for qualifying educational expenses. c. They have no impact on qualifying for financial aid. d. There is no limit on how much can be contributed. e. All of the above. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
13. If your installment loan has a variable interest rate, a. the rate will remain the same over the life of the loan. b. the amount you borrowed will change with interest rates. c. you cannot accurately predict the total interest you will pay on the loan. d. you can calculate the total interest you will pay on the loan. e. your monthly loan payment will change every month. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Analysis
14. Commercial banks generally charge lower interest rates than other lending institutions because a. they make shorter term loans. b. they usually take only the best credit risks. c. depositors require lower rates. d. they get their funds in the open credit market. e. they make secured loans only. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
15. A ____ is often a source of low-rate automobile financing on specific models of vehicles. a. savings and loan association b. credit union c. commercial bank d. consumer finance company e. captive finance company ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
16. If you needed a loan to buy furniture, the lowest interest rate would usually be available from a a. savings and loan association. b. pawn shop.
c. captive finance company. d. consumer finance company. e. credit union. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
17. The highest interest rate installment loans are usually made by a. consumer finance companies. b. commercial banks. c. credit unions. d. savings and loan associations. e. life insurance companies. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
18. Credit unions lend money to qualified people who are a. employees. b. members. c. previous borrowers. d. policyholders. e. stockholders. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
19. The majority of loans made by savings and loan associations are ____ loans. a. home improvement b. auto c. mortgage d. education e. consolidation ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
20. Sales finance companies a. lend money to retailers. b. buy installment loans from retailers. c. sell installment loans to retailers. d. lend money to consumers. e. sell installment loans to banks. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
21. A loan from the cash value of your life insurance policy would be characterized by a. increased death benefits to beneficiaries. b. increased premiums. c. unchanged death benefits available to beneficiaries. d. no specific repayment date. e. annual percentage rates higher than other sources. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
22. Bob Shockey borrowed $25,000 from his $250,000 cash value life insurance policy to send his daughter to private college. Assuming he pays interest as in accrues, if Bob dies before the debt is repaid his beneficiary will receive a. $275,000. b. $250,000. c. $225,000. d. $ 25,000. e. Taxable income. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Evaluation
23. Which of the following are recommended if you loan money to a friend or relative? a. Charge a market rate of interest. b. Have a lawyer draft a loan contract. c. Put the agreement in writing. d. Make the loan due within one year or less. e. All of the above ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
24. Which of the following are recommended if you loan money to a friend or relative? a. Do it in a business-like fashion. b. Charge interest if the loan is not to be quickly repaid. c. Be sure both parties understand it is a loan, not a gift. d. Lend only money you can afford to give away. e. All of the above ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
25. Besides the finance charge, you should also consider ____ when you shop for a consumer loan. a. loan maturity b. total cost of the loan c. collateral d. repayment penalties e. all of the above ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Knowledge
26. A single-payment loan is advantageous only if a. the interest rate is less than on an installment loan. b. funds will be available to repay the lump sum. c. figured with discount method. d. figured with simple interest method. e. it is unsecured. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills 27. A single payment loan a. is generally unsecured by collateral.
DIF: Challenging OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Analysis
b. c. d. e.
usually matures in one year or less. usually matures in five to seven years. is generally used to finance auto purchases. is provided by sales finance companies.
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Knowledge
28. If you borrow money on a single payment loan and discover you cannot pay it back when it is due you should a. let the payment become past due. b. consolidate the loan. c. convert the loan to installments. d. negotiate a rollover e. file bankruptcy ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Knowledge
29. When the simple interest method is used to determine finance charges, the interest is calculated based on the a. ending balance of the loan. b. average outstanding balance. c. actual balance of the loan. d. beginning balance of the loan. e. none of these. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Knowledge
30. Annual percentage rate is equivalent to a. dollar cost of credit method. b. discount method. c. average loan balance method. d. add-on method. e. simple interest method. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Analysis
31. The annual percentage rate (APR) on a single payment loan for $1,000 at a simple interest rate of 12% is a. 10%. b. 12%. c. 15%. d. 18%. e. 24%. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Comprehension
32. Purchasing credit life or disability insurance protection is usually a. required in order to make the loan. b. non-negotiable. c. at the lender's option.
d. very costly. e. a good idea for the borrower. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Comprehension
33. When credit life or disability insurance protection is required as a condition of a loan, the cost a. must be added to the finance charge. b. must be included in the APR calculation. c. is generally very reasonable. d. a and b e. a, b, and c ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Knowledge
34. A(n) ____ clause gives the lender legal recourse in collecting the debt if the borrower does not pay. a. add-on b. sales c. acceleration d. garnishment e. balloon ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Knowledge
35. Installment loans using the simple interest method a. have the highest finance charges of any method. b. have interest charged only on the monthly loan balance. c. do not have balloon payments. d. have a lower APR than the stated interest rate. e. have a higher APR than the stated interest rate. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Analysis
36. You want to borrow $1,000 at an interest rate of 10%. The most expensive method of calculating the dollar cost of the interest on this installment loan will be the a. add-on method. b. double declining balance method. c. discount method. d. simple interest method. e. past-due balance method. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Synthesis
37. The monthly payment on an 8%, 36-month, add-on loan for $10,000 would be a. $278 b. $300 c. $314 d. $344 e. $380 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Evaluation
38. Home equity loans are similar to other installment loans except a. interest rates are generally higher. b. the interest paid is generally tax deductible. c. no home equity is required. d. they are typically unsecured debts. e. a and c ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Knowledge
39. Sometimes it may be better to use savings rather than borrow to make a purchase. This would be recommended when a. the borrower has adequate savings. b. interest rates are rising. c. interest rates are falling. d. the cost of borrowing is greater than the interest earned on the savings. e. interest earned on savings is greater than the interest paid on the loan. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Analysis
40. A legal claim that allows creditors to liquidate loan collateral is a a. loan. b. note. c. security claim. d. lien. e. none of these ANS: D PTS: 1 NAT: BUSPROG: Analytic skills 41. The average student loan in 2012 was a. $5,200 b. $10,600 c. $12,800 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Knowledge d. $18,400 e. $26,300 DIF: Easy OBJ: LO: 7-1 KEY: Bloom's: Knowledge
42. Before taking out students loans, all the following should be considered except a. grants d. personal resources b. federal student aid e. all of the above c. scholarships ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-1 KEY: Bloom's: Knowledge
43. Which of the following loan sources is the most expensive? a. Commercial banks d. Savings and loan associations b. Credit unions e. None of the above c. Consumer finance companies ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 7-2 KEY: Bloom's: Knowledge
44. Which source of consumer loans often has the most favorable terms? a. Commercial banks d. Savings and loan associations b. Credit unions e. None of the above c. Consumer finance companies ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-2 KEY: Bloom's: Knowledge
45. Which source of consumer loans specializes in home mortgage lending? a. Commercial banks d. Savings and loan associations b. Credit unions e. None of the above c. Consumer finance companies ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 7-2 KEY: Bloom's: Knowledge
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 1. Consolidation loans are generally [inexpensive | expensive]. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
2. Loan repayment of a [Perkins | PLUS] loan would not begin until a student is out of school. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
3. Loan repayment of a [PLUS | Stafford] loan would begin a month after the loan is received. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
4. To get a government-backed student loan, one should contact his [bank | university]. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
5. The interest paid on a student loan [is sometimes | is not] tax deductible. ANS: a
PTS: 1 DIF: Challenging OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
6. There is a limit on the [number | dollar amount] of student loans you can have. ANS: b PTS: 1 DIF: Challenging OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
7. 529 plans are best suited for a child [already in college | with several years left before going to college]. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Comprehension
NAT: BUSPROG: Analytic skills
8. A 529 plan is a [savings | lending] plan. ANS: a PTS: 1 DIF: Easy OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
9. The majority of consumer loans are made with [fixed | variable] interest rates. ANS: a PTS: 1 DIF: Easy OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
10. When interest rates are rising, you would prefer a [fixed-rate | variable-rate] loan. ANS: a PTS: 1 DIF: Challenging OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Analysis
NAT: BUSPROG: Analytic skills
11. When interest rates are falling, you would prefer a [fixed-rate | variable-rate] loan. ANS: b PTS: 1 DIF: Challenging OBJ: LO: 7-1 STA: DISC: TVM KEY: Bloom's: Analysis
NAT: BUSPROG: Analytic skills
12. The majority of single payment loans [are | are not] secured by collateral. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
13. Almost half of all consumer loans are made by [commercial banks | finance companies].
ANS: a PTS: 1 DIF: Easy OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
14. You must be a member of a [credit union | S&L] in order to borrow money there. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
15. [Consumer finance companies | Credit unions] obtain funds from their shareholders and through open market borrowing. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
16. A [sales finance company | captive finance company] purchases notes drawn up by sellers of typically big-ticket items. ANS: a PTS: 1 DIF: Challenging OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
17. Borrowing from relatives is [highly | seldom] recommended by financial advisors. ANS: b PTS: 1 DIF: Easy OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
18. Loans to relatives and friends should be [verbal | written] agreements. ANS: b PTS: 1 DIF: Easy OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
19. Your budget should be considered [before | after] taking on a large consumer loan. ANS: a PTS: 1 DIF: Easy OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
20. The longer the loan maturity, the [lower | higher] the monthly payments will be. ANS: a
PTS: 1 DIF: Moderate OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Analysis
NAT: BUSPROG: Analytic skills
21. If you want to calculate whether to take the rebate or the low interest rate on an auto financing deal, it would be most useful to have [time value of money tables | a financial calculator]. ANS: b PTS: 1 DIF: Challenging OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Evaluation
NAT: BUSPROG: Analytic skills
22. The longer the loan maturity, the [lower | higher] the total finance costs will be. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Analysis
NAT: BUSPROG: Analytic skills
23. You are borrowing $1,000, APR is 10%, and the loan maturity is one year. Total interest charges will be higher if [you pay off the loan in 12 monthly installments | you make one payment in full at the end of the year]. ANS: b PTS: 1 DIF: Challenging OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Evaluation
NAT: BUSPROG: Analytic skills
24. It is [legal | illegal] for a lender to charge a pre-payment penalty. ANS: a PTS: 1 DIF: Easy OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
25. Borrowers are more likely to ask for a(n) [single payment | installment payment] consumer loan. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 7-5 STA: DISC: TVM KEY: Bloom's: Comprehension
NAT: BUSPROG: Analytic skills
26. [Interim financing | Single-payment loan] is used in situations where the funds to be used for repayment are known to be forthcoming. ANS: a PTS: 1 DIF: Challenging OBJ: LO: 7-5 STA: DISC: TVM KEY: Bloom's: Synthesis
NAT: BUSPROG: Analytic skills
27. Calculating interest using the [discount | simple interest] method will result in the higher APR on a single-payment loan. ANS: a
PTS: 1 DIF: Challenging OBJ: LO: 7-5 STA: DISC: TVM KEY: Bloom's: Synthesis
NAT: BUSPROG: Analytic skills
28. If the proceeds from the sale of your repossessed collateral are insufficient to pay the balance due on your loan, the lender usually [can | cannot] collect the deficiency from you. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
29. Credit life insurance [is | is not] a good financial deal from the perspective of the borrower. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 7-2 STA: DISC: TVM KEY: Bloom's: Analysis
NAT: BUSPROG: Analytic skills
30. An [add-on | acceleration] clause allows the lender to demand repayment of the entire debt if the borrower defaults on his payments. ANS: b PTS: 1 DIF: Challenging OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
31. The legal method of getting an employer to pay a portion of the borrower's wages to the lender is known as wage [withholding | garnishment]. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Knowledge
NAT: BUSPROG: Analytic skills
32. Using [simple | add-on] interest would be less expensive for the borrower when determining the total to be paid to the lender. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Analysis
NAT: BUSPROG: Analytic skills
33. The Rule of 78 is used to calculate [APR | balance due] when an installment loan is paid off early. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Application
NAT: BUSPROG: Analytic skills
34. A finance company uses the discount method of calculating interest. The loan principal is $5,000, the interest rate is 10%, and repayment is expected in two years. You will receive [$5,000 | $4,000] from the lender. ANS: b
PTS: 1 DIF: Challenging OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Evaluation
NAT: BUSPROG: Analytic skills
35. You are borrowing $5,000 at 9%. You may choose a 24 or 36 month repayment plan. Monthly payments will be higher with the [24 | 36] month plan. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Analysis
NAT: BUSPROG: Analytic skills
36. You are borrowing $5,000 at 9%. You may choose a 24 or 36 month repayment plan. The total finance cost will be higher with the [24 | 36] month plan. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 7-3 STA: DISC: TVM KEY: Bloom's: Analysis
NAT: BUSPROG: Analytic skills
37. When the interest rate on savings is higher than the interest rate on a loan, it is less expensive to [borrow | use savings] to make a purchase. ANS: a PTS: 1 DIF: Moderate OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Analysis
NAT: BUSPROG: Analytic skills
38. When the interest rate on savings is lower than the interest rate on a loan, it is less expensive to [borrow | use savings] to make a purchase. ANS: b PTS: 1 DIF: Moderate OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Analysis
NAT: BUSPROG: Analytic skills
39. The average annual cost of a college education at a private college is about [$15,000|$51,000|$40,000]. ANS: c PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 7-1
NAT: BUSPROG: Analytic skills
40. About [27% | 47%] of student loans are past due. ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge
OBJ: LO: 7-1
NAT: BUSPROG: Analytic skills
41. There are now about [$1billion | $1 trillion] in student loans outstanding.
ANS: b PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge
OBJ: LO: 7-1
NAT: BUSPROG: Analytic skills
42. The best loan rates for consumer loans are usually from [savings and loan associations | consumer finance companies]. ANS: c PTS: 1 DIF: Moderate KEY: Bloom's: Analysis
OBJ: LO: 7-2
NAT: BUSPROG: Analytic skills
43. Students borrowing to pay for college should base the amount borrowed on [current income | future income]. ANS: b PTS: 1 DIF: Moderate KEY: Bloom's: Analysis
OBJ: LO: 7-1
NAT: BUSPROG: Analytic skills
44. [Public lenders | private lenders] are more flexible in providing financial relief when borrowers are under pressure. ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge
OBJ: LO: 7-2
NAT: BUSPROG: Analytic skills
PROBLEM 1. Jamil is purchasing a new truck for $30,000. Jamil is making a $2,000 down payment, and he will make 60 monthly payments of $541 each. What are the total finance costs on this loan? ANS: Loan amount = $28,000 ($30,000 - $2,000) Total monthly payments = $32,460 ($541 60) Total cost of loan = $4,460 PTS: 1 DIF: Challenging OBJ: LO: 7-5 STA: DISC: TVM KEY: Bloom's: Evaluation
NAT: BUSPROG: Analytic skills
2. Jamie is going to buy some furniture with a single payment loan that is discounted. The loan will be for $5,000 for 2 years at 10% interest. Calculate the APR on this loan. (Show all work.) ANS: Finance charge = $5,000 .10 2 = $1,000 Annual finance charge = $1,000/2 = $500 Average loan = $5,000 - $1,000 = $4,000 APR =
= .125 or 12.5%
PTS: 1 DIF: Challenging OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Evaluation
NAT: BUSPROG: Analytic skills
3. Calculate the average percentage rate (APR) for an add-on loan with 36 monthly installments. The principal is $4,000; the stated interest rate is 6%. (Show all work.) ANS:
where:
M = number of payments in a year N = number of payments over entire loan F = total finance charges P = principal F = $4,000 .06 3 = $720
PTS: 1 DIF: Challenging OBJ: LO: 7-4 STA: DISC: TVM KEY: Bloom's: Evaluation
NAT: BUSPROG: Analytic skills
4. Calculate the finance charge and the monthly payment on a $20,000 add-on installment loan with an interest rate of 9% and a term of 5 years. (Show all work.) ANS: Finance charge = $20,000 .09 5 = $9,000 Monthly payment =
= $483.33
PTS: 1 DIF: Challenging OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Evaluation
NAT: BUSPROG: Analytic skills
5. Downward Motors has offered Vicki either a $2,500 rebate or a 2%, 4-year loan on the new SUV she is purchasing for $33,000 with a $3,000 down payment. Vicki has done her homework and knows that she can get a 6%, 4-year loan at his credit union. Should Vicki take the rebate or the 2% loan from the dealer? (Show your key strokes.) ANS: PV = 30,000 I = 2/12 N = 4 12 PMT = $651
PMT = (651) I = 6/12 N = 4 12 PV = 27,720
$30,000 - 2,500 $27,500
$27,720 - 27,500 $ 220
Taking the rebate and financing the SUV through the credit union will save Vicki $220. She should take the rebate. PTS: 1 DIF: Challenging OBJ: LO: 7-6 STA: DISC: TVM KEY: Bloom's: Synthesis
NAT: BUSPROG: Analytic skills
Chapter 8—Insuring Your Life TRUE/FALSE 1. The basic purpose of insurance is to protect you from the results of accidental losses. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 8-1 STA: DISC: Risk and Return
2. Deciding to sell a motorcycle would be an example of risk sharing. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 8-1 STA: DISC: Risk and Return
3. Spreading risk among a large number of people is a major principle of insurance. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 8-1 STA: DISC: Risk and Return
4. Risk avoidance means asking an insurance company to take over the risk for a small payment (the premium). ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 8-1 STA: DISC: Risk and Return
5. Underwriters can predict whether or not you will suffer a loss this year. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 8-1 STA: DISC: Risk and Return
6. Avoiding alcoholic beverage while driving is an example of risk reduction. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 8-1 STA: DISC: Risk and Return
7. Generally, the primary purpose of life insurance is to provide a tax-advantaged investment plan. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 8-2 STA: DISC: Risk and Return
8. The multiple of earnings approach to evaluating life insurance needs is simplistic but can be unreliable. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 8-3 STA: DISC: Risk and Return
KEY: Bloom's: Comprehension 9. The needs approach to evaluate the right amount of life insurance is the most accurate method to determine the proper amount of death benefits. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 8-3 STA: DISC: Risk and Return
10. The needs approach can determine your life insurance requirements with a single step. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-3 STA: DISC: Risk and Return
11. The life insurance needs of beneficiaries are secondary since most proceeds are paid to living policyholders. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-2 STA: DISC: Risk and Return
12. The primary purpose of life insurance is to protect family members financially after one's death. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-2 STA: DISC: Risk and Return
13. The need for additional life insurance can be determined by looking at the difference between available resources and family monetary needs. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-3 STA: DISC: Risk and Return
14. Social security benefits are often available resources to the family after the death of a family member. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-3 STA: DISC: Risk and Return
15. The three major categories of life insurance are term, straight life, and limited payment. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 8-4 STA: DISC: Risk and Return
16. Term insurance is generally the most economical form of life insurance for young families. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-4 STA: DISC: Risk and Return
17. Guaranteed renewable term insurance allows you to renew the policy for another term without qualifying medically. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
18. Life insurance needs change dramatically over one's lifetime. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-4 STA: DISC: Risk and Return
19. The right of the policyholder to the cash value of a whole life policy is a nonforfeiture right. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 8-4 STA: DISC: Risk and Return
20. Annual term insurance premiums increase as you get older while whole life insurance premiums remain constant. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
21. Limited payment whole life insurance is a contract written for a given number of years after which the face value is automatically paid to the insured. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
22. When you stop making premium payments on a whole life policy, the protection is immediately forfeited. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 8-4 STA: DISC: Risk and Return
23. Unbundling in universal life insurance means that the cost of the insurance and savings elements are identified separately for the policy owner to see. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
24. Variable life insurance if most often the best plan for most people's primary insurance needs. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
25. Whole life policies typically provide a high investment rate of return.
ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
26. The return on term life insurance policies receive favorable tax treatment. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 8-4 STA: DISC: Risk and Return
27. A variable life policy combines life insurance coverage with tax-favored investment options. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
28. Like universal life insurance, variable life insurance provides a minimum guaranteed return. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
29. Group life insurance is often provided as a fringe benefit by employers. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-4 STA: DISC: Risk and Return
30. Group life insurance is usually term life insurance. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-4 STA: DISC: Risk and Return
31. Credit life insurance is often a legal requirement when you buy something on credit. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
32. Because premiums get higher as you age, it is probably advisable for you to buy life insurance at age 20 to save money whether or not you need the insurance then. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 8-4 STA: DISC: Risk and Return
33. Universal life insurance is often suitable for single college students since the cost is quite low. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
34. If a named beneficiary does not survive an insured, the proceeds of the policy revert to the insurance company. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-6 STA: DISC: Risk and Return
35. One should typically name both primary and contingent beneficiaries for life insurance policies. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-6 STA: DISC: Risk and Return
36. Generally, the period-certain settlement option is desirable because life insurance companies pay higher than average interest rates. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 8-6 STA: DISC: Risk and Return
37. An attractive feature of whole life insurance is the availability of loans from the cash value. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 8-4 STA: DISC: Risk and Return
38. Loans are available from almost all life insurance policies. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-4 STA: DISC: Risk and Return
39. You may reinstate your lapsed life insurance policy without answering health related questions again. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
40. A waiver of premium benefit excuses premium payment when the insured is unemployed. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 8-4 STA: DISC: Risk and Return
41. All types of life insurance offer a cash surrender value. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 8-4 STA: DISC: Risk and Return
42. Life insurance death benefits are not subject to income taxes. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 8-4 STA: DISC: Risk and Return
KEY: Bloom's: Knowledge 43. Policy dividends paid on participating policies are a return of unused premium based upon the claims experience of the mutual insurance company. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 8-4 STA: DISC: Risk and Return
44. Mary Lou died from a heart attack. Her $20,000 policy had a double indemnity clause. Her beneficiary will receive $40,000. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 8-6 STA: DISC: Risk and Return
45. It is probably advisable to purchase life insurance from a company that has been in business for at least 25 years. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-5 STA: DISC: Risk and Return
46. Life insurance cash value may be collected by terminating the policy. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
47. Life insurance cash value may be borrowed from the insurer at a low interest and does not need to be paid back. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
48. Cash value is an important component of whole life, universal life, and variable life but is never a component of term insurance. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
49. Cash value will not be forfeited to the insurance company for non-payment of a premium, but will instead always accrue to the benefit of the policy owner. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 8-4 STA: DISC: Risk and Return
50. Individually owned life insurance premiums are generally tax deductible. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 8-5 STA: DISC: Risk and Return
KEY: Bloom's: Knowledge 51. Lump-sum distributions of death benefits are generally excluded from federal income tax. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-4 STA: DISC: Risk and Return
52. When cash value is withdrawn from a life insurance policy it is always tax free. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
53. Life insurance policy loans are generally not taxable in the year taken and not deductible in the year repaid. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
54. The face value on a whole life policy is likely to change over time. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-4 STA: DISC: Risk and Return
55. Life insurance designed to pay the balance on a mortgage is an example of a good use decreasing term policy. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
56. Level premium term policies have become much more popular than annual renewable term policies in recent years. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 8-4 KEY: Bloom's: Knowledge
57. A life insurance policy should contain a co-insurance clause. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 8-6 KEY: Bloom's: Comprehension
58. Multiple indemnity policies should be ignored as a source of funds when determining insurance needs because it offers no protection if the insured’s death is due to natural causes. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 8-6 KEY: Bloom's: Knowledge
59. A guaranteed purchase option is when an insured sells an interest in the life insurance policy to an investor, who then becomes the policy’s beneficiary. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 8-6 KEY: Bloom's: Knowledge
60. With traditional whole life policies sold by an agent, sales commissions and marketing expenses account for between 50% and 100% of the first year’s premium. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 8-5 KEY: Bloom's: Knowledge
61. With traditional whole life policies sold by an agent, sales commissions and marketing expenses account for between 20% to 25% of total premiums paid over the life of the policy. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 8-5 KEY: Bloom's: Knowledge
MULTIPLE CHOICE 1. The basic purpose of insurance is to a. protect your health. b. protect you from losses. c. supplement your income. d. shield you from bad decisions. e. none of these ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 8-1 STA: DISC: Risk and Return
2. Insurance is a tool that can lessen ____ risk. a. social b. mental c. economic d. accident e. exposure ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 8-1 STA: DISC: Risk and Return
3. The purchase of insurance is a common form of which risk management technique: a. risk retention b. risk transfer c. risk assumption d. risk avoidance e. loss control ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge 4. Underwriting is best described as:
DIF: Moderate OBJ: LO: 8-1 STA: DISC: Risk and Return
a. b. c. d. e.
Activities related to selecting acceptable risks so that general insurer objectives are met. Actuarial science Production-related activities performed primarily by agents in the field Process of developing pricing structures for insurance, often performed by an actuary A function most often performed by adjusters.
ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 8-1 STA: DISC: Risk and Return
5. From the standpoint of the person buying insurance, the central purpose of insurance should be: a. to collect for all accidental losses b. to transfer risks of serious losses c. to support the prevention of losses d. to accumulate savings e. to reduce payments for the most frequently occurring losses ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 8-2 STA: DISC: Risk and Return
6. Which of the following types of policies is most likely to allow you to switch investments? a. limited pay life b. whole life c. variable life d. term life e. adjustable whole life ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 8-4 STA: DISC: Risk and Return
7. Which of the following forms of life insurance requires the lowest premium per dollar of initial death benefits? a. universal life b. whole life c. variable life d. term life e. adjustable whole life ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-4 STA: DISC: Risk and Return
8. Kurt purchased a policy with an initial premium of $3,000 and may elect how much he desires to pay in premiums from now on. He has purchased a face value of $100,000 and can accumulate cash value. What type of life insurance has Kurt purchased? a. universal life b. whole life c. modified whole life d. term life e. adjustable whole life ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 8-4 STA: DISC: Risk and Return
KEY: Bloom's: Analysis 9. Which of the following companies does NOT rate the financial strength of life insurance companies? a. A.M. Best b. Moody's c. Duff & Phelps d. Weiss e. Welch's ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 8-5 STA: DISC: Risk and Return
10. If a life insurance policy pays dividends, it is called: a. universal life b. participating c. investment grade d. paid-up e. extended ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
11. The most valuable single technique in personal risk management to assist an individual in determining how much life insurance is needed is: a. Computing the Human Life Value. b. Using the probability of death each year, prevailing interest rates and assumed inflation rates to find the discounted present value of a future income stream. c. Assessing the family's total economic needs and subtracting financial resources available to meet those needs. d. Estimating the sum of money which, when paid in installments, will produce the same income as the person would have earned, after deducting assumed amounts for taxes and personal maintenance expenses. e. Using a multiple of earnings adjusted for occupation. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-3 STA: DISC: Risk and Return
12. Underwriting helps protect life insurance companies from which of the following: a. major downturns in the economy b. short-term shocks in the investment markets c. adverse selection d. having too many healthy people buy life insurance e. shifts in the macro-social structure of the population ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 8-1 STA: DISC: Risk and Return
13. The probability of a loss occurring can be reduced by a. risk observance. b. loss prevention. c. risk assumption.
d. risk retention. e. insurance. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-1 STA: DISC: Risk and Return
14. Through insurance, society is able to a. reduce costs. b. increase rewards. c. reduce financial risks and share losses. d. change financial risks and reduce losses. e. anticipate risks. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-1 STA: DISC: Risk and Return
15. The best way to handle risk is to a. avoid risk b. assume risk. c. try to prevent losses. d. transfer risk to an insurance company. e. use some combination of these. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-1 STA: DISC: Risk and Return
16. Underwriting is a. selling insurance at a premium less than that of the competition. b. payment of a claim. c. a method for developing policy wording. d. the determination of which exposures to insure. e. none of these. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-1 STA: DISC: Risk and Return
17. The underwriting function is designed to be sure that premiums are based on a. income levels. b. the value of the loss. c. the value of the gain. d. the chance of loss. e. expense levels. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 8-1 STA: DISC: Risk and Return
18. The primary purpose of life insurance is to provide a. financial security for dependents in the event of death. b. protection from creditors and lawsuits. c. tax-advantaged investments.
d. high-yield investments. e. all of the above. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-1 STA: DISC: Risk and Return
19. Using the ____ approach is the most accurate method to determine life insurance needs. a. human life value b. multiple earnings c. risk assessment d. economic identification e. needs ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-3 STA: DISC: Risk and Return
20. The needs approach to determining the amount of life insurance considers a. family income. b. paying off debts. c. special financial needs. d. liquidity. e. all of these. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-3 STA: DISC: Risk and Return
21. In determining available resources to offset economic needs, you would generally not consider a. social security benefits. b. earning potential of financially independent children. c. earning potential of surviving spouse. d. savings. e. employer-provided group life insurance. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 8-3 STA: DISC: Risk and Return
22. Term life insurance is characterized by a. level annual premiums throughout life. b. premium amounts related to age. c. inappropriateness for most person's life insurance needs. d. non-convertibility. e. cash value. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension 23. ____ is not a type of term insurance. a. Limited pay b. Decreasing c. Convertible
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
d. Renewable e. Annual ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-4 STA: DISC: Risk and Return
24. The settlement option chosen by most beneficiaries is a. lump sum. b. interest only. c. fixed amount. d. fixed time. e. life income. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-6 STA: DISC: Risk and Return
25. ____ is a common provision in many term policies. a. A reward clause b. A renewable clause c. Cash value d. A limited clause e. An arbitration clause ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-6 STA: DISC: Risk and Return
26. If life insurance is convertible, the policy can be a. transferred to the life of another person. b. exchanged for cash. c. changed to health or disability protection d. changed to another type of life insurance. e. revised as needed. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
27. Decreasing term insurance usually has a decreasing face value and a. a decreasing premium. b. a level premium. c. an increasing premium. d. a fluctuating premium. e. none of the above. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
28. Rodney and Toni are a young couple with two small children. They are doing well financially but their life insurance needs are high and their budget is tight. What type of life insurance will give them the most protection for their money? a. continuous premium
b. c. d. e.
universal life paid up life term life variable life
ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
29. The least expensive form of whole life insurance protection is a. term. b. straight life. c. limited payment. d. universal. e. none of the above. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
30. If the objective of your life insurance program is to get the greatest death protection now for your insurance dollars, you should choose ____ insurance. a. term b. universal c. limited pay d. industrial e. whole life ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
31. Whole life insurance is designed to provide a. protection only. b. savings only. c. savings and loan value. d. protection and savings. e. loan value only. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
32. You want to pay premiums for 20 years and have your insurance premium obligations finished at that time, but you feel you will need life insurance for the rest of your life. You should choose ____ insurance. a. continuous premium b. limited pay c. single premium d. multiple premium e. universal ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
33. Which of the following is not characteristic of universal life insurance? a. flexible premiums b. choice of how the accumulation account is invested c. option A provides a level death benefit d. option B provides a stated amount of insurance plus the accumulated cash value e. the death protection and the savings portion are identified separately ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 8-4 STA: DISC: Risk and Return
34. Henry must make set premium payments on his insurance policy until he dies, and if he cancels the policy he will receive the cash value. His plan is a ____ life policy. a. term b. whole life c. limited payment d. universal e. none of the above ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
35. The insurance portion of a universal life policy is most analogous to a. mortgage insurance. b. group insurance. c. whole life insurance. d. term insurance. e. variable insurance. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
36. Universal life insurance is a. a deferred premium payment policy. b. primarily sold to college students. c. a combined investment plan and insurance policy. d. a provision for a secondary beneficiary. e. all of the above. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
37. An insured usually chooses variable life insurance in order to a. provide more flexible coverage. b. emphasize the savings portion while still having death protection. c. lessen the savings feature of life insurance. d. substitute for fixed-dollar insurance protection. e. reduce insurance premiums. ANS: B
PTS: 1
DIF: Challenging
OBJ: LO: 8-4
NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
STA: DISC: Risk and Return
38. ____ can be both an advantage and a disadvantage of universal life insurance. a. Flexible premiums b. Tax features c. High returns d. Unbundling e. fixed returns ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 8-4 STA: DISC: Risk and Return
39. The death benefit of ____ life insurance may go down due to poor investment returns. a. limited pay b. whole c. universal d. variable e. c and d ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
40. Group life insurance is a. provided by lenders. b. now called home service life. c. generally a decreasing term policy. d. often more expensive than private coverage. e. All of the above ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
41. ____ and ____ are both relatively expensive types of decreasing-term life insurance. a. Group life; credit life b. Credit life; mortgage life c. Mortgage life; industrial life d. Industrial life; special-purpose policies e. Special-purpose policies; group life ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
42. Life insurance policies with small face amounts where the premium may be collected weekly by agents is a. credit life insurance. b. mortgage life insurance. c. industrial life insurance. d. special purpose insurance. e. group life insurance.
ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-4 STA: DISC: Risk and Return
43. A grace period permits the policy holder to retain insurance even though the premium has not been paid for a. a year. b. 6 months. c. 3 months. d. 2 months. e. 30 days ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-6 STA: DISC: Risk and Return
44. Marilyn Simms died with a $200,000 life insurance policy. Her husband, Jack, was the primary beneficiary and their children, Mimi (age 24) and Ann (age 30), were the contingent beneficiaries. All three survived Marilyn. How would the policy proceeds be distributed? a. $200,000 to Jack b. $100,000 each to Mimi and Ann c. $100,000 to Jack and $50,000 each to Mimi and Ann d. $66,666 each to Jack, Mimi, and Ann e. $150,000 to Jack and $25,000 each to Mimi and Ann ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 8-6 STA: DISC: Risk and Return
45. Which of the following policy features allow the insured to increase coverage periodically without showing proof of insurability? a. multiple indemnity clause b. guaranteed purchase options c. disability clause d. paid-up insurance option e. extended-term option ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-6 STA: DISC: Risk and Return
46. For the insured who needs more life insurance, the best option for receiving policy dividends is to a. receive them as cash payments. b. leave the dividends with the insurance company to earn interest. c. buy additional paid-up coverage. d. apply them toward the next premium payment. e. take living benefits. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 8-6 STA: DISC: Risk and Return
47. A life insurance contract contains clauses for a. settlement options. b. policy reinstatement.
c. change of policy. d. all of the above. e. none of the above. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-6 STA: DISC: Risk and Return
48. Nonforfeiture rights guarantee that a policy owner will not lose his or her ____. a. face value. b. death benefits for survivors. c. cash value. d. premium refunds. e. premium reductions. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 8-6 STA: DISC: Risk and Return
49. A participating policy a. has no incontestability clause. b. is a form of endowment insurance. c. may pay dividends. d. requires a savings function. e. contains no tax benefits. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 8-6 STA: DISC: Risk and Return
50. Paying life insurance premiums on a(n) ____ basis will be the most economical. a. annual b. semi annual c. quarterly d. monthly e. It makes no difference. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 8-6 STA: DISC: Risk and Return
51. When a primary beneficiary dies before the insured, proceeds are payable to a. the state b. the probate court c. the insured's estate d. the contingent beneficiary or beneficiaries e. the insurance company keeps the proceeds ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 8-6 STA: DISC: Risk and Return
52. The basic assumptions that the company used to compute its life insurance premiums include all but a. age b. sex
c. health status d. income e. none of the above ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 8-6 KEY: Bloom's: Knowledge
53. A life insurance policy should contain all the following except a. Policy description b. Underwriting discussion c. Column definitions d. Co-insurance clause e. Disclaimer ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 8-6 KEY: Bloom's: Knowledge
54. Which type of settlement option pays for over a predetermined time frame? a. Lump sum b. Interest only c. Lifetime income d. Fixed period e. Fixed amount ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 8-6 KEY: Bloom's: Knowledge
55. What is it called when an insured sells an interest in the life insurance policy to an investor, who then becomes the policy’s beneficiary? a. Participating policy b. Living benefit rider c. Viatical settlement d. Guaranteed purchase option e. None of the above ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 8-4 KEY: Bloom's: Knowledge
56. With traditional whole life policies sold by an agent, sales commissions and marketing expenses account for at least ___ % of the first year’s premium and at least ___% of total premiums paid over the life of the policy. a. 20, 5 b. 50, 10 c. 75, 25 d. 100, 20 e. 200, 50 ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 8-6 KEY: Bloom's: Knowledge
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
1. Smoking [will | will not] be a factor in determining life insurance premiums. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-1 STA: DISC: Risk and Return
2. If a loss is certain to occur, there is [a | no] risk. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 8-1 STA: DISC: Risk and Return
3. It [is | is not] possible to avoid most risks in your life. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-1 STA: DISC: Risk and Return
4. An activity that reduces the chance that a loss will occur is [risk shifting | loss prevention]. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-1 STA: DISC: Risk and Return
5. People share losses through [loss control | insurance]. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-1 STA: DISC: Risk and Return
6. You would be most likely to assume the risk of a [small | large] potential loss. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-1 STA: DISC: Risk and Return
7. In order to predict accurately the number of losses that will occur in a given time, insurance companies must study [large | small] numbers of cases. ANS: a
PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-1 STA: DISC: Risk and Return
8. Deciding which people will be insured by an insurance company is a function of the [agent | underwriter]. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-1 STA: DISC: Risk and Return
9. Using the needs approach, we look at the survivors' needs if the income producer dies [tomorrow | before his life expectancy]. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 8-3 STA: DISC: Risk and Return
10. Social Security survivors' benefits typically provide benefits for children through [high school | college]. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-3 STA: DISC: Risk and Return
11. The most accurate way to determine how much life insurance you need is to use the [multiple earnings | needs] approach. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-3 STA: DISC: Risk and Return
12. If your insurance policy promises to pay death benefits only if you die during a specified time, you have [term | whole] life insurance. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 8-4 STA: DISC: Risk and Return
13. The majority of term policies have a [level | decreasing] face value. ANS: a PTS: 1
DIF: Easy
OBJ: LO: 8-4
NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
STA: DISC: Risk and Return
14. The premium on your term insurance will [increase | stay the same] with each renewal. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 8-4 STA: DISC: Risk and Return
15. Most term insurance [is | is not] renewable. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-4 STA: DISC: Risk and Return
16. The cash value would build more quickly with a [continuous | limited payment] whole life policy. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 8-4 STA: DISC: Risk and Return
17. Annual premiums would be lower with [continuous | limited payment] whole life insurance. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-4 STA: DISC: Risk and Return
18. The life insurance policy that clearly separates the protection and savings elements is [whole life | universal life]. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 8-4 STA: DISC: Risk and Return
19. The policy owner assumes the investment risk with [whole life | variable life] insurance. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 8-4 STA: DISC: Risk and Return
20. The [policy owner | insurance company] makes the investment decisions with universal life insurance.
ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-4 STA: DISC: Risk and Return
21. The [policy owner | insurance company] makes the investment decisions with variable life insurance. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-4 STA: DISC: Risk and Return
22. [Credit life | Group] insurance is one of the most expensive forms of life insurance. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-4 STA: DISC: Risk and Return
23. Group insurance is most likely to be [term | whole life]. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-4 STA: DISC: Risk and Return
24. Credit life insurance is generally considered to be a [good | poor] life insurance buy. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-4 STA: DISC: Risk and Return
25. If neither the primary nor secondary beneficiary survives the insured, the life insurance proceeds will be [kept by the insurance company | paid to the state in which the insured lived | paid to the estate of the insured and are distributed by the probate court]. ANS: c PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-4 STA: DISC: Risk and Return
26. The beneficiary [will | will not] have to pay income taxes on the proceeds from a life insurance policy. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 8-4 STA: DISC: Risk and Return
KEY: Bloom's: Knowledge 27. An insured can borrow from the [cash | face] value of her life insurance policy. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-4 STA: DISC: Risk and Return
28. Changing the beneficiary on a life insurance policy is generally [easy | difficult] to do. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-6 STA: DISC: Risk and Return
29. The [lump sum | life income] settlement option is the most commonly selected option. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-6 STA: DISC: Risk and Return
30. Life insurance [will | will not] pay proceeds if an insured is killed in a commercial airline crash. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-6 STA: DISC: Risk and Return
31. Living benefits would [increase | decrease] the proceeds available for beneficiaries. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-6 STA: DISC: Risk and Return
32. If you have $300 per year available for life insurance, you could get higher life insurance protection with a [continuous | limited payment] policy. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
OBJ: LO: 8-6 STA: DISC: Risk and Return
33. You can learn about the financial strength of an insurance company by checking Best's Insurance Reports and [the SEC | Standard and Poor's] rating system.
ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-5 STA: DISC: Risk and Return
34. A life insurance agent who takes her profession seriously is likely to have earned the [CPCU | CLU] professional certification. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 8-5 STA: DISC: Risk and Return
35. [Level premium | annual renewable] term policies have become much more popular in recent years. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 8-4 KEY: Bloom's: Knowledge
36. A life insurance policy should contain which of the following? [policy description | co-insurance clause]. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking
OBJ: LO: 8-6 KEY: Bloom's: Knowledge
37. Insurance is a tool that can lessen [economic | accident] risk. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 8-1 KEY: Bloom's: Comprehension
38. A [viatical settlement | guaranteed purchase option] is when an insured sells an interest in the life insurance policy to an investor, who then becomes the policy’s beneficiary. ANS: a PTS: 1 DIF: Challenging NAT: BUSPROG: Reflective thinking
OBJ: LO: 8-6 KEY: Bloom's: Knowledge
39. With traditional whole life policies sold by an agent, sales commissions and marketing expenses account for at least [25% | 100%] of the first year’s premium. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking
OBJ: LO: 8-5 KEY: Bloom's: Knowledge
40. With traditional whole life policies sold by an agent, sales commissions and marketing expenses account for at least [20% | 50%] of total premiums paid over the life of the policy. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking
OBJ: LO: 8-5 KEY: Bloom's: Knowledge
PROBLEM 1. Alice is 40 years old and earns $35,000 annually. The multiple earnings approach to determine the amount of life insurance needed shows that she should have 6.5 times her earnings. How much insurance should Alice have? (Show all work.) ANS: $35,000 6.5 = $227,500 PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Evaluation
OBJ: LO: 8-3 STA: DISC: Risk and Return
Chapter 9—Insuring Your Health TRUE/FALSE 1. Millions of Americans are not covered by health insurance. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 9-1 STA: DISC: Risk and Return
2. Advances in medical technology, prescriptions drugs and treatments have substantially reduced the costs health care in recent decades. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 9-1 STA: DISC: Risk and Return
3. You would have a better chance to choose your own doctor with a PPO rather than an HMO. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 9-2 STA: DISC: Risk and Return
4. Health Maintenance Organizations (HMOs) provide pre-paid health care to participants. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-2 STA: DISC: Risk and Return
5. Large employers are less likely to offer health insurance to their employees than small employers. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 9-2 STA: DISC: Risk and Return
6. A preferred provider organization has characteristics of both managed care and an indemnity plan. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 9-2 STA: DISC: Risk and Return
7. Group health insurance premiums are usually lower than individual health insurance premiums. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 9-2 STA: DISC: Risk and Return
8. Typically group health insurance plans provide substantially less comprehensive coverage than the average individually underwritten policy. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 9-2 STA: DISC: Risk and Return
KEY: Bloom's: Knowledge 9. If you lose your job, COBRA permits you to continue your group health insurance coverage permanently as long as you pay the premium within 36 months of the termination of employment. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
10. Blue Cross provides hospital coverage and Blue Shield provides prescription pharmacy coverage. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 9-2 STA: DISC: Risk and Return
11. Medicare and Medicaid are hospital and physicians coverage, respectively. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-2 STA: DISC: Risk and Return
12. Supplementary Medical Insurance is a voluntary participatory program, commonly known as Medicare Part B. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 9-2 STA: DISC: Risk and Return
13. Hospital insurance will pay daily room and board charges up to a specified number of days and reimbursement for ancillary charges up to a specified dollar amount. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 9-4 STA: DISC: Risk and Return
14. Hospital insurance policies will pay for all hospital expenditures most of the time. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
15. When you are hospitalized for surgical care, surgical expense coverage will pay the hospital bill. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 9-4 STA: DISC: Risk and Return
16. Some surgical expense insurance pays a specific amount for a list of various types of surgery. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
17. A comprehensive health insurance usually covers the cost of anesthetics and their administration.
ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
18. Your bill for consultation with a specialist would ordinarily be paid by physician's expense insurance. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
19. Major medical often supplements the basic coverage of hospital, surgical, and physician's expense insurance. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
20. A deductible clause in major medical insurance plans is most often on a per year basis. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
21. In insurance terminology, "participation" and "coinsurance" mean the same thing. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 9-4 STA: DISC: Risk and Return
22. Internal limits are constraints placed on insurance agents stipulating the level of risk for which they can write a policy. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
23. Comprehensive major medical simply increases the policy limits of major medical insurance without changing the coverage. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 9-4 STA: DISC: Risk and Return
24. Increasing the deductible is likely to lower the premium on a comprehensive major medical policy. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
25. Increasing the stop loss provision is likely to lower the premium on a comprehensive major medical policy. ANS: T
PTS: 1
DIF: Moderate
OBJ: LO: 9-4
NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
STA: DISC: Risk and Return
26. Hospital expense coverage is adequate for long-term or catastrophic medical needs of most people. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 9-5 STA: DISC: Risk and Return
27. Terms of payment and terms of coverage are two sets of provisions that should be carefully scrutinized when evaluating an insurance program. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 9-4 STA: DISC: Risk and Return
28. Your health insurance has an 80% co-insurance clause. Once the deductible is satisfied, your insurance company will pay 80% of your covered losses up to the stated limits. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 9-4 STA: DISC: Risk and Return
29. The major emphasis of dental insurance is to cover only extractions and x-rays. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 9-4 STA: DISC: Risk and Return
30. Mental illness is normally not covered in health insurance policies. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
31. Health insurance policies automatically cover all family members. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
32. Most group insurance policies require a second opinion for non-surgical procedures. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 9-2 STA: DISC: Risk and Return
33. Major medical plans will usually cover the cost of nursing home care. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
34. Long-term care insurance provides protection against the cost of extended hospital stays.
ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-5 STA: DISC: Risk and Return
35. Long-term care insurance can cover both nursing home and home health care. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-5 STA: DISC: Risk and Return
36. An elimination period is the number of days that must pass before disability policies pay proceeds. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-5 STA: DISC: Risk and Return
37. An elimination period is a term that applies to disability insurance and does not have any meaning in long-term care insurance. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 9-5 STA: DISC: Risk and Return
38. Disability occurs only when someone is completely incapable of returning to work. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-6 STA: DISC: Risk and Return
39. Most disabilities are permanent. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 9-6 STA: DISC: Risk and Return
40. Workers compensation may trigger coverage in a disability income policy. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-6 STA: DISC: Risk and Return
41. The definition of "disability" is standardized in disability income policies. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-6 STA: DISC: Risk and Return
42. Payments under workers compensation are more readily available than are social security disability benefits. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-6 STA: DISC: Risk and Return
43. Disability income benefits under social security will be paid as long as you cannot perform the duties of the job you were holding when the disability began. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 9-6 STA: DISC: Risk and Return
44. Disability income benefits under social security are automatically adjusted periodically for cost of living increases. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 9-6 STA: DISC: Risk and Return
45. If you are trying to keep your disability income premiums reasonably priced but still appropriate for insuring your financial needs, select a short elimination period and a short duration of benefits. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 9-6 STA: DISC: Risk and Return
46. Eating healthy and exercising is an acceptable substitute for comprehensive health care coverage. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 9-2 STA: DISC: Risk and Return
47. Living a healthy lifestyle is an example of loss prevention and control. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 9-2 STA: DISC: Risk and Return
48. Generally, insurance is more reasonably priced through group plans than as individual policies. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 9-3 STA: DISC: Risk and Return
49. A managed care plan is a healthcare plan that emphasizes cost control and preventative treatment. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 9-2 STA: DISC: Risk and Return
50. A group HMO employs a group of doctors to provide healthcare services to members in a central facility. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 9-2 STA: DISC: Risk and Return
51. Blue Cross / Blue Shield plans are really hybrid HMOs that allow members to go outside of network.
ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 9-2 STA: DISC: Risk and Return
52. HMOs require members to pick one primary care physician. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 9-2 KEY: Bloom's: Comprehension
53. Medicare Advantage policies require payment from the policyholder in the form of a deductible. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 9-2 KEY: Bloom's: Comprehension
54. The medicare coinsurance payment is usually 20%. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 9-2 KEY: Bloom's: Knowledge
55. All Americans are required to have or buy health insurance beginning in 2014 or pay a penalty. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 9-2 KEY: Bloom's: Knowledge
56. Insurers are required under the law to cover the children of those they insure up to the age of 21. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 9-2 KEY: Bloom's: Knowledge
57. Insurers are required to cover people with pre-existing medical conditions without limiting or setting unrealistically high insurance rates. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 9-2 KEY: Bloom's: Knowledge
MULTIPLE CHOICE 1. The fastest growing segment of the health care industry is a. fee for service plans. b. Medicaid. c. managed care plans. d. All of these are growing at the same rate. e. none of these. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 9-2 STA: DISC: Risk and Return
2. Jackie pays $20 every time she visits her doctor. She is covered by a(n) a. HMO b. IPA c. PPO
d. Indemnity plan e. Could be any of these except the indemnity plan. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 9-2 STA: DISC: Risk and Return
3. Which of the following types of plans pay for some medical costs even when the insured decides to go out of the provider network (without a referral) for services? a. HMO b. IPA c. PPO d. POS e. c and d ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 9-2 STA: DISC: Risk and Return
4. An Individual Practice Association differs from a HMO in that a. you have no choice of the physician. b. they are located in a central facility. c. associated doctors operate from their own offices. d. they are less likely to be found in small communities. e. none of these. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 9-2 STA: DISC: Risk and Return
5. The "O" in COBRA stands for which of the following words? a. optical b. opportunity c. ordinary d. omnibus e. occupational ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 9-4 STA: DISC: Risk and Return
6. If your employment is terminated, COBRA provides for a. cancellation of all group insurance benefits. b. continuation of group insurance benefits until you are reemployed. c. permanent continuation of group health insurance. d. temporary continuation of group insurance benefits; you pay premiums. e. temporary continuation of group insurance benefits; employer pays premiums. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
7. The majority of employers pay a. the entire health care insurance premium for workers. b. the entire health care insurance premium for dependents.
c. the entire health care premium for workers and dependents. d. part of the premium for workers and dependents. e. none of the premium for workers and dependents. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-2 STA: DISC: Risk and Return
8. Most employees select ____ for their health insurance needs. a. indemnity plans b. preferred provider organizations c. health maintenance organizations d. individual practice associations e. point of service plans ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 9-2 STA: DISC: Risk and Return
9. Health insurance coverage can include a. group plans. b. workers' compensation. c. social security. d. veteran's benefits. e. all of the above. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 9-2 STA: DISC: Risk and Return
10. Social security provides health care coverage to persons age ____ and those who are ____. a. 55 and over; collecting disability under Social Security b. 60 and over; collecting disability under Social Security c. 65 and over; collecting disability under Social Security d. 60 and over; low income e. 60 and over; low income ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-2 STA: DISC: Risk and Return
11. Medicare is a government-sponsored health care plan composed of Part A and Part B. Part A covers a. hospital expenses. b. doctor's bills. c. custodial nursing home expenses. d. prescription drugs. e. all of the above. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-2 STA: DISC: Risk and Return
12. Which of the following statements is true about the means (income) testing for Medicare? a. there are strictly enforced income limits that are based on federal standards but may vary slightly by state.
b. limits apply to the amount of counted assets individuals can have, but they are routinely overlooked. c. means testing is intended to ensure that only the truly needy get access to Medicare. d. there is an asset test and an income test. e. Medicare is not income tested. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 9-2 STA: DISC: Risk and Return
13. Medicare is a government-sponsored health care plan composed of Part A and Part B. Part B covers a. hospital expenses. b. doctor's bills. c. custodial nursing home expenses. d. prescription drugs. e. all of the above. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-2 STA: DISC: Risk and Return
14. Gabe is 58 years old and has been dependent on a cane for a couple of years. Gabe fears that he may need long term care services some day in the future. His net worth is $400,000 and he receives $50,000 per year in a pension. He considers himself to be in excellent health and has never had a serious health scare like a heart attack, stroke, or cancer. He eats lots of bran and exercises regularly. Which of the following policies would you recommend to Gabe? a. Gabe needs a disability income policy. b. Gabe should buy a long term care policy with a long elimination period, lifetime benefits, and a COLA. c. Gabe should buy a long term care policy with a five-year limit, short elimination period without a COLA. d. Gabe doesn't need disability insurance and probably can't qualify for long term care insurance. e. Gabe can qualify for Medicaid if and when he needs long term care services. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 9-6 STA: DISC: Risk and Return
15. Supplementary Medical Insurance (SMI) provides health care protection beyond basic hospital coverage for a. all Medicare recipients. b. all social security recipients. c. Medicare recipients who pay for SMI on a compulsory basis. d. Medicaid recipients. e. Medicare recipients who pay for SMI on a voluntary basis. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 9-2 STA: DISC: Risk and Return
16. Workers' compensation is a state program that provides benefits for a. unemployed workers. b. workers suffering injury or illness on the job. c. any injury suffered by a worker at any time.
d. injuries resulting from employer's negligence. e. only b and d. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-2 STA: DISC: Risk and Return
17. Hospital indemnity policies would make payment for a. surgery. b. care at the doctor's office. c. private duty nursing care. d. prescriptions when not in hospital. e. per day hospital charges. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 9-4 STA: DISC: Risk and Return
18. Ben's health coverage charges a low ($15) deductible each time he visits the doctor or hospital. Other than the low per-service deductible, there is very little cost sharing. However, Ben must go to the health care providers listed by the provider of the health coverage. If he goes to a provider that is not on the list, there is very little coverage. Which of the following types of entity most likely provides Abe's health coverage? a. HMO b. Blue Cross/Blue Shield association c. commercial insurer (major medical) d. PPO e. fee-for-service indemnity plan ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 9-4 STA: DISC: Risk and Return
19. Surgical expenses now generally are reimbursed on the basis of a. actual surgical expense. b. listed benefit schedules. c. specific percentage of actual surgical expense. d. average national cost of the surgery. e. usual, reasonable and customary expenses. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
20. Suppose a person has a health insurance policy with a $500 calendar year deductible, a $2,000 out-of-pocket cap, and an 80% coinsurance provision. If this person suffers a $600 covered loss, how much will the insurance company pay? (Assume no previous losses have occurred.) a. $ 80 b. $100 c. $480 d. $600 e. some other amount ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
KEY: Bloom's: Application 21. Nick has a comprehensive health care policy with a $250 per calendar year deductible and 80%-20% with a maximum $1,000 copayment cap per calendar year. In January, Nick had a $600 claim which the insurance company paid $280. Nick experiences another unrelated claim in October resulting in total bills of $5,000. How much will Nick have to pay for the second claim? a. $5,000 b. $3,930. c. $1,800 d. $ 930. e. none of the above. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 9-4 STA: DISC: Risk and Return
22. Major medical plans are characterized by deductibles, internal limits, and a. benefit levels. b. participation or coinsurance. c. illness or injury frequency limits. d. maximum surgical medical benefits. e. sliding or decreasing premiums. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
23. A comprehensive major medical insurance would not a. have a large deductible. b. include basic hospital coverage. c. provide surgical expense coverage. d. include medical expense coverage. e. include a per diem while in the hospital . ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 9-4 STA: DISC: Risk and Return
24. Given a $250 annual deductible, a $5,000 lid on the coinsurance, 80/20 coinsurance, and a $250,000 policy limit, how much of a $27,500 medical bill will be paid by the insured? a. $ 250 b. $5,000 c. $5,450 d. $5,250 e. $5,700 ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Evaluation 25. A characteristic of dental insurance is a. high cost. b. dentist financing. c. high deductible limits. d. lack of orthodontic coverage.
DIF: Challenging OBJ: LO: 9-4 STA: DISC: Risk and Return
e. low maximum limits. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 9-4 STA: DISC: Risk and Return
26. Miscellaneous sources of health care coverage include a. homeowners insurance. b. automobile insurance. c. veterans benefits. d. all of the above. e. none of the above. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 9-4 STA: DISC: Risk and Return
27. ____ are required by many insurance plans to reduce the number of unnecessary surgeries. a. Deductibles b. Waiting periods before the surgery is performed c. Second opinions d. Meetings with company surgical committees e. Approval by hospital surgical committees ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 9-4 STA: DISC: Risk and Return
28. Terms of payment under your health insurance are governed by a. policy limits. b. deductibles. c. coordination of benefits. d. waiting periods. e. all of the above. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
29. A "coordination of benefits" provision in a health insurance policy provides which of the following benefits? a. Allows the policy holder to be double-covered for the same loss. b. Provides broader coverage than a policy without such provision. c. Often results in lower cost insurance premiums. d. Drops pre-existing conditions clauses from a policy. e. All of the above ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 9-4 STA: DISC: Risk and Return
30. Which of the following best describes a "pre-existing condition"? a. An exclusion. b. Cancer, heart condition or other serious diseases. c. An injury that results from an accident.
d. Something not covered by the insurance policy. e. A medical condition for which one has previously been treated. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
31. Your right to continue a health insurance policy if you choose is known as a. policy exclusions. b. persons covered. c. continuation. d. duration of benefits. e. renewability. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-4 STA: DISC: Risk and Return
32. The insurance designed to help with nursing home or in-home care due to chronic illness is called a. Medicare. b. major medical. c. comprehensive major medical. d. nursing home care. e. long term care. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 9-5 STA: DISC: Risk and Return
33. Which of the following statements is true about a guaranteed renewable long-term care policy? a. benefits are taxable. b. premiums are never tax deductible. c. the policy is non-cancellable. d. premiums cannot be increased by the insurer unless they are increased for the entire rating class. e. premiums cannot increase for any reason. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 9-5 STA: DISC: Risk and Return
34. One drawback of long-term care insurance is its a. high annual premiums. b. overlap with Medicare. c. inability to cover custodial care. d. relatively high deductible. e. relatively high coinsurance requirement. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-5 STA: DISC: Risk and Return
35. Activities of daily living (ADLs) are important in determining ____ for long-term care insurance. a. type of care b. services covered
c. waiting period d. eligibility e. benefit duration ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 9-5 STA: DISC: Risk and Return
36. Which of the following is not a desirable feature in a long-term care policy? a. inflation protection b. optional renewability clause c. duration of benefits of 6 years d. coverage for Alzheimer's disease e. coverage for preexisting conditions ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 9-5 STA: DISC: Risk and Return
37. Which of the following best describes a custodial care facility? a. a place that combines apartment-style living with prepared meals, housekeeping, and personal care services. b. a place that provides regular assistance with such activities as transferring someone from a bed to a chair, or helping them take a bath or get dressed. c. a place with licensed medical professionals that assist residents regularly with medically necessary care. d. a place that provides regular assistance with chronic health conditions that are acute in nature. e. custodial care is best provided in a hospital where surgical facilities are always available. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 9-5 STA: DISC: Risk and Return
38. Which of the following is most likely to need and be able to obtain a long-term care policy? a. Mike is 35, in excellent health, single and makes $56,000 per year. b. Clare is 47, in poor health (cancer), married and makes $27,000 per year. c. Gail is 78, has been diagnosed with senile dementia, and is retired with a net worth of $500,000. d. Steve is 56, in good health, makes $75,000 per year and has a net worth of $750,000. e. Ava is 63, married, makes $73,000 per year and has a net worth of $4,000,000 ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 9-5 STA: DISC: Risk and Return
39. Bob and Barbara Castle are each 39 years old and have sought your advice with regard to their financial affairs. Bob is a school administrator making $75,000 per year and Barbara is not employed outside of the home. The Castles' net worth is approximately $190,000. They have three kids ages, 6, 10, & 14. You have determined that the Castles currently have adequate life, health, auto, and homeowner's insurance. Which of the following forms of insurance is likely to fulfill their highest priority risk management need? a. supplemental major medical insurance b. disability income insurance c. critical illness insurance
d. long-term care insurance e. additional life insurance ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 9-6 STA: DISC: Risk and Return
40. Disability income insurance provides benefits that are designed to a. pay for hospital care costs from injuries. b. substitute for lost income. c. cover hospital care costs from illness. d. substitute for social security disability benefits. e. supplement retirement income for the elderly. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-6 STA: DISC: Risk and Return
41. Which of the following changes would tend to increase the premium on a disability policy: a. a shorter elimination period b. use of "any occupation" definition of disability instead of "own occupation to which one is reasonably suited." c. decreasing the benefit level from 50% to 66% of prior earnings. d. decreasing the payment period from until age 65 to a maximum of 2 years. e. none of the above would tend to increase the premium. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 9-6 STA: DISC: Risk and Return
42. An elimination period in disability income insurance is most closely analogous to which of the following cost sharing provisions in health insurance? a. deductible b. coinsurance c. limit d. cap e. all of the above closely resemble an elimination period ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 9-6 STA: DISC: Risk and Return
43. All of the following except a ____ are highly recommended for a long-term disability income policy. a. guaranteed renewable clause b. cost-of-living adjustment c. long duration of benefit d. short waiting period e. waiver of premium ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 9-6 STA: DISC: Risk and Return
44. Suppose Janet, a skilled neuro-surgeon, became unable to perform surgery because of severe arthritis. Which of the following is NOT true?
a. If Janet has a disability policy with an "own occupation" definition of disability, she will probably collect some benefits. b. If the policy contains an "own occupation" definition of disability, the insurer will provide coverage only if Janet would not be able to perform another type of job such as teaching or consulting. c. If the policy contains an "any occupation for which reasonable suited" definition of disability, the insurer will attempt to determine if there is another job for which Janet is suited and is still able to perform. d. A policy with an "own occupation" definition is generally more expensive than a policy with an "any occupation for which reasonable suited" definition of disability. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 9-6 STA: DISC: Risk and Return
45. Disability income insurance will provide income to a disabled or ill person a. without a waiting period. b. with unlimited funds for years. c. with a waiting period before income is received. d. with payments made to the recipient for up to age 70. e. none of the above. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-6 STA: DISC: Risk and Return
46. Disability income policies usually have ____ that is a time delay from the date of the issuance of the policy until benefit privileges are activated. a. waiting periods b. probationary periods c. elimination periods d. internal limit periods e. outer limits ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-6 STA: DISC: Risk and Return
47. When trying to determine your disability income needs, you should consider available sick leave, income needs, and a. social security benefits. b. surgical expense protection. c. Medicare. d. life insurance. e. income tax bracket. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 9-6 STA: DISC: Risk and Return
48. In order to qualify for disability insurance under social security, a person must be a. unable to carry out the duties of the current job. b. unable to carry out the duties of any job. c. ill for at least two years. d. willing to undergo rehabilitation.
e. none of these ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-6 STA: DISC: Risk and Return
49. Which of the following is(are) characteristic of Social Security disability income benefits? a. 1-year waiting period b. "own occ" definition of disability c. disability expected to last 1 year, or be fatal d. a and b e. a, b, and d ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 9-6 STA: DISC: Risk and Return
50. Most people do not need protection against a. the loss of income because of time spent away from work. b. a specific dread disease. c. medical and rehabilitation expenses. d. nursing home costs. e. in hospital services. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Easy OBJ: LO: 9-3 STA: DISC: Risk and Return
51. Which of the following programs is a public assistance program that provides health insurance benefits only to those who are unable to pay for healthcare? a. Medicare b. Medicaid c. Blue Cross/Blue Shield d. Social Security disability benefits e. worker's compensation ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 9-2 STA: DISC: Risk and Return
52. Joe has a disability income policy that pays a monthly benefit of $1,200. Joe has been disabled for 30 days, but he only received a check in the amount of $600 from his disability insurance. What is probably the reason that he only received $600? a. The policy has a deductible of $600. b. The elimination period is 15 days. c. The policy has a 50% coinsurance clause. d. Joe is considered to be only 50% disabled. e. Joe has only owned the policy for 6 months. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 9-6 STA: DISC: Risk and Return
53. Medicare Advantage supplemental benefits include all of the following except a. Vision d. Hospitalization
b. Dental c. General checkups ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking
e. Wellness programs DIF: Moderate OBJ: LO: 9-2 KEY: Bloom's: Knowledge
54. Medicare Advantage policies require payment from the policyholder in the form of a a. Deductible d. Excess charge b. Co-insurance e. a and b c. Copayment ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 9-2 KEY: Bloom's: Knowledge
55. The medicare coinsurance payment is usually a. 0% d. 50% b. 10% e. None of the above c. 20% ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 9-2 KEY: Bloom's: Knowledge
56. About ___ million Americans lack health insurance. a. 10 d. 75 b. 30 e. 100 c. 50 ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 9-1 KEY: Bloom's: Knowledge
57. The U.S. spends about ___% of our economic output on health care. a. 5 d. 17 b. 9 e. 20 c. 13 ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 9-1 KEY: Bloom's: Knowledge
58. The Affordable Care Act's expenditures are to be financed by all of the following except a. Higher medicare taxes d. Fees on insurers b. Excise tax on certain “Cadillac” policies e. Anticipated cost savings c. Higher income taxes ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 9-2 KEY: Bloom's: Knowledge
59. Starting in 2014, the Affordable Care Act requires insurance companies to set premiums
based on all the following except a. Family size b. Where you live c. Tobacco use ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking
d. Gender e. Age DIF: Challenging OBJ: LO: 9-2 KEY: Bloom's: Knowledge
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 1. The average age of the American population is [decreasing | increasing]. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-1 STA: DISC: Risk and Return
2. One complaint about HMOs in the past, as compared to traditional indemnity plans, is that [the cost was expensive | the care was not available for major illnesses | members couldn’t always choose their physicians]. ANS: c PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-2 STA: DISC: Risk and Return
3. One difference between health maintenance organizations (HMOs) and individual practice associations (IPAs) is that [HMOs cost much less | IPAs do not provide services from a central location]. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-2 STA: DISC: Risk and Return
4. Traditional indemnity policies reimburse the insured based on the [amount charged | usual, customary, and reasonable charges] for the medical services received. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-2 STA: DISC: Risk and Return
5. [The government | Individuals] pay(s) a larger share of personal health care expenses than private health insurance. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-2 STA: DISC: Risk and Return
6. [Medicare | Medicaid] makes health care payments available for anyone over age 65. ANS: a
PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-2 STA: DISC: Risk and Return
7. Medicare [hospital | supplemental medical] insurance requires that those covered pay a monthly premium. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-2 STA: DISC: Risk and Return
8. Medicare would pay [the entire | part of the] hospital bill for a covered person. ANS: b PTS: 1 DIF: Challenging NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-2 STA: DISC: Risk and Return
9. Workers Compensation would make payments to an injured worker [if he had been hurt on the job | only if he could prove negligence on the part of his employer]. ANS: a PTS: 1 DIF: Challenging NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-2 STA: DISC: Risk and Return
10. Premiums for Workers Compensation are paid by the [employees | employers]. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-2 STA: DISC: Risk and Return
11. [Medicare | Workers' compensation] pays for medical expenses that are the result of on-the-job injuries and illnesses. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-2 STA: DISC: Risk and Return
12. Hospital insurance would pay the costs for room and board and [the use of an operating room | the fee charged by the surgeon]. ANS: a PTS: 1
DIF: Moderate
OBJ: LO: 9-4
NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
STA: DISC: Risk and Return
13. Having your "reasonable and customary" surgical expenses paid is an example of [service | scheduled] benefits. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-4 STA: DISC: Risk and Return
14. Scheduled surgical benefits tend to be [very close to | way below] what most surgeons will charge. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-4 STA: DISC: Risk and Return
15. Physician's expense insurance [would | would not] pay for the cost of a routine office call. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-4 STA: DISC: Risk and Return
16. Surgical expense insurance would pay for cosmetic surgery [for a face lift | to reduce the size of your nose | only if deemed a medical necessity]. ANS: c PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-4 STA: DISC: Risk and Return
17. Most dental insurance is written through [group | individual] policies. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-4 STA: DISC: Risk and Return
18. Most commonly, the deductible in a health insurance policy is on [an annual | a per incident] basis. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-4 STA: DISC: Risk and Return
19. When there is a co-insurance or participation clause in a health insurance policy, the amount the insurance will pay is computed [before | after] the deductible is paid. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-4 STA: DISC: Risk and Return
20. The amount of health insurance reimbursement actually paid may be reduced by [internal limits | co-payment caps]. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-4 STA: DISC: Risk and Return
21. Your health insurance stipulates that you will pay the first $500 of your health care expenses for the year. This is an example of a [deductible | co-payment]. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 9-4 STA: DISC: Risk and Return
22. An individual receiving health care [could | could not] receive multiple payments from more than one insurance company for this care. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-4 STA: DISC: Risk and Return
23. A coordination of benefits provision in a health care policy would [aid | prohibit] collecting multiple payments for health care. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-4 STA: DISC: Risk and Return
24. If you are laid off, your health insurance [can be continued at the employer's option | must be continued if you pay the premiums]. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 9-4 STA: DISC: Risk and Return
25. Dependent children [regardless of age | up to a stated maximum age] will usually be covered by your health insurance policy. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-4 STA: DISC: Risk and Return
26. Your health insurance will usually pay [the same | less] for mental health problems compared to physical problems. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-4 STA: DISC: Risk and Return
27. Long-term health care [does | does not] have a deductible. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-5 STA: DISC: Risk and Return
28. "Long Term Care" is a term used to describe [nursing home | extended hospital]. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-5 STA: DISC: Risk and Return
29. Medicare and Medicaid cover [more | less] than half of the total cost of long-term care. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-5 STA: DISC: Risk and Return
30. [Men | Women] are more likely to need long-term care insurance. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-5 STA: DISC: Risk and Return
31. When purchasing a long-term care policy, the [guaranteed renewability | optional renewability] provision is recommended. ANS: a
PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 9-5 STA: DISC: Risk and Return
32. Disability insurance is designed to [replace some of your income | pay medical bills] when you are disabled. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 9-6 STA: DISC: Risk and Return
33. The ["own occupation" | "any occupation"] definition of disability is more restrictive. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-6 STA: DISC: Risk and Return
34. You would be more likely to receive [70 | 90] percent of your pre-disability income from a disability income policy. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-6 STA: DISC: Risk and Return
35. The longer the elimination or waiting period in your disability income policy, the [higher | lower] the premiums. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
OBJ: LO: 9-6 STA: DISC: Risk and Return
36. Disability income benefits are taxable when the policy premiums were paid by the [employer | employee]. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 9-6 STA: DISC: Risk and Return
37. Loss prevention tactics can be [only marginally | very] successful in reducing accidents and illnesses. ANS: b PTS: 1
DIF: Moderate
OBJ: LO: 9-6
NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
STA: DISC: Risk and Return
38. If an employee could afford additional health insurance coverage in addition to group coverage, most should purchase [dental | disability income] insurance. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 9-6 STA: DISC: Risk and Return
39. During the past few decades, the percent of our income that we as a nation spend on health care has [increased | decreased]. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 9-1 STA: DISC: Risk and Return
40. After passage of the Affordable Care Act, many HMOs [require | do not require] members to pick one primary care physician. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 9-2 KEY: Bloom's: Knowledge
41. After passage of the Affordable Care Act, many HMOs [allow | do not allow] out-of-network coverage. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 9-2 KEY: Bloom's: Knowledge
42. Medicare Advantage supplemental benefits include [lab tests | wellness programs]. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking
OBJ: LO: 9-2 KEY: Bloom's: Knowledge
43. Medicare Advantage policies require payment from the policyholder in the form of [deductibles and coinsurance | copayments]. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking
OBJ: LO: 9-2 KEY: Bloom's: Knowledge
44. The medicare coinsurance payment is usually [10% | 20%].
ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 9-2 KEY: Bloom's: Knowledge
45. About [20 | 50] million Americans lack health insurance. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 9-1 KEY: Bloom's: Knowledge
46. The U.S. spends about [17% | 24%] of our economic output on health care. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 9-1 KEY: Bloom's: Knowledge
47. And about [one in five | one in seven] people between the ages of 35 and 65 will become disabled for five years or more. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking
OBJ: LO: 9-6 KEY: Bloom's: Knowledge
PROBLEM 1. Nick and Sheila Preston are married and have purchased a comprehensive major medical policy which covers them and their two sons, Wally and Brent. The policy has a $500 calendar year family deductible, a $2,500 stop-loss provision, and an 80% coinsurance clause. The following losses occur: On January 1, 2004 Sheila was treated for an infection at a cost of $200, on July 1, 2004 Wally was treated for an injury suffered while waterskiing at a cost of $10,000, on December 5, 2004 Nick underwent eye surgery at a cost of $1,500, and on January 5, 2005 Brent was treated for a broken leg at a cost of $2,000. How much will the insurer pay for each of these losses? ANS: January 1, 2004 loss: ($200 - $200 of deductible) = $0. July 1, 2004 loss: ($10,000 - $300 remaining deductible) .80 coinsurance = $7,760. December 5, 2004 loss: ($1,500 - $0 deductible) * .80 = $1,200. However, the stop loss kicks in and causes more to be paid. So far the Nick and Sheila have paid $200 + $2,240 = $2,440. The $2,500 stop loss would result in Nick and Sheila only needing to pay $60. Therefore, the insurance company should pay $1,440. January 5, 2005 loss: New deductible and stop loss, therefore (2,000 - $500) .8 = $1,200. PTS: 1 DIF: Challenging NAT: BUSPROG: Reflective thinking
OBJ: LO: 9-4 STA: DISC: Risk and Return
KEY: Bloom's: Evaluation 2. Tommy and Amanda Perez are a dual-earner couple with a young son, Bobby. Tommy and Amanda each receive health care coverage for themselves from their respective employers. Their employers pay the premiums for the workers, and coverage for dependents is available if the worker pays the premium cost. They are trying to decide which policy to cover Bobby under for the upcoming year. The following is a brief description of their policies and projected medical expenses for Bobby.
Tommy's HMO Coverage
Amanda's Major Medical Coverage
Maximum Limits
unlimited
$500,000/year/person
Deductible/Copayment
$20/doctor's visit, $50/emergency clinic visit, $15/prescription, $ 0/in-hospital charges
$500/year/person
Participation
not applicable
175/20 with a $2,500/year/person cap
Major exclusions
Dental and vision
Prescriptions, dental, and vision
Monthly premiums for dependents
$105/dependent/month
$90/dependent/month
Bobby is a healthy 8-year-old who is accident prone. Based on his past medical records, Tommy and Amanda expect the following covered medical costs for the year: 6 trips to the doctor--average cost of $75 per trip 2 trips to the emergency clinic--average cost of $300 per trip 1 broken bone--average cost of in-hospital surgery $1,250 12 prescriptions--average cost of $45 per prescription What would the combined cost of premiums plus out-of-pocket medical costs be for Bobby under Tommy's HMO? What would the combined cost of premiums plus out-of-pocket medical cost be for Bobby under Amanda's major medical plan? ANS: Tommy's HMO 6
$ 20 = $
Amanda's Major Medical 120 Doctor
2 $ 50 = $ 100 Emergency clinic 0 Hospital 1 $ 0 $ = 12 $ 15 = $ 180 Prescriptions - 500 Deductible $ 400 Out-of-pocket costs
6$ 75 $ 450 Doctor = 2 $ 300 = $ 600 Emergency clinic 1 $1,250 = $1,250 Hospital $2,300 $1,800 .2 Coinsurance %
12 $105 =
$1,260 Annual premiums
$1,660 Total Cost PTS: 1 DIF: Challenging NAT: BUSPROG: Reflective thinking KEY: Bloom's: Evaluation
$
360 Coinsurance 540 Prescriptions
12 $ =
45
$
12 $ =
90
$1,080 Annual premiums + 500 Deductible + 360 Coinsurance $2,480 Total Cost
OBJ: LO: 9-4 STA: DISC: Risk and Return
Chapter 10—Protecting Your Property TRUE/FALSE 1. Property insurance is meant to protect property owners from two basic types of exposures, physical loss of property and loss through depreciation. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 10-1 STA: DISC: Risk and Return
2. A peril is a cause of loss. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-1 STA: DISC: Risk and Return
3. Property inventories are important to identify insurance needs and to substantiate claims. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
4. A written inventory of personal property is required by insurance companies for property insured under the unscheduled general contents coverage. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
5. Antiques, collections, and boats are adequately protected under a standard homeowner's policy. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-2 STA: DISC: Risk and Return
6. Personal property floaters provide increased coverage for jewelry and other collectable items at an additional premium. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-2 STA: DISC: Risk and Return
7. The terms "perils" and "losses" refer to the same thing. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-1 STA: DISC: Risk and Return
8. Fire is an example of a hazard. ANS: F
PTS: 1
DIF: Easy
OBJ: LO: 10-1
NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
STA: DISC: Risk and Return
9. Floods are specifically defined in homeowner's policies. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-2 STA: DISC: Risk and Return
10. Liability claims may result from alleged negligent acts. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 10-1 STA: DISC: Risk and Return
11. Liability insurance generally provides some coverage for legal fees. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
12. You would be considered to be negligent when you, a dependent, or another named insured's action causes harm or property loss. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
13. The principle of indemnity states that the insured can be compensated for an amount equal to his economic loss. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 10-1 STA: DISC: Risk and Return
14. Actual cash value provides coverage at the current market value of your property. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
15. Actual cash value is defined as replacement cost minus depreciation. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-1 STA: DISC: Risk and Return
16. The most common definition of actual cash value is purchase price less depreciation. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
17. The Principle of Indemnity does NOT apply to life and health insurance.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
18. The principle of indemnity generally limits the amount that the insured may collect to the actual cash value of the property. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 10-1 STA: DISC: Risk and Return
19. If your insurance company makes a payment to you, subrogation is the right of the company to collect from the person causing the accident or from his/her insurance company. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-1 STA: DISC: Risk and Return
20. Other-insurance clauses help prevent the violation of the principle of indemnity. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
21. The Right of Subrogation allows the insured to get reimbursed for claims paid. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
22. Earthquakes are covered under most homeowners policies. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-2 STA: DISC: Risk and Return
23. Nancy's house has been completely destroyed by fire. Prior to the accident, the house had a value of $100,000. Nancy had two separate policies totaling $60,000 each. She may collect $60,000 from each insurance company. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 10-2 STA: DISC: Risk and Return
24. HO coinsurance requires the insured to carry insurance protection equal to the market value of the house. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
25. A coinsurance clause will cause insurers to proportionately reduce claims payments unless you carry insurance up to a specific amount, such as 80 percent of the replacement value.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 10-1 STA: DISC: Risk and Return
26. A house with a replacement value of $110,000 is currently insured for $90,000. The house has suffered a $15,000 loss from windstorm damage. The insurance company will pay the full $15,000 less the deductible. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
27. HO-4 and HO-6 are for renters and owners of condominiums, respectively. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 10-2 STA: DISC: Risk and Return
28. The HO-3 form is a good policy for first-time buyer owners because it is a named perils policy. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 10-3 STA: DISC: Risk and Return
29. Homeowner policy forms are fairly standardized from one company to another. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-2 STA: DISC: Risk and Return
30. As a tenant, you would purchase a HO-3 policy. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-3 STA: DISC: Risk and Return
31. An HO-1 policy lists more perils for which you are insured than an HO-3 does. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
32. While you were away on your summer vacation, raccoons took up residence in your attic. They did $5,000 damage. Your H0-2 policy will cover this loss. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 10-2 STA: DISC: Risk and Return
33. While you were away on winter vacation, there was a severe snowstorm that caused your roof to cave in causing a $20,000 loss. Your H0-2 policy will cover this loss. ANS: T
PTS: 1
DIF: Challenging
OBJ: LO: 10-2
NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
STA: DISC: Risk and Return
34. Connie rented a hotel room while on vacation. If someone breaks into her room, her HO-4 policy will cover her stolen property. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 10-2 STA: DISC: Risk and Return
35. You will insure your house for $90,000. The premium on an HO-3 policy will be greater than that of an HO-2 policy. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
36. Covered liability perils do not include claims for libel, slander, or character defamation. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
37. Your homeowner's policy will pay for damage to the neighbor's property when your 10 year old son throws a rock through her picture window. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
38. Protection for personal property both at home and away from home is a provision of the homeowners' policy. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
39. Like standard homeowners' policies, a renters' policy liability coverage includes coverage away from home. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
40. Replacement cost and actual cash value is the same thing. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-1 STA: DISC: Risk and Return
41. Internal limits are normally specified in the homeowners' insurance contract for some categories of personal property. ANS: T
PTS: 1
DIF: Moderate
OBJ: LO: 10-2
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
STA: DISC: Risk and Return
42. The premiums for homeowners' insurance are based on size of deductible, internal limits, and standard coverage. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-2 STA: DISC: Risk and Return
43. Replacement cost coverage is available for renters but requires an extra premium. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-2 STA: DISC: Risk and Return
44. To save premium costs, one should decrease her deductible and liability coverage on a homeowners' policy. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 10-3 STA: DISC: Risk and Return
45. Automobile liability claims could potentially be more costly to you than car damage claims. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
46. Careful drivers have limited need for liability protection, because they are not likely to be at fault in an accident. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
47. A $100,000/$300,000 bodily injury liability automobile policy could pay up to $100,000 to one person or up to $300,000 to several people seeking damages. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
48. A pure no-fault system insurance would not pay for medical expenses. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
49. The automobile liability insurance policy covers the insured and residents of his/her household when driving an owned automobile. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
KEY: Bloom's: Knowledge 50. The insurance company will provide defense for a covered person against both civil and criminal charges involving her motor vehicle. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
51. A rental car could be a covered auto under a personal auto policy liability section. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
52. Automobile medical payments insurance normally contains an indemnity clause. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 10-4 STA: DISC: Risk and Return
53. The named insured and her passengers would be covered under automobile medical payments insurance. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
54. Uninsured motorist protection usually provides protection to your car if a hit-and-run incident occurs. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
55. Collision coverage would pay for damages to your car if a tree falls on it. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 10-4 STA: DISC: Risk and Return
56. The type of car you drive has little effect on your auto insurance premiums. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
57. State financial responsibility laws require only auto liability insurance. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
58. The no-fault automobile insurance movement has had a major effect on auto insurance premiums.
ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
59. Financial responsibility laws in most states are high enough to adequately meet one's auto liability needs. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
60. A personal property floater and a personal liability umbrella policy offer similar coverage. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 10-2 STA: DISC: Risk and Return
61. A personal liability umbrella policy typically includes coverage for auto related liability losses in excess of the limits purchased in a personal auto policy. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-5 STA: DISC: Risk and Return
62. The personal liability umbrella policy typically includes coverage for liability losses that are in excess of the limits purchased in the comprehensive personal liability coverage provided in the homeowners' policy. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-5 STA: DISC: Risk and Return
63. The minimum limit for personal umbrella policies is generally $1,000,000. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-5 STA: DISC: Risk and Return
64. A captive agent represents many insurance companies. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-6 STA: DISC: Risk and Return
65. One should never admit fault at the scene of an accident. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-6 STA: DISC: Risk and Return
66. Uninsured motorist coverage covers passengers in your car from losses caused by your negligence. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
KEY: Bloom's: Application 67. Collision insurance pays for damage to your automobile regardless of who is at fault. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
68. Getting married will lower your auto insurance premiums. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
69. The federal government subsidizes the flood insurance program. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-2 STA: DISC: Risk and Return
70. Age of home affects insurance premiums the most. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 10-2 KEY: Bloom's: Knowledge
71. The advisable dollar limit for any one auto accident is $250,000. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 10-4 KEY: Bloom's: Knowledge
72. The best place to buy automobile insurance is your insurance agent. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 10-6 KEY: Bloom's: Knowledge
73. Section I of a homeowner’s insurance policy covers medical payments. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 10-2 KEY: Bloom's: Knowledge
74. Section I of a homeowner’s insurance policy covers the insured’s dwelling unit, accompanying structures, and personal liaiblity. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 10-2 KEY: Bloom's: Knowledge
75. Section II of a homeowner’s insurance policy covers personal property and personal liability. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills MULTIPLE CHOICE
DIF: Easy OBJ: LO: 10-2 KEY: Bloom's: Knowledge
1. All property insurance companies require you to show the following when making a claim: a. Proof of loss b. Personal property inventory c. Values at the time of inventory d. All of the above. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-6 STA: DISC: Risk and Return
2. The basic principles of property and liability insurance pertain to: a. types of exposure b. the principles of indemnity c. coinsurance d. all of the above ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-1 STA: DISC: Risk and Return
3. Some common liability risks include: a. driving a car b. entertaining guests at home c. being careless in performing professional duties d. all of the above ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 10-1 STA: DISC: Risk and Return
4. The asset most likely to be specifically itemized in a property insurance endorsement is a. sofa. b. clothing. c. jewelry. d. garden equipment. e. all of these. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
5. Your standard HO policy will not include coverage for damage done by a. flood. b. windstorm. c. falling objects. d. wind. e. theft. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-2 STA: DISC: Risk and Return
6. A standard HO policy covers damage from most weather-related perils except a. snow and freezing. b. windstorms and earthquakes.
c. earthquakes and floods. d. floods and volcanic eruption. e. Freezing and volcanic eruption. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-2 STA: DISC: Risk and Return
7. A liability suit could result when a. lightning strikes your home. b. your son falls down the stairs of your home. c. your auto is stolen. d. your dog bites the neighbor. e. smoke from the fireplace fills your house. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
8. Which Homeowners' policy is best suited for a resident of a rented apartment to cover that person's personal property? a. HO-3 b. HO-4 c. HO-5 d. HO-8 e. A Homeowners' policy will not apply since the real estate involved is not owned by the insured. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
9. Negligence results when a person a. is not insured. b. acts as a "reasonable person." c. fails to act as a "reasonable person." d. admits it. e. is more than 18 years old. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
10. The 80% coinsurance clause in a homeowner's policy would cause a reduction in the claim payment for a covered loss to the dwelling of $30,000 in which of the following cases: a. dwelling limit of $75,000, replacement cost of dwelling $90,000, actual cash value of dwelling $85,000 b. dwelling limit of $75,000, replacement cost of dwelling $100,000, actual cash value of dwelling $90,000 c. dwelling limit of $90,000, replacement cost of dwelling $90,000, actual cash value of dwelling $90,000 d. dwelling limit of $110,000, replacement cost of dwelling $110,000, actual cash value of dwelling $90,000 e. dwelling limit of $120,000, replacement cost of dwelling $100,000, actual cash value of dwelling $90,000
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 10-1 STA: DISC: Risk and Return
11. The principle of ____ states that an insured should not be compensated by an insurance company in an amount exceeding the economic loss. a. subrogation b. insurable interest c. coinsurance d. indemnity e. none of these ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
12. Donna, who is single and 30-years-old, has received several speeding tickets recently and was shocked by the effect on her auto insurance. Donna drives a 2002 Pontiac Firebird, is currently not covered by health insurance, has an emergency fund of $25,000, an income of $100,000 per year, and an investment portfolio of $230,000. She is trying to reduce the price of her auto insurance. Which of the following actions is most likely to be advisable. a. lower her liability limits to the minimum allowed in her state b. drop her medical payments coverage c. raise her deductible from $250 to $1,000 d. drop her comprehensive coverage and keep collision-only e. drop everything from her policy except the liability insurance ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 10-4 STA: DISC: Risk and Return
13. Generally, actual cash value is defined as a. replacement cost. b. original purchase price. c. market value. d. purchase cost minus depreciation. e. replacement cost minus depreciation. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-1 STA: DISC: Risk and Return
14. The principle of indemnity would prevent: a. the act of one person from being imputed to another. b. an insured from collecting more than he lost. c. a negligent third party from being held liable for damages if the injured party was insured. d. a significant amount of loss control activity. e. an insurer from ever waiving it's right to subrogation. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
15. The right of ____ gives the insurer the right to recover its costs from the at-fault party after the company has paid a claim to its insured. a. subrogation b. indemnity c. insurance interest d. coinsurance e. none of these ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
16. Tom visits George at his ranch. Although a novice on horseback, Tom decides to join George in a morning ride. George recommends that Tom ride an unbroken stallion named Satan. While mounting Satan, Tom is thrown headlong through the windshield of Tom's car. The damage to the car is $2,000 and Tom's own insurance pays him $1,500 ($500 deductible). Under what principle could Tom's insurance company sue George for his negligence? a. adhesion b. indemnity c. estoppel d. subrogation e. misrepresentation ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
17. If you have two insurance policies on the same property, the ____ clause explains how the two insurance companies will share the loss. a. principle of indemnity. b. coinsurance clause. c. other insurance clause. d. companies' insurable interest. e. principle of subrogation. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
18. Coinsurance is a policy provision to discourage the policyholder from being a. over insured. b. underinsured. c. insured only if specified by lending agency. d. insured with more than one company. e. insured by government agencies. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 10-1 STA: DISC: Risk and Return
19. The form of homeowner's insurance that is incorrectly paired with the insured is a. HO-1, renter. b. HO-2, homeowner. c. HO-4, renter. d. HO-8, homeowner.
e. HO-6, condominium owner. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 10-2 STA: DISC: Risk and Return
20. The condominium owner would choose a ____ policy. a. HO-2 b. HO-3 c. HO-4 d. HO-6 e. HO-8 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 10-2 STA: DISC: Risk and Return
21. You just purchased an older home with a market value of $100,000 and a replacement value of $180,000. What HO form would meet your needs? a. HO-2 b. HO-3 c. HO-4 d. HO-6 e. HO-8 ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 10-3 STA: DISC: Risk and Return
22. Which of the following best describes the personal articles floater? a. an endorsement providing coverage for items of expensive personal property not adequately covered under the standard homeowners policy. b. an addition to the automobile policy intended to cover items of personal property that are often in or upon a covered automobile. c. a specialized inland marine policy covering boats and trailers used with boats. d. a liability policy that covers against liability caused by ownership or use of items of personal property. e. none of the above. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
23. Section I of the homeowner's insurance policy covers a. the home only. b. the house and the garage. c. negligence of an insured. d. the home and its contents. e. negligence and the house. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
24. Section II of the homeowner's insurance contract covers
a. b. c. d. e.
libel. contractual wrongdoing. the house and contents. liability of the insured. none of these.
ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
25. Homeowner's property insurance does not provide protection on the a. owned dwelling unit. b. garage. c. accompanying structures. d. landscaping. e. vacant lot. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-2 STA: DISC: Risk and Return
26. A homeowner's policy does not provide protection for the personal property of a. family members at home. b. family members while in college. c. guests. d. tenants. e. family members traveling. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
27. The deductible on a standard homeowners' policy applies to a. coverage on the house. b. coverage on personal property. c. liability coverage. d. a and b e. a, b, and c ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
28. For an extra premium, the HO-3 homeowners policy pays based on replacement cost for a. the house. b. contents. c. both the house and contents. d. cars. e. none of these. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
29. Homeowners' insurance premiums are determined by
a. b. c. d. e.
policy limits. perils covered. deductibles chosen. all of these. none of these.
ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-2 STA: DISC: Risk and Return
30. The Thomson's house burned to the ground! They felt they were adequately covered (see coverage below). Their car (market value $10,000) was in the garage and totally destroyed. How much will they be reimbursed for their auto from their HO-3 policy? Replacement Value of house ACV coverage on house Deductible a. b. c. d. e.
$80,000 $60,000 $ 300
$ 0 $9,700 $6,000 $5,700 $8,000
ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
31. The Thomson's house burned to the ground! They felt they were adequately covered (see coverage below). Their car (market value $10,000) was in the garage and totally destroyed. How much will the Thompsons be reimbursed for their home? Replacement Value of house ACV coverage on house Deductible a. b. c. d. e.
$80,000 $60,000 $ 300
$80,000 $79,700 $63,700 $60,000 $59,700
ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
32. Your son left his skateboard at the bottom of the basement stairs. While going downstairs to change a broken light bulb, you step on the skateboard and break your ankle during the fall. Medical damages total $1,455. How much will your $140,000 homeowners' insurance policy pay for this accident? The policy has $100,000 comprehensive liability coverage and medical payments of $1,000/person. a. $ 0 b. $ 250 c. $ 500 d. $1,000
e. $1,455 ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 10-2 STA: DISC: Risk and Return
33. Which of the following would be insured for actual cash value under a standard HO-2 policy? a. The house b. Unscheduled personal property c. Scheduled personal property d. a and c e. a, b, and c ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 10-2 STA: DISC: Risk and Return
34. Which of the following events would probably increase your auto premiums? a. Your 25th birthday b. You get married c. Trading in your 1999 Mercedes for a 2000 Ford Escort d. Increasing your collision deductible e. None of the above would increase your premium ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 10-4 STA: DISC: Risk and Return
35. Homeowners' insurance will cover which of the following? a. The meter-reader was bitten by Cujo, your poodle. b. Your attached garage destroyed by Hurricane Ivan. c. Your new Pontiac Transport Mini-Van parked inside the garage. d. a, b, and c e. a and b ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
36. Jamil and Vicky purchased a $200,000 homeowners policy for their house in 1988. They have renewed the policy each year since and have replacement coverage. This policy has a $1,000 deductible. Their home now has a replacement value of $275,000. Last week they came home to find a small fire which caused the following damages: home personal property landscaping
$50,000 $20,000 $ 7,000
How much will the insurance company pay for the $50,000 loss to their home? a. $ 50,000 less the deductible b. $ 45,000 less the deductible c. $ 57,000 less the deductible d. $200,000 less the deductible e. none of the above
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 10-2 STA: DISC: Risk and Return
37. Carl and Alexandra purchased a $200,000 homeowners policy for their house in 1988. They have renewed the policy each year since and have replacement coverage. This policy has a $1,000 deductible. Their home now has a replacement value of $275,000. Last week they came home to find a small fire which caused the following damages: home personal property landscaping
$50,000 $20,000 $ 7,000
Assume Carl and Alexandra have a standard HO-3 policy with personal property covered at 50% and landscaping covered for 10%. How much will the insurance pay for the losses of their personal property and landscaping? a. $15,000 b. $ 9,700 c. $24,545 d. $27,000 e. $30,000 ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 10-2 STA: DISC: Risk and Return
38. Common types of property that are subject to internal limits on homeowner's policies include a. musical instruments b. furniture c. jewelry d. clothing e. all of the above ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
39. Which of the following losses is most likely to be covered under your auto liability insurance? a. a legal bill incurred by your insurer defending you from a claim related to an accident caused by your negligence. b. a medical bill for your injuries related to an accident that you caused. c. a medical bill for injuries to a passenger in your car arising from an accident in which you were not at fault. d. an auto shop bill for repairs of a car you own due to an accident caused by your negligence. e. an auto repair bill for repairs to the car of a driver who negligently caused an accident with you. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 10-4 STA: DISC: Risk and Return
40. Auto insurance is needed primarily because of a. potential damage to auto. b. potential liability claims.
c. lender's requirements. d. state law. e. federal requirements. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
41. Liability coverage provides payment to the a. insured for damage. b. family members of insured. c. holder of auto loan. d. lawyer needed to defend criminal offense. e. non-family members involved in the accident. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
42. Your auto liability insurance shows policy limits of $100,000/$300,000. This means a. $100,000 would be paid to the people in your automobile and the $300,000 to passengers in the other car. b. $100,000 is the limit per individual with $300,000 divided equally between the remaining passengers. c. $100,000 limit per individual with a $300,000 limit per accident. d. $100,000 limit per individual with $300,000 being paid to the driver of the other car. e. none of the above. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
43. Kevin, who has liability limits of $20,000/$40,000/$20,000 and a $500 collision deductible, is involved in an accident. Due to his negligence he runs into a Rolls Royce. Three people sustained bodily injuries in the Rolls Royce. The driver's injuries were worth $1,000,000, a passenger received injuries worth $12,500, and another passenger received injuries of $7,100. How much will the PAP pay for these bodily injuries? a. $20,000 b. $40,000 c. $39,600 d. $39,100 e. Some other amount ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 10-4 STA: DISC: Risk and Return
44. Maximum liability policy limits are determined by a. state law. b. auto type. c. the insured's choice. d. court proceedings. e. none of these. ANS: C
PTS: 1
DIF: Moderate
OBJ: LO: 10-4
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
STA: DISC: Risk and Return
45. Auto medical payments cover a. anyone in your car b. anyone in the other person's car. c. only the policy owner. d. a and b e. a, b, and c ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
46. To reduce auto insurance premiums as your car depreciates in value, you should consider self-insuring which of the following risks? a. bodily injury liability b. collision c. property damage liability d. comprehensive (other than collision) e. b and d ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 10-4 STA: DISC: Risk and Return
47. Comprehensive automobile coverage refers to a. complete coverage including liability, medical payments, and damage to your auto. b. coverage for damage to an insured automobile from perils other than collision. c. coverage that adds items of property such as CB radios and telephones that are ordinarily excluded d. coverage for bodily injuries suffered in an automobile accident. e. none of the above. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
48. Who is covered under medical payment coverage of your automobile policy? a. Your daughter's friends riding in your car. b. The driver of the car you hit. c. The pedestrian you hit while crossing the street.. d. a and c e. all of the above ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
49. In order to collect under uninsured motorists coverage, three specific conditions must be in effect. They are: a. another motorist was at fault; this motorist has no available insurance coverage; and damages were incurred. b. another motorist was at fault; this motorist has insurance coverage; and damages were incurred.
c. you were at fault; the other motorist has insurance coverage; and damages were incurred. d. you were at fault; the other motorist has no available insurance coverage; and damages were incurred. e. either a or d ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
50. Collision protection pays for damage to a. non-auto property of insured. b. auto of insured. c. all autos in accident. d. auto of other party in accident. e. non-auto property of others damaged in accident. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
51. Your car is damaged by fire while parked in your garage. Protection would be provided by a. comprehensive auto coverage. b. property damage liability coverage. c. homeowner's personal property coverage. d. homeowner's dwelling unit coverage. e. auto collision coverage. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
52. After packing up to return home for the holidays after the fall semester, Tex stopped at Double T bookstore to sell textbooks. After collecting $25, he headed back to his pickup truck only to find a broken window, the truck broken into, and all his suitcases and personal property gone. The loss of his personal property and suitcases would be covered by a. umbrella liability insurance. b. comprehensive (other than collision) auto coverage. c. property damage liability auto coverage. d. property damage to the property of others (homeowners' coverage). e. personal property off premises (homeowners' coverage). ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-2 STA: DISC: Risk and Return
53. After packing up to return home for the holidays after the fall semester, Peter stopped at Double T bookstore to sell textbooks. After collecting $25, he headed back to his pickup truck only to find a broken window, the truck broken into, and all his suitcases and personal property gone. The damages to his pickup would be covered by a. property damage liability auto coverage. b. uninsured motorist auto coverage. c. personal injury protection. d. comprehensive (other than collision) auto coverage. e. collision coverage.
ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
54. Jake drove Amanda's truck to the football bowl game because his car was broken. On the way home, Jake was involved in an accident that was his fault. The resulting liability damages totaled $85,000. Jake has $100,000 liability coverage on his car, and Amanda has $50,000 on her truck. How would the $85,000 liability damages be paid for this accident? a. $50,000 from Amanda's policy with no further payment b. $85,000 from Jake's policy c. $50,000 from Amanda's policy plus $35,000 from Jake's policy d. $50,000 from Amanda's policy plus $35,000 out of Jake's pocket e. $50,000 from Amanda's policy plus $35,000 out of Amanda's pocket. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 10-4 STA: DISC: Risk and Return
55. Auto insurance premiums would be affected by a. auto body type. b. auto engine size. c. business usage. d. commuting over 50 miles daily. e. all of these. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
56. If you have an outstanding loan on your car, the contract will require you to carry ____ insurance. a. bodily injury liability b. property damage liability c. medical payments d. collision and comprehensive e. all of these ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
57. Premium discounts may result from a. safe driving record and prompt premium payment. b. good grades and long-term employment. c. multiple auto ownership and good credit rating. d. safe driving record and good grades. e. long-term employment and prompt payment of traffic tickets. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 10-4 STA: DISC: Risk and Return
58. Examples of additional, optional automobile coverage includes a. towing. b. hub cap coverage. c. auto rental reimbursement.
d. repainting coverage. e. a and c. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
59. Factors that affect home insurance costs include: a. type of structure b. location of home c. both a & b d. none of the above ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-2 STA: DISC: Risk and Return
60. Auto insurance premiums are generally reduced by a. choosing a higher deductible. b. buying a sporty "high powered" car. c. moving to a larger city. d. avoiding carpooling to work. e. all of the above ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
61. You could save money on your car insurance premiums by a. buying a 4-door sedan. b. choosing a $1,000 deductible. c. moving to a small town. d. all of these. e. none of these would make any difference. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
62. Auto insurance companies may offer premium discounts for a. being a good student. b. installing anti-theft devices. c. taking a defensive driving course. d. all of these. e. none of these. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-4 STA: DISC: Risk and Return
63. A(n) ____ agent represents multiple insurance companies. a. captive b. business c. good d. independent
e. employed ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 10-6 STA: DISC: Risk and Return
64. A claims adjustor may work for a. the insurance company. b. an independent adjustment bureau. c. himself. d. any of the above. e. none of the above. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 10-6 STA: DISC: Risk and Return
65. An automobile covered under a policy with a $500 collision deductible is damaged in a collision with a fence. It could be repaired for $15,000, replacement cost is $25,000, and the depreciation and physical condition deduction is $5,000. How much will the insurance company pay? a. $24,500 b. $7,500 c. $15,000 d. $14,500 e. Some other amount ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 10-4 STA: DISC: Risk and Return
66. What factor affects insurance premiums the most? a. Style d. Credit score b. Age e. Detached or attached garage c. Brick or wood exterior ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 10-2 KEY: Bloom's: Knowledge
67. The advisable dollar limit for any one auto accident is a. $50,000 d. $300,000 b. $100,000 e. $500,000 c. $200,000 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 10-3 KEY: Bloom's: Knowledge
68. The best place to buy automobile insurance is a. insurance agent d. state insurance commission b. auto dealer e. none of the above c. finance company ANS: A PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 10-3 KEY: Bloom's: Knowledge
69. Section I of a homeowner’s insurance policy covers all of the following except a. personal liability d. personal property
b. dwelling c. other structures ANS: A PTS: 1 NAT: BUSPROG: Analytic skills
e. all above are covered DIF: Easy OBJ: LO: 10-2 KEY: Bloom's: Knowledge
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 1. The Principle of [Indemnity | Peril] states that the insured may not be compensated by the insurance company in an amount exceeding the insured's economic loss. ANS: a PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
2. When considering your possible losses as a property owner, you would be more likely to suffer a very severe loss from [loss of property | liability claims]. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
3. [Negligence | Indemnity] is the failure to act in a reasonable manner or take necessary steps to protect others from harm. ANS: a PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
4. When selling you a HO policy, your insurance agent will [require | suggest] that you prepare a personal property inventory. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
5. A HO-2 policy will protect your property from losses due to [all | listed] perils. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
6. Bill was the at-fault party when you and he collided. Your insurance company has paid for the damages to your car. Now, it intends to recover this money from Bill. This is the right of [subrogation | indemnification]. ANS: a PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
7. A HO-3 policy will protect your property from losses due to [all | listed] perils. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
8. Marilee has insurance (which does not expire for another six months) on a house she recently sold to Claudia. Now the house has been flattened by a tornado. Marilee [can | cannot] collect on her policy. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
9. Actual cash value (ACV) is calculated by subtracting depreciation from the [purchase price | replacement cost] of an item. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
10. Most HO policies [would | would not] contain a clause requiring you to carry insurance equal to a minimum percent of the replacement value of your home in order to be paid in full for small losses. ANS: a PTS: 1 DIF: Challenging STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
11. Your house has a replacement value of $120,000. Your HO policy has an 80% co-insurance clause. In order to receive full compensation if your house is totally destroyed, you must carry insurance for [$96,000 | $120,000]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
12. [Comprehensive | Named Peril] policy covers all perils unless they are specifically excluded. ANS: a PTS: 1
DIF: Easy
OBJ: LO: 10-2
NAT: BUSPROG: Analytic skills
STA: DISC: Risk and Return
KEY: Bloom's: Knowledge
13. [HO-2 | HO-3] is an example of a named peril policy. ANS: a PTS: 1 DIF: Challenging STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
14. Earthquake policy and flood protection [would | would not] be provided by the standard HO policy. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
15. Negligent acts must be [intentional | unintentional] in order to be insured. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
16. You own your house. The amount of insurance coverage you will have on your furniture will be dependent upon [the replacement value of your house | the amount of insurance on your home]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
17. You use a small building on your property to manufacture Widgets. This building [will | will not] be covered by your standard HO policy. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
18. The personal property of your [boarder | visiting mother-in-law] would be covered by your HO policy. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
19. Your $10,000 stamp collection would be best protected under [your HO policy | a personal property floater]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
20. [Most | Few] tenants carry renters insurance. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
21. If your furniture in your rented apartment is destroyed by a fire, it [would | would not] be covered by your landlord's policy. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
22. A renters' policy typically [does | does not] provide protection against liability claims. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
23. If you are sued, the liability portion of your property insurance [must | has no obligation to] defend you. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
24. Decreasing the amount of deductibles will [increase | decrease] your insurance premiums. ANS: a PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
25. During your lifetime, you are more likely to be sued for negligence as a result of owning a [car | home]. ANS: a PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
26. To save HO insurance premiums, experts recommend that you should decrease your [deductible | liability coverage]. ANS: c PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
27. The insurance company [will | will not] provide liability coverage if your dog bites the neighbor.
ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
28. Automobile medical insurance is designed to pay for injuries to the [driver of your car | members in the car you hit]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
29. Medical payments coverage [would | would not] pay for the medical bills of passengers in your car who are not related to you. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
30. Uninsured motorist insurance is quite [expensive | inexpensive]. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
31. If you hit a deer with your car, payment will come from your [collision | comprehensive] protection. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
32. Buying collision and comprehensive auto insurance from the dealer selling you the car is considered to be a [good | bad] idea. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
33. The theft of your favorite jacket from your locked car [would be | would not be] taken care of by your renter's policy. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
34. Sally drove Jessie's car to the mall and was involved in an accident that was her fault. The primary auto insurance that will cover this accident is [Sally's | Jessie's].
ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
35. The factor that is likely to have the greatest effect on your automobile insurance is your [driving record | address]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
36. The type of car you drive will have [no | a large] effect on the premiums you pay. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
37. Most insurance companies [will | will not] offer good student discounts on car insurance premiums. ANS: a PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
38. A mobile home is [less | more] likely to suffer a complete loss than a conventional house. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
39. A personal liability umbrella liability policy is designed to [replace | supplement] HO and car liability coverage. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
40. Umbrella liability insurance is more likely to be needed by [higher | lower] income persons. ANS: a PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
41. An insurance adjustor is working for the [insurance company | claimant]. ANS: a
PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
42. You will almost [never | always] need the services of a public claims adjustor to settle your claim with an insurance company. ANS: a PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 10-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
43. The professional designation you want your property insurance agent to have is the [ACLU | CPCU]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 10-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
44. Research shows that people with [lower | higher] credit scores tend to file more insurance claims. ANS: a PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 10-2
NAT: BUSPROG: Analytic skills
45. The advisable dollar limit for any one auto accident is [$100,000 | $300,000]. ANS: b PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 10-4
NAT: BUSPROG: Analytic skills
46. The best place to buy automobile insurance is [auto dealer | finance company | independent agent]. ANS: c PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 10-4
NAT: BUSPROG: Analytic skills
47. Section I of a homeowner’s insurance policy covers [personal property | medical payments | dwelling]. ANS: c PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge
OBJ: LO: 10-2
NAT: BUSPROG: Analytic skills
48. Section II of a homeowner’s insurance policy covers [dwelling | personal liability]. ANS: b PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge
OBJ: LO: 10-2
NAT: BUSPROG: Analytic skills
49. Section I of a homeowner’s insurance policy covers [personal property | personal liability].
ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge
OBJ: LO: 10-2
NAT: BUSPROG: Analytic skills
PROBLEM 1. George and Nancy had a $30,000 repair bill on their home after the tornado went through town. Their policy contained the usual 80% co-insurance clause. Their home's replacement value was $150,000; their policy coverage was $110,000 with a $250 deductible. a. b. c.
How much insurance should they have carried to meet the coinsurance obligation? What percentage of this loss will the insurance company pay? How much of the loss will George and Nancy have to absorb? (Show all work.)
ANS: a. Required coverage .80 $150,000 = $120,000 b. Company obligation = $110,000/$120,000 = 92% c. George & Nancy's share of loss = [(1.00 - .92) $30,000] - $250 = $2,150 PTS: 1 DIF: Challenging STA: DISC: Risk and Return
OBJ: LO: 10-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
2. Jim drove his car into a home and wiped out the car in front of him, the home, and a pedestrian. Jim has auto liability insurance of 25/50/10. He also has medical payments coverage of $1,000 and a $250 deductible on his collision coverage. The following damage resulted: Pedestrian's claims Jim's injuries Other driver's claims Passenger's (in other car) claims Damage to Jim's car Damage to other car Damage to the home
$29,000 1,500 12,000 20,000 11,500 12,500 8,000
How much will Jim's auto insurance coverage pay for this accident? How much will Jim be personally responsible for? ANS: Insurance
Jim
Pedestrian Other driver Passenger
$25,000 12,000 20,000
$4,000
Total bodily injury
$50,000
7,000
Other car Home
12,500 8,000
Total property damage liability
$20,500
10,000
10,500
Jim's injuries
1,000
500
Jim's car
11,250
250
Total payment
$72,250
$22,250
PTS: 1 DIF: Challenging STA: DISC: Risk and Return
OBJ: LO: 10-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
Chapter 11—Investment Planning TRUE/FALSE 1. Investing is considered a short-term activity that involves the buying and selling of securities. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 11-1 STA: DISC: Investments
2. Investing and speculating are two entirely different activities. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 11-1 STA: DISC: Investments
3. Mutual funds provide professional management and diversification that individual investors especially those with limited resources - can rarely obtain on their own. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 11-1 STA: DISC: Investments
4. A systematic investment routine involves investing similar sums in regular intervals. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-1 STA: DISC: Investments
5. When completed, an investment plan is a way of translating an abstract investment target into a specific investment program. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 11-1 STA: DISC: Investments
6. The term "investment' refers to money placed in some medium where value and level of return are totally unpredictable. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 11-1 STA: DISC: Investments
7. Two prerequisites to investing are above average risk and clear understanding of market direction. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-1 STA: DISC: Investments
8. A statement specifying how investment capital will be invested in order to reach targeted goals is called a marketing plan.
ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-1 STA: DISC: Investments
9. Your goals tend to set the tone for your investment program, and they play a major role in determining how conservative or aggressive you're likely to be in making investment decisions. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 11-1 STA: DISC: Investments
10. The major reason most people invest is to shelter current income from taxes. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-1 STA: DISC: Investments
11. Owning common stock represents a debt investment. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 11-1 STA: DISC: Investments
12. Common stock pays interest payments on a quarterly basis. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-1 STA: DISC: Investments
13. Common stock generally allows the stockholder to vote on issues of corporate governance. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-1 STA: DISC: Investments
14. Long-term securities are traded in the primary market. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-2 STA: DISC: Investments
15. Newly issued securities are sold to the public in the secondary market. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-2 STA: DISC: Investments
16. A prospectus describes the firm and the issue of a new security. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-2 STA: DISC: Investments
17. An individual is more likely to use the secondary markets than the primary market.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 11-2 STA: DISC: Investments
18. Listed securities are traded on organized exchanges. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-2 STA: DISC: Investments
19. If a company's shares are traded on the New York Stock Exchange, the company is a member of the exchange. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 11-2 STA: DISC: Investments
20. Preferred stocks are the common stocks of ultra blue-chip companies. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-2 STA: DISC: Investments
21. Preferred stock combines the fixed income features of bonds with the same price appreciation potential as common stocks. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 11-2 STA: DISC: Investments
22. Mutual funds often sell directly to investors. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-2 STA: DISC: Investments
23. A retail stockbroker buys and sells securities on behalf of clients. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
24. The Securities Investor Protection Corporation insurance guarantees the dollar value of your securities will not dip below a certain level. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
25. A round lot consists of multiples of 100 shares of stock. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
KEY: Bloom's: Knowledge 26. A sale of 450 shares of stock would involve the trade of an odd lot. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
27. All OTC stocks are part of NASDAQ. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
28. The over-the-counter market is not an organized security exchange. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
29. The bid price would be the price paid by an investor for an OTC stock. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
30. NASDAQ is now the second largest securities market in the U.S. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
31. The federal government regulates securities markets through the Securities and Exchange Commission. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
32. Prices are rising in bear markets, indicating economic optimism. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 11-1 STA: DISC: Investments
33. When a brokerage house holds your securities for you, they hold them in a street name. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
34. According to recent legislation, under the FDIC each brokerage account is insured up to $250,000. ANS: F
PTS: 1
DIF: Moderate
OBJ: LO: 11-3
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
STA: DISC: Investments
35. An odd lot transaction is generally more expensive than a round lot transaction. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
36. There are 50 shares in a round lot. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
37. Brokers charge a commission on security purchases as well as on security sales. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
38. Discount brokers discount the price of securities to below the prevailing market price. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
39. A market order to sell would be filled at the highest price available that day. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
40. A limit order may be used either to buy or to sell. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
41. Buying on margin would allow you to purchase securities using borrowed funds. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
42. The Securities and Exchange Commission sets margin requirements on security purchases. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
43. The Federal Reserve Board (Fed) has the power to raise and lower the margin requirements for stock purchases.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
44. A short sale transaction will be profitable when prices are falling. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
45. The federal margin requirement for common stock is 50%. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
46. Trading on margin can magnify losses or profits. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
47. A corporation's annual stockholders' report provides financial data and other information related to both past and planned activities. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-4 STA: DISC: Investments
48. The most popular average/index covering stocks listed on the New York Stock Exchange is the New York Stock Exchange Index. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 11-4 STA: DISC: Investments
49. The Standard and Poor's Index includes 30 industrial stocks. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-4 STA: DISC: Investments
50. Stockbrokerage firms often do industry analysis. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-4 STA: DISC: Investments
51. On-line trading is the only valuable investment service available through the Internet. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-4 STA: DISC: Investments
52. An annual stockholder report will contain audited financial statements of the company. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-4 STA: DISC: Investments
53. The NYSE index includes all stocks listed on the "Big Board." ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-4 STA: DISC: Investments
54. The first step in asset allocation is selecting the securities that should go into your portfolio. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-6 STA: DISC: Investments
55. A portfolio is a collection of investment assets assembled to meet your investment objectives. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-6 STA: DISC: Investments
56. A diversified portfolio should be less risky than putting your money into a single security. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 11-6 STA: DISC: Investments
57. Diversification increases risk. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 11-6 STA: DISC: Investments
58. A retired couple can probably bear more risk in their portfolio than a young investor with a secure job. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 11-6 STA: DISC: Investments
59. There is a trade-off between earning a high current income from an investment and obtaining significant capital appreciation from it. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 11-6 STA: DISC: Investments
60. Once one's asset allocation plan is developed and securities are selected, these decisions do not have to be made again until there is a major life change. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 11-6 STA: DISC: Investments
KEY: Bloom's: Comprehension 61. A portfolio is a collection of investment vehicles assembled to meet an investment goal. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-6 STA: DISC: Investments
62. The total return of a portfolio is influenced far more by specific security selection than asset allocation. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 11-6 STA: DISC: Investments
63. Portfolio rebalancing refers to buying and selling activities intended to return a portfolio to its target allocation levels. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-6 STA: DISC: Investments
64. The single most important reason for investing is for retirement. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 11-1 KEY: Bloom's: Knowledge
65. NYSE Euronext is a part of the broker market accounting for 40% percent of global transactions. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 11-2 KEY: Bloom's: Knowledge
66. The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 included several reforms aimed at reforming banks and insurance companies. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 11-2 KEY: Bloom's: Knowledge
67. In terms of market capitalization, Apple is the biggest company in the world. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 11-1 KEY: Bloom's: Knowledge
68. Retired people often choose investments offering high current income with high risk. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 11-1 KEY: Bloom's: Analysis
69. Exchange traded notes face both market risk and the risk of the issuing bank defaulting. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills MULTIPLE CHOICE
DIF: Moderate OBJ: LO: 11-2 KEY: Bloom's: Analysis
1. ____ is a short-term investment activity. a. Buying life insurance b. Buying bonds c. Investing in common stock d. Speculating in common stock e. Saving ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 11-1 STA: DISC: Investments
2. Which of the following is least likely to be an investment objective? a. enhance current income b. save for a major purchase c. pay monthly bills d. accumulate funds for retirement e. seek shelter from taxes ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 11-1 STA: DISC: Investments
3. Which of the following is a characteristic of an organized securities exchange? a. they facilitate trading unlisted securities b. municipal bonds are primarily traded in organized exchanges c. pink sheets are commonly used in these markets d. the NASDAQ is an example of an organized exchange e. trading in securities is carried out in a physical location ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 11-2 STA: DISC: Investments
4. Which of the following is not a securities market a. capital market b. money market c. primary market d. secondary market e. Dow Jones market ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 11-2 STA: DISC: Investments
5. Which of the following types of brokers is most likely to involve an investor trading electronically from his or her personal computer? a. Full service broker b. Bank broker c. Futures broker d. Online broker e. Market maker ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
KEY: Bloom's: Comprehension 6. The Securities Investor Protection Corporation insures brokerage firm accounts up to a. $500,000 per account and $250,000 in cash b. $250,000 per account and $100,000 in cash c. $1,000,000 per account and $500,000 in cash d. $500,000 per account and $250,000 in cash e. $500,000 per account and $100,000 in cash ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
7. Which of the following securities/investment acts regulates the sale of mutual fund shares? a. The Securities Act of 1933 b. the Securities and Exchange Act of 1934 c. The Investment Company Act of 1940 d. The Sarbanes/Oxley Act of 2002 e. The Securities and Protection Act of 1970 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 11-2 STA: DISC: Investments
8. During a bull market a. prices go up b. prices go down c. prices remain stable d. investments are pessimistic e. cattle futures perform well ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-2 STA: DISC: Investments
9. The most important investment prerequisites are a. adequate income and savings. b. adequate income and insurance. c. adequate insurance and liquidity. d. an investment plan and professional advice. e. consistency and risk awareness. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 11-1 STA: DISC: Investments
10. The most common reason given for investing is a. enhancing current income. b. saving for retirement. c. sheltering earnings from taxes. d. paying for an expensive vacation. e. saving for college education. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 11-1 STA: DISC: Investments
KEY: Bloom's: Knowledge 11. During a bear market, security prices generally a. hold value b. rapidly increase in value c. remain neutral d. decline in value e. consolidate in value ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-2 STA: DISC: Investments
12. There are a variety of investment vehicles including which of the following: a. common stock b. bonds c. preferred and convertible securities d. real estate e. all of the above are investment vehicles ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-1 STA: DISC: Investments
13. You have been offered an opportunity to buy shares of a diversified collection of securities. You will be investing in a. bonds. b. common stock. c. mutual funds. d. real estate. e. stock opt ions. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 11-1 STA: DISC: Investments
14. Securities markets include a. capital and money markets. b. primary and secondary markets. c. stock exchanges. d. all of these. e. none of these. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-2 STA: DISC: Investments
15. Securities sold in the primary markets are usually handled by a(n) a. commercial banker. b. broker. c. investment banker. d. dealer. e. none of these. ANS: C
PTS: 1
DIF: Moderate
OBJ: LO: 11-2
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
STA: DISC: Investments
16. Which of the following is an order to sell a stock when the market price drops to or below a specified level? a. Market order b. limit order c. stop loss order d. fill or kill order e. day order ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
17. The SEC requires corporations to issue ____ describing the firm and the security issue it wishes to sell. a. an advertisement b. a prospectus c. an underwriting journal d. a dealer newsletter e. none of these ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-2 STA: DISC: Investments
18. Which of the following is a true statement about the Dow Jones Industrial Average? a. it is based on 30 industrial stocks b. it is based on 50 transportation stocks c. it is a composite index for the 500 largest industrial publicly traded companies d. it is based on 100 utilities stocks e. it contains 50 blue chip stocks ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-2 STA: DISC: Investments
19. If a company's common stock is traded on an exchange, the company is said to be a. an exchange member. b. seated on the exchange. c. marketed on the exchange. d. listed on the exchange. e. licensed by the exchange. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-2 STA: DISC: Investments
20. The ____ is not an organized security exchange. a. New York Stock Exchange b. American Stock Exchange c. Midwest Stock Exchange d. Pacific Stock Exchange e. Over-the-Counter Exchange
ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-2 STA: DISC: Investments
21. Unlisted securities are traded on the a. SEC market. b. SIPC. c. OTC market. d. AMEX. e. NYSE. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-2 STA: DISC: Investments
22. Which of the following are characteristics of an effective portfolio strategy? a. level and stability of income b. investment time horizon c. investment experience and age d. disposition toward risk e. all of the above ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 11-6 STA: DISC: Investments
23. When you sell a security OTC, you will receive the a. offering price. b. market price. c. ask price. d. selling price. e. bid price. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 11-2 STA: DISC: Investments
24. The securities market which you could not locate on the map is the a. New York Stock Exchange. b. American Stock Exchange. c. Midwest Stock Exchange. d. Pacific Stock Exchange. e. Over the Counter Market. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 11-2 STA: DISC: Investments
25. The federal government regulates securities markets through the a. Department of Commerce. b. Federal Reserve System. c. National Association of Securities Dealers. d. Securities and Exchange Commission. e. Federal Securities Agency.
ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-2 STA: DISC: Investments
26. A bull market is characterized by a. investor optimism. b. governmental stimulus. c. economic slowdown. d. falling stock prices. e. investor pessimism. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 11-2 STA: DISC: Investments
27. Stockbrokers are also known as a. market makers. b. account executives. c. broker-dealers. d. commission sellers. e. traders. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
28. ____ is not a normal brokerage service. a. Providing investment information b. Buying and selling securities c. Managing your portfolio d. Storing security certificates e. Providing market quotations ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
29. The SIPC provides protection to the investor from a. declining security prices. b. low or missing dividend payments. c. brokerage firm failure. d. using margin requirements. e. none of these. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
30. When you buy 300 shares of a company you have purchased a. an odd lot. b. a round lot. c. both an odd lot and a round lot. d. a combined lot. e. none of these.
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
31. Discount brokers will a. execute orders. b. give advice. c. watch portfolios. d. do all of these. e. do none of these. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
32. A market order would be transacted at the a. lowest price of the day. b. highest price of the day. c. best price when the order is entered. d. limit price. e. none of these. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
33. An immediate order to buy or sell common stock at the best price is a a. stop order. b. market order. c. limit order. d. stop-loss order. e. discount order. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
34. Instructing your broker to buy or sell a stock at a particular price is a a. limit order. b. market order. c. margin order. d. regular order. e. stop order. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge 35. Buying on margin is buying a. at the lowest price. b. at the market price. c. with borrowed funds. d. by trading currently-owned stock. e. with a short sale process.
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
36. The margin required on the purchase of common stock is currently set at a. 30%. b. 40%. c. 50%. d. 60%. e. 70%. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
37. Minimum margin requirements that brokers must observe are set by the a. brokerage firm. b. corporation issuing stock. c. Securities and Exchange Commission. d. Securities Investor Protection Corporation. e. Federal Reserve System. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
38. Which of the following are characteristics of a limit order? a. the order that provides the quickest way to have an order filled b. buy orders are filled at the lowest available price c. stock is purchased at the current market price d. the order is executed as soon as the specified price is reached e. securities are always bought on margin. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 11-3 STA: DISC: Investments
39. In investment terminology, selling stock that you have borrowed is known as a a. margin sale. b. short sale. c. limit sale. d. stop-loss sale. e. none of these. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-3 STA: DISC: Investments
40. Selling equities you don't own and buying them back to cover the sale is a. short selling in anticipation of a bear market in that security b. going long. c. discounting the market averages. d. a very safe investment activity. e. considered wise in a bull market.
ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 11-3 STA: DISC: Investments
41. The Internet allows individual investors to legally a. perform investment research and screening b. make trades without using a brokerage firm c. participate in pump and dump schemes d. obtain information that is always completely accurate from chat rooms e. more than one of the above ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-5 STA: DISC: Investments
42. The most widely followed stock average is the a. Dow Jones Industrial Average. b. Standard & Poor's Index. c. New York Stock Exchange Index. d. American Stock Exchange Index. e. Wall Street Journal Index. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-4 STA: DISC: Investments
43. The ____ Index reflects the total market value of over 98% of all publicly traded stock in the US. a. Dow Jones Industrial Average b. S & P 500 c. NASDAQ d. Wilshire 5000 e. New York Stock Exchange ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-4 STA: DISC: Investments
44. How much would it cost to purchase a round lot (the smallest number you can get and still be a round lot) of Stock A at the closing price for the day? YTD % CHG + 9.6 - 3.8 +1.7 a. b. c. d. e.
52 weeks Hi Lo 29.60 22 17.33 15 32 17
Yld Stock A B C
Vol Div .60 1.20 --
Net % 3 8.6 --
P/E 12 10 15
100s 790 510 465
Last 19.50 13.25 24.70
$ 790 $ 1,950 $ 2,960 $19,500 $29,600
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 11-4 STA: DISC: Investments
Chg +0.13 +0.25 +0.38
45. How many shares of Stock A traded on this day? YTD % CHG + 9.6 - 3.8 +1.7 a. b. c. d. e.
52 weeks Hi Lo 29.60 22 17.33 15 32 17
Yld Stock A B C
Vol Div .60 1.20 --
Net % 3 8.6 --
P/E 12 10 15
100s 790 510 465
Last 19.50 13.25 24.70
Chg +0.13 +0.25 +0.38
2,000 79,000 51,000 10,000 12,000
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 11-4 STA: DISC: Investments
46. What was the closing price of Stock C on the previous trading day? YTD % CHG + 9.6 - 3.8 +1.7 a. b. c. d. e.
52 weeks Hi Lo 29.60 22 17.33 15 32 17
Yld Stock A B C
Vol Div .60 1.20 --
Net % 3 8.6 --
P/E 12 10 15
100s 790 510 465
Last 19.50 13.25 24.70
Chg +0.13 +0.25 +0.38
$24.00 $23.63 $24.32 $23.00 Cannot tell from the information given
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 11-4 STA: DISC: Investments
47. The smallest round lot of stocks quoted at 23.25 would cost you (ignoring commissions) a. $ 23.25. b. $ 232.50. c. $ 2,325.00. d. $23,250.00. e. none of these ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation 48. A collection of investments is called a. a letter of exposure. b. a diversification. c. a grouping. d. an envelope. e. a portfolio.
DIF: Challenging OBJ: LO: 11-3 STA: DISC: Investments
ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 11-6 STA: DISC: Investments
49. A diversified securities portfolio is characterized by a. dissimilar risk and return characteristics of the securities. b. concentrating on a single industry. c. minimal loss potential. d. stable earnings. e. formula timing. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 11-6 STA: DISC: Investments
50. ____ is a portfolio characteristic which leads to reduced risk with good return. a. Maturity b. Price-earnings ratio c. Diversification d. Stratification e. Duration ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-6 STA: DISC: Investments
51. An essential ingredient of an effective investment strategy is a. enough money to diversify. b. a good broker. c. blue-chip stock selections. d. high-income securities. e. a bull market. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 11-6 STA: DISC: Investments
52. An unmarried investor with few responsibilities should be able to accept ____ better than two people who are married with young children. a. return b. risk c. maturity d. diversification e. balance ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 11-6 STA: DISC: Investments
53. A long term investment strategy includes all of the following except a. stock and bond selection. b. diversification. c. immediate financial needs to pay current bills. d. risk-return behavior. e. investor education.
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 11-6 STA: DISC: Investments
54. Portfolio management involves making decisions in order to a. buy low and sell high. b. maximize risk and return. c. accept risk. d. own stocks in bear markets. e. meet your investment needs and objectives. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 11-6 STA: DISC: Investments
55. In addition to a description of any investments owned, the worksheet listing your investments should include a. the purchase price. b. the original amount of the investment. c. the current annual income. d. the latest market value. e. all of the above. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 11-6 STA: DISC: Investments
56. Assume that the price of ABC common stock fell from in a short period of time from $105 to $84. Which of the following investors probably made the most money, if all of these transactions occurred prior to the drop in price? a. Abe took a long position in 1000 shares of ABC b. Bert took a short position in 1000 shares of ABC c. Carrie kept her money in CDs at the bank d. Darren shorted 2000 shares of ABC using a margin loan e. Earl used a margin loan to finance a 2000 share long position in ABC ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 11-6 STA: DISC: Investments
57. Which of the following terms best describes a day trader a. Speculator b. Long-term investor c. Money market maker d. Buy and hold mentality e. Illegal gambler ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 11-6 STA: DISC: Investments
58. A stock portfolio containing 80% common stocks is most likely to be appropriate for a. a retired couple who needs a high return b. a divorced middle-aged mother who needs a high return
c. a blue-collar, two-income family with five kids d. a young single worker putting money aside for retirement e. a portfolio with 80% in common stocks is not suitable for anyone under any circumstances ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 11-6 STA: DISC: Investments
59. The single most important reason for investing is for a. home purchase down payment d. college fund b. auto purchase down payment e. ensuring a sufficient emergency fund c. retirement ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 11-1 KEY: Bloom's: Knowledge
60. NYSE Euronext is a part of the broker market accounting for what percent of global equities? a. 20 d. 70 b. 40 e. 80 c. 60 ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 11-2 KEY: Bloom's: Knowledge
61. Which of the following was not an intention of The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010? a. improve accountability d. protect consumers from exploitation b. discontinue the “too big to fail” approach e. Recapitalize banks c. improve transparency ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 11-2 KEY: Bloom's: Knowledge
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 1. [Speculating | Investing] is considered to be a long term activity. ANS: b PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
2. [Investing | Speculating] is viewed as a short-term activity that involves the buying and selling of securities in which future value and expected return are highly uncertain. ANS: b PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
3. Before you start investing, you should plan to have a minimum of [$1,000 | $15,000] available. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
4. The first thing you need to determine in order to reach an investment goal is the [rate of return you can receive | the amount of money you need to set aside periodically]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
5. [Depositing a lump sum and letting it grow | Making monthly deposits to your investment] would be the least costly way to reach a financial goal. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
6. An investment offering a high current income would likely be more desirable for [a young couple | a retired couple]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
7. Ownership in a corporation would be represented by [stock | bonds]. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
8. The owner of a bond would expect to receive [steady | variable] annual income. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
9. [Common stocks | Bonds] have no maturity date. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
10. A fixed dividend would be received with [common | preferred] stock.
ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
11. A convertible bond would let the investor exchange it for [preferred | common] stock. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
12. Short term securities are traded in the [money | capital] market. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
13. The issuer of the security would get no money from a trade in the [primary | secondary] market. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
14. The [primary | secondary] market is where new securities are sold to the public. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
15. An IPO is be sold in the [primary | secondary] market many times. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
16. A(n) [underwriting | prospectus] is a document made available to prospective security buyers that describes the firm and a new security issue. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
17. A [broker | investor] can be a member of a "syndicate" when taking orders for a new IPO. ANS: a PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 11-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
18. The [broker | dealer] market is made up of both the NASDAQ market and the OTC market. ANS: b PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 11-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
19. Listed securities would be purchased from [a securities exchange | the over the counter market]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
20. The [bid | ask] price for a stock sold on the OTC market represents the price you would receive when you sold the stock. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
21. The majority of the securities laws were enacted [before | after] 1930. ANS: b PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
22. The Securities and Exchange Commission was established as a result of the [Securities Act of 1933 | Securities Exchange Act of 1934]. ANS: b PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
23. A [bull | bear] market is characterized by falling stock prices. ANS: b PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
24. A [bull | bear] market is characterized by rising stock prices. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
25. Stockbrokers prefer clients who [buy and hold | trade actively.]
ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
26. A deep discount broker will execute orders as well as [pick the stocks for you to buy | provide extensive information about various securities | offer little to no other services]. ANS: c PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
27. The Securities Investors Protection Corporation would make payment to you if [the corporation in which you bought stock | the brokerage firm holding your stock] went bankrupt. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
28. Most brokerage agreements [will | will not] permit you to sue your broker for malpractice. ANS: b PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
29. Fifty shares of stock would constitute [an odd lot | a round lot]. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
30. Two hundred shares of stock would constitute [an odd lot | a round lot]. ANS: b PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
31. On a percentage basis, commissions will be higher if you are buying a [large | small] number of shares. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
32. Brokerage commissions on [stock | bond] transactions are likely to be a flat fee per unit. ANS: b
PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
33. An order to buy or sell a security at the best price available at the time the order is received is a [market | limit] order. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
34. If you want to set a specific price in your order, you will use a [market | limit] order. ANS: b PTS: 1 DIF: Easy STA: DISC: Investments
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
35. You are going to buy stock on margin. You will be required to put up a minimum of [50 | 60] percent of the money needed to make the purchase. ANS: a PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
36. Margin requirements are set by the [SEC | Federal Reserve]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
37. Using margin will magnify [only gains | only losses | gains and losses]. ANS: c PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
38. You are selling short; you anticipate the price of the stock will [rise | fall]. ANS: b PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
39. When you sell short, the proceeds of the sale will be [held until the sale is covered | given to you immediately after the sale]. ANS: a PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
40. The maximum amount of money you could lose in a short sale is [known | unknown] at the time of the transaction. ANS: b PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
41. Publicly traded corporations [are required to | may choose to] provide annual reports to their stockholders. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
42. The Dow Jones Industrial Average is based on [all stocks traded on the NYSE | 50 large stocks | 30 large stocks]. ANS: c PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
43. The [DJIA | S&P Index] is based on 500 different stocks. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
44. The high price for ABC stock over the past 52 weeks was [29 | 23.98]. YTD % CHG + 14.1
52 HI 29
WEEKS LO 19.44
STOCK (SYM) ABC
DIV .16
YLD % .7
PE 20
VOL 100S 1488
LAST 23.98
NET CHG -0.27
ANS: a PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 11-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
45. You would expect to receive an annual dividend of [$0.16 | $0.70] per share. YTD % CHG + 14.1
52 HI 29
WEEKS LO 19.44
STOCK (SYM) ABC
DIV .16
YLD % .7
PE 20
VOL 100S 1488
LAST 23.98
NET CHG -0.27
ANS: a PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 11-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
46. [2,000 | 148,800] shares of ABC stock were traded on this day. YTD % CHG + 14.1
52 HI 29
WEEKS LO 19.44
STOCK (SYM) ABC
DIV .16
YLD % .7
PE 20
VOL 100S 1488
LAST 23.98
NET CHG -0.27
ANS: b PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 11-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
47. The closing price of this stock on the previous day was [higher | lower] than today's close. YTD % CHG + 14.1
52 HI 29
WEEKS LO 19.44
STOCK (SYM) ABC
DIV .16
YLD % .7
PE 20
VOL 100S 1488
LAST 23.98
NET CHG -0.27
ANS: a PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 11-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
48. ABC stock is [up 14.1% | down 27%] since the beginning of the year. YTD % CHG + 14.1
52 HI 29
WEEKS LO 19.44
STOCK (SYM) ABC
DIV .16
YLD % .7
PE 20
VOL 100S 1488
LAST 23.98
NET CHG -0.27
ANS: a PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 11-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
49. Day trading is [illegal | risky]. ANS: b PTS: 1 DIF: Easy STA: DISC: Investments
OBJ: LO: 11-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
50. The collection of investments you select to meet your investment goals is called your [portfolio | allocation]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
51. The axiom that explains diversification is [Don't cry over spilt milk | Don't put all of your eggs in one basket]. ANS: b PTS: 1
DIF: Moderate
OBJ: LO: 11-6
NAT: BUSPROG: Analytic skills
STA: DISC: Investments
KEY: Bloom's: Application
52. Diversification should [reduce the possibility of losing all your money | have little impact on the risk of losing money]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
53. Asset allocation is another term for [selecting the stocks you want to buy | deciding what percentage of your investment you want in stocks]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
54. Investments with high current income typically have [high | low] potential capital appreciation. ANS: b PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
55. The single most important reason for investing is for [home purchase down payment | retirement]. ANS: b PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 11-1
NAT: BUSPROG: Analytic skills
56. The single most important reason for investing is for [a down payment on a home | a down payment on an automobile | retirement]. ANS: c PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 11-1
NAT: BUSPROG: Analytic skills
57. NYSE Euronext is a part of the broker market totaling about [40% | 80%] of world equity markets. ANS: a PTS: 1 DIF: Challenging KEY: Bloom's: Knowledge
OBJ: LO: 11-2
NAT: BUSPROG: Analytic skills
58. The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 included provisions to improve [accountability | sustainability]. ANS: a PTS: 1 DIF: Challenging KEY: Bloom's: Knowledge
OBJ: LO: 11-2
NAT: BUSPROG: Analytic skills
59. In terms of market capitalization, [Apple | IBM] is the biggest company in the world. ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge
OBJ: LO: 11-4
NAT: BUSPROG: Analytic skills
60. Retired people often choose investments offering [high current income | low current income]. ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Analysis
OBJ: LO: 11-1
NAT: BUSPROG: Analytic skills
61. Exchange traded funds face the risk of [market fluctuations | default]. ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Comprehension
OBJ: LO: 11-2
NAT: BUSPROG: Analytic skills
PROBLEM 1. Monte wants to save for his daughter's college education. He would like to have $85,000 in 15 years. If Monte can earn an average of 8.5% on this fund, how much would he need to deposit in the account today to meet his goal? If Monte has no money to set aside now but wants to save at the end of each month for this goal, how much would he need to add to the account each month? ANS: Lump sum FV = N = I = PV =
85,000 15 8.5 25,002
Monthly Payments FV = 85,000 N = 15 12 I = 8.5/12 PMT = 235
PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 11-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
2. Abe owns 1000 shares of Amazon, which he purchased for $12 per share 3 months ago. Abe just checked the price of Amazon and found that it is selling for $19 per share. He is so excited about his gain that he has booked a $6,000 20-day trip to Hawaii for he and his wife. He wants to be sure that the trip will be paid for entirely from gains in his Amazon shares because his wife has been nagging him about his frequent stock trading habit and he feels that this trip will demonstrate to her once and for all that he has the skills, acumen and instincts to get rich trading stocks. He feels strongly that the price of Amazon stock will go through the roof in the intermediate term but is concerned about short-term volatility. Abe's plan is to sell the shares only if the value of his shares either declines below $18,000 or if the value climbs to $30,000. He would like to submit his stock orders right now, because for the next three weeks it is very important to his marriage that he not trade or even follow the market (maybe just a peek at CNBC while his wife is in the shower). Which of the following set of stock orders would accomplish his pathetic goals?
ANS: A GTC stop-loss order to sell 1000 shares at $18 and a GTC limit order to sell 1,000 shares at $30. PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 11-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
3. You have just bought (on margin) 100 shares of IBM Corp. common stock for $108 per share. One year from now you expect to sell the stock for $140. The interest charge will be 9%. What return do you expect to earn on your investment? (Show all work. Ignore commissions.) ANS: Amount invested Amount borrowed Total purchase
$ 5,400 $ 5,400 $10,800
1 year gross proceeds Less interest (.09 $5,400) Net proceeds Less total invested Net profit
$14,000 486 $13,514 10,800 $ 2,714
Return on investment =
= .503 or 50.3%
PTS: 1 DIF: Challenging STA: DISC: Investments
OBJ: LO: 11-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
4. You have inherited $250,000. You have decided that since you don't need the money currently, you should invest for the long-term. After seeking advice, you decide on an asset allocation plan that puts 10% in short-term securities, 75% in equities, and 15% in bond funds. How much money would you put in each category? (Show all work.) ANS: Short-term Securities (.10 $250,000) Equities (.75 $250,000) Bond funds (.15 $250,000) Total invested PTS: 1 DIF: Moderate STA: DISC: Investments
$ 25,000 187,500 37,500 $250,000 OBJ: LO: 11-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
5. You have just bought 100 shares of ABC Corporation common stock at 70.50. The commission is calculated as 1.5% of the total value of the transaction plus $30. What commission will you be charged and how much must you pay the broker for the entire transaction? (Show all work.) ANS: Market transaction = 100 $70.50 = $7,050 Commission = (.015 $7,050) + $30 = $105.75 + $30 = $135.75 Total payment = $7,050 + 135.75 = $7,185.75
PTS: 1 DIF: Moderate STA: DISC: Investments
OBJ: LO: 11-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
Chapter 12—Investing in Stocks and Bonds TRUE/FALSE 1. Market risk considers the possibility that the firm may fail. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
2. Changes in the value of securities due to social, political, or economic factors are referred to as market risk. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
3. A company with low financial risk has little to no long-term debt. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
4. Purchasing power risk is of most concern during economic recession. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
5. Interest rate risk is greater for stocks than for bonds. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
6. Interest rate risk is greater for long-term bonds than for short-term bonds. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
7. Event risk occurs when something substantial happens to a company that has an immediate impact on its financial condition. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
8. The returns you expect from securities are income and growth. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
KEY: Bloom's: Comprehension 9. Capital appreciation of an investment is a form of Current Income. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
10. Compound interest is a very important concept when evaluating the return on an investment you plan to hold for a long time. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
11. A lower expected return will mean a higher risk will have to be accepted. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
12. In most investments, there is a risk-return tradeoff. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
13. All securities involve risk of some kind. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
14. Total investment return can be approximated using the current yield. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 12-2 STA: DISC: Stocks and Bonds
15. An investment is acceptable if the expected rate of return is greater than the desired rate of return. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 12-2 STA: DISC: Stocks and Bonds
16. Recovery of principal and capital gain are elements of total return. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-2 STA: DISC: Stocks and Bonds
17. The risk free rate of return is often measured by the return on US Treasury Bills. ANS: T
PTS: 1
DIF: Easy
OBJ: LO: 12-2
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
STA: DISC: Stocks and Bonds
18. Common stockholders are considered to be the residual owners of the company. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-3 STA: DISC: Stocks and Bonds
19. If the current price of an investment increases, the investment's annual yield will decrease. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 12-2 STA: DISC: Stocks and Bonds
20. Bondholders will receive interest payments after the stockholders receive dividends. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 12-5 STA: DISC: Stocks and Bonds
21. Publicly traded issues are shares only available to qualified investors. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-3 STA: DISC: Stocks and Bonds
22. You received a stock dividend this year instead of cash. This is taxable income. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-3 STA: DISC: Stocks and Bonds
23. You received a cash dividend from your stock investment this year. This is taxable income. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-3 STA: DISC: Stocks and Bonds
24. Stock dividends are taxed at Long Term Capital Gains Rates. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 12-3 STA: DISC: Stocks and Bonds
25. Common stocks pay a guaranteed dividend each year. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-3 STA: DISC: Stocks and Bonds
26. Most companies pay their stockholders cash dividends on a semi-annual basis. ANS: F
PTS: 1
DIF: Moderate
OBJ: LO: 12-3
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
STA: DISC: Stocks and Bonds
27. If Wristwatch Arm Corporation (WAC) has assets of $10 million, liabilities of $5 million, and preferred stock of $1 million, its book value is $6 million. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
28. John and Mary Smith own 500 shares of ABE stock. After the company pays a 6 percent stock dividend, John and Mary will own 530 shares of ABE stock. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
29. Earnings per share (EPS) tell the stockholder the amount of dividend earned. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
30. Net Profit margin is a key measure of profitability that relates the net profits of a firm to its sales. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
31. Low price/earnings ratios indicate limited or low investor confidence. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
32. Stocks with high betas will have larger price gains and losses than those with low betas. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
33. Stocks with high betas will have larger price gains but lower price declines than those with low betas. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
34. A stocks beta is an indication of its relationship to the general market. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
35. Earnings per share can be defined as the return earned on behalf of each share of common and preferred stock, calculated by dividing all earnings by the total number of shares outstanding. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
36. One would prefer a stock with steadily increasing earnings per share and return on equity. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
37. Blue-chip stocks are expected to pay dividends more regularly than growth stocks. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
38. Tech stocks represent stocks in the technology and utility sectors. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
39. Price fluctuations of defensive stocks follow the fluctuations of the market as a whole. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
40. Dividend reinvestment plans should be avoided because of their relatively high cost. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
41. The value of a stock at any time is a function of future returns rather than of past performance. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
42. Dividend Reinvestment Plans provide shareholders with cash, so that they can invest in similar stocks. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
43. Typically the best time to invest in the stock market is when the market is very volatile. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
44. Income stocks are similar to bonds in that they pay annual interest to owners. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
45. Bonds represent a form of corporate debt capital. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-5 STA: DISC: Stocks and Bonds
46. Bonds provide for investment return primarily in the form of growth. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 12-5 STA: DISC: Stocks and Bonds
47. Bond return can include both interest and capital gains. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-5 STA: DISC: Stocks and Bonds
48. A callable bond allows the issuer to retire the security prior to maturity. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-5 STA: DISC: Stocks and Bonds
49. Treasury notes, bills, and bonds represent loans to the federal government. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
50. Bonds can be used conservatively by investors seeking current income and aggressively by investors seeking capital gains. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
51. Investors typically welcome their bonds being called because of the generous call premium paid. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
52. The callable feature of a bond protects the issuer when current rates are falling. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
KEY: Bloom's: Analysis 53. TIPS are appropriate investors who are conservative and concerned about inflation. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
54. An investor is guaranteed to make a positive return on Treasury notes and bonds. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
55. All treasury bonds issued today are non-callable. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
56. If you buy a zero coupon bond, you will receive no cash from the corporation until the bond matures. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
57. Only the federal government issues zero coupon bonds. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
58. Municipal bonds can be attractive investments, despite their lower interest rate, since their interest income is exempt from federal income tax. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
59. Bonds rated AA by S&P and Aa by Moody's would be investment quality. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
60. You would expect more growth with the preferred stock you own than with the common stock in your portfolio. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 12-3 STA: DISC: Stocks and Bonds
61. Common stock owners must receive dividends before preferred stockholders.
ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-3 STA: DISC: Stocks and Bonds
62. Preferred stock can be exchanged for common stock. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-3 STA: DISC: Stocks and Bonds
63. Convertible preferred stock can be exchanged for common stock. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-3 STA: DISC: Stocks and Bonds
64. A bond with a S&P rating of BBB is considered investment-grade. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
65. Junk bonds have higher risk and similar returns to investment grade bonds. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
66. At the time you buy a convertible bond, you will know the number of stock shares for which it can be exchanged. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
67. A premium bond sells at par value. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
68. Bond prices are impacted by both the direction and magnitude of interest rate changes. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
69. The higher the tax bracket you are in, the more attractive the purchase of municipal bonds becomes. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
70. A bond with a yield to maturity that equaled or exceeded an investor's desired rate of return is considered an attractive investment. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
71. There is an inverse relationship between the bond prices and current interest rates. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
72. Pulling money out of the market exposes you to the significant risk that you'll miss the months of good returns that could help you recoup prior losses. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 12-1 KEY: Bloom's: Analysis
73. The yields on municipal bonds are usually higher than the returns available from fully taxable issues. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 12-6 KEY: Bloom's: Comprehension
74. When a bond is sold between coupon payment dates, the buyer pays the seller for the accrued interest. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 12-6 KEY: Bloom's: Comprehension
75. The commonly-cited price for a bond is usually its clean bond price. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 12-6 KEY: Bloom's: Knowledge
76. A beta of more than one would be expected of a speculative stock. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 12-6 KEY: Bloom's: Analysis
MULTIPLE CHOICE 1. Security investors incur varying degrees of risk. Business risk is related to a. price level changes in the economy. b. investor behavior in the market. c. the debt-to-equity ratio of the firm. d. the potential success or failure of the firm. e. security price fluctuations. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
2. In which of the following type of investment is the most liquidity risk?
a. b. c. d. e.
Common stock Corporate bonds Treasury bonds Land Mutual fund shares
ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
3. Which of the following types of risk affect owners of fixed income securities more than owners of equity securities a. business risk b. financial risk c. market risk d. purchasing power risk e. none of the above ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
4. Companies with a great deal of long-term debt would rate fairly high in ____ risk. a. market b. event c. business d. financial e. liquidity ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
5. ____ risk results from the behavior of investors in the securities market a. Business b. Financial c. Market d. Purchasing power e. Interest rate ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
6. A high inflation rate would result in a high degree of a. business risk. b. financial risk. c. market risk. d. purchasing power risk. e. interest rate risk. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
7. An example of event risk would be a. inflation. b. a corporate takeover. c. a newspaper article about the economy. d. earnings announcements. e. capital growth. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
8. The returns you would expect from your investments could be a. risk. b. capital gains. c. current income. d. a and c above. e. b and c above. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
9. Risk and return are ____ related. a. inversely b. directly c. slightly d. oppositely e. none of the above ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-1 STA: DISC: Stocks and Bonds
10. Bond prices and current interest rates are ____ related. a. inversely b. directly c. slightly d. positively e. none of the above ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
11. The approximate yield to maturity when the average income is $3.00, the average capital gain is $6.00, the average investment is $27.00, and the investment is held for 3 years is a. 11 percent. b. 33 percent. c. 27 percent. d. 21 percent. e. 50 percent. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 12-2 STA: DISC: Stocks and Bonds
12. Suppose the EPS of Wal-Mart stock was $2 and the current price per earnings ratio is 10. What is the current price of Wal-Mart stock? a. $5 b. $8 c. $20 d. $40 e. Can not compute with given information ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
13. The approximate yield to maturity when the average income is $1.00, the average capital gain is $5.00, the average investment is $26.00, and the investment is held for 10 years is a. 11 percent. b. 23 percent. c. 27 percent. d. 33 percent. e. 50 percent. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 12-2 STA: DISC: Stocks and Bonds
14. The minimum rate of return you would like to receive in compensation for the amount of risk you have assumed is the a. desired rate of return. b. actual rate of return. c. exact rate of return. d. approximate yield. e. none of these. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-2 STA: DISC: Stocks and Bonds
15. If the current price of an investment increases, what affect does the price increase have on approximate yield a. moderately increase yield b. decrease yield c. will not affect the yield d. drastically increase yield e. none of the above ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis 16. Corporate ownership is evidenced by a. preferred stock. b. common stock. c. bonds. d. capital gain. e. property rights.
DIF: Moderate OBJ: LO: 12-2 STA: DISC: Stocks and Bonds
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-3 STA: DISC: Stocks and Bonds
17. The Smith family owns 200 shares of Elta stock. The company declared a 5% stock dividend. The Smiths now own a. 200 shares. b. 205 shares. c. 210 shares. d. 420 shares. e. 410 shares. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 12-3 STA: DISC: Stocks and Bonds
18. Cash dividends on common stock are most often paid a. weekly b. monthly c. quarterly d. semi-annually e. annually ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-3 STA: DISC: Stocks and Bonds
19. U-Need-This has $12 million liabilities, $12 million preferred stock, 10 million shares of common stock outstanding, and $39 million in total assets. The book value is a. $2.00 per share. b. $4.30 per share. c. $4.10 per share. d. $1.50 per share. e. none of the above. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
20. Anderson, Inc. has $10 million liabilities, $12 million preferred stock, 8 million shares of common stock outstanding, and $45 million in total assets. The book value is a. $2.30 per share. b. $2.88 per share. c. $4.13 per share. d. $4.38 per share. e. none of the above. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation 21. Stock profitability is often measured by a. book value. b. return on equity.
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
c. market value. d. net profit margin. e. beta. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
22. The ____ of a stock reflects stockholder confidence. a. par value b. book value c. face value d. price/earnings ratio e. dividend yield ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
23. Market risk is often measured using a. the price/earnings ratio. b. the dividend yield. c. alpha. d. beta. e. none of these. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
24. A company has a beta of 1.0; if the market goes down by 8%, the value of the company's stock will a. increase 8%. b. decline 8%. c. increase 1%. d. decline 1%. e. none of these. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
25. Only the strongest, most stable and safe-return companies can be called a. blue chip stocks. b. growth companies. c. income stocks. d. defensive stocks. e. cyclical stocks. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
26. Companies whose earnings have increased at an above-average level over the recent past are called a. blue-chip companies. b. growth companies.
c. income companies. d. speculative companies. e. defensive companies. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
27. Stocks whose price movements who tend to follow the business cycle are called a. cyclical stocks b. defensive stocks c. speculative stocks d. income stocks e. tech stocks ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
28. ____ stocks are really purchased as a gamble rather then because they have a proven history of good performance. a. Blue-chip b. Growth c. Cyclical d. Defensive e. Speculative ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
29. A characteristic of defensive stocks is a. income. b. steady earnings. c. steady dividends. d. growth. e. price stability in economic decline. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
30. To most stockholders, the main advantages of common stock investment are a. attractive returns and active trading. b. attractive returns and voting rights. c. high dividends and active trading. d. high risk and active trading. e. high risk and attractive returns. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
31. ____ stocks would generally be considered appropriate for investors who fully understand the risks involved and can tolerate such risk exposure.
a. b. c. d. e.
Large-cap Mid-cap Penny Small-cap B and d
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
32. The easiest way to invest in foreign stock is to purchase a. the stock directly from an over sea's broker. b. the stock directly from your regular broker. c. the stock directly over the Internet. d. international mutual funds. e. American Depository Receipts. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
33. One of the more appealing features of a common stock is that stock investments a. offer ownership with a limited liability. b. offer relatively high annual income. c. can always be sold for at least the purchase price. d. have a relatively high minimum investment. e. offer tax-exempt income. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
34. When cash dividends on stock are paid, but the stockholder has these dividends automatically reinvested, what are the federal income tax implications? a. Taxes must be paid in the year the dividends are paid at ordinary income tax rates. b. Taxes must be paid in the year the dividends are paid at long-term capital gains rates. c. Taxes must be paid, but not until the stockholder sells the stock that was purchased through the dividend reinvestment plan. d. Taxes do not have to be paid on these dividends--ever. e. Either a or c -- it is up to the investor to make the choice. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
35. Which of the following is an advantage of owning growth stocks? a. High and growing dividends b. High but declining dividends c. Low PE ratio d. High potential for capital growth e. Tend to be solid blue chip stocks ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
36. When evaluating a stock as a possible investment, one must consider a. the current market price. b. the expected capital gain. c. the expected dividend income. d. one's investment goals. e. all of the above ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
37. Advantages of common stock investments include a. guaranteed dividend income. b. potential for high return c. liquidity. d. b and c e. a, b, and c ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
38. Which of the following statements about preferred stock is true? a. Preferred shareholders generally get enhanced voting rights. b. Dividends must generally be paid to preferred shareholders before dividends may be paid to common shareholders. c. Preferred stocks are a hybrid between equity and debt, because like common stock the owners of preferred shares can vote and like debt they are paid interest. d. It would be foolish to purchase the common stock of a company that also issues preferred shares, because the preferred shares have a higher yield with a stronger guarantee. e. None of the above are true. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
39. Which of the following would be a disadvantage of owning an income stock? a. High and growing dividends b. High but declining dividends c. Lower growth potential d. High potential for capital growth e. Tend to be solid blue chip stocks ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
40. Advantages of a dividend reinvestment plan can include a. stock sold at a discount. b. guaranteed rate of return. c. tax advantages. d. a and c e. a, b, and c
ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 12-4 STA: DISC: Stocks and Bonds
41. A bond may sell a. at par value. b. below par value. c. above par value. d. none of these. e. any of these. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
42. A bond selling below par value is selling at a. a discount. b. its coupon value. c. a premium. d. maturity. e. the highest effective yield. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
43. Which of the following is most likely to occur immediately following the announcement that the rating on a corporate bond has been lowered to junk status? a. The yield-to-maturity on the bond will decline. b. The price of the bond will decline. c. The price of the bond will increase d. More than one of the above e. None of the above ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
44. Bonds are issued by a. corporations, state and local and federal governments. b. state and local governments and partnerships. c. corporations and partnerships. d. Moodys and Standard and Poor's. e. none of these. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
45. Bonds issued by subdivisions of the U.S. government but not guaranteed by the government are called a. federal bonds. b. agency bonds. c. treasury bonds. d. municipal bonds. e. trust bonds.
ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
46. A bond is issued at $1,000 par value during a time in which interest rates for similar bonds were 8%. Today new bonds issued with a similar credit worthiness is 10%. Which of the following is most likely to be true about the bond. a. It is currently selling for a premium b. It is currently selling at a discount c. currently selling at par d. The bond is likely to be called e. none of the above ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
47. Which of the following types of bonds are unsecured? a. mortgage bond b. equipment trust certificate c. debenture bond d. agency bond e. all of the above are unsecured ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 12-5 STA: DISC: Stocks and Bonds
48. John Smith is in the 28 percent tax bracket. If he were to purchase a $1,000 municipal bond that had a stated interest rate of 6.9%, the taxable equivalent yield would be a. 6.900%. b. 8.261%. c. 9.583%. d. 12.105%. e. 14.625%. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
49. Julie Johnson is in the 31 percent tax bracket. If she were to purchase a $1,000 municipal bond that had a stated interest rate of 6.5%, the taxable equivalent yield would be a. 6.50%. b. 9.03%. c. 9.24%. d. 9.42%. e. 10.51%. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation 50. When interest rates rise, bond prices will a. return to a steady price.
DIF: Challenging OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
b. c. d. e.
rise. fall. vary unpredictably. not be affected.
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
51. The approximate yield-to-maturity of a bond is greater than the stated rate of interest when a. purchased at face value. b. purchased at discount. c. purchased at premium. d. market rates of interest decline. e. market rates of interest are constant. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
52. A Puppy Pet Services $1,000 bond has a 7 1/2% coupon rate, matures in 2010 and is currently quoted at 82. The current yield is a. 6.15%. b. 7.50%. c. 9.15%. d. 10.27%. e. 11.43%. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
53. Sunshine Mining Bonds have a $1,000 face value, pay $95 annual interest, mature in 2004, and are currently quoted at $1,302.50. The coupon rate of interest is a. 8.500%. b. 9.500%. c. 13.025%. d. 13.052%. e. can't tell from the information given. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation 54. A bond is quoted as 6 a. $ 5 b. $ 50 c. $ 65 d. $500 e. $650
DIF: Challenging OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
05. The bondholder would receive ____ interest per year.
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
55. A bond is quoted as Lging 8 07 with a close of 106. Which of the following statements are true about this bond? a. Lging pays $85 annually ($170 annually) in interest. b. The market price of Lging is currently $1,060. c. The current yield is less than 8 %. d. The bond is selling at a premium e. All of the above ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
56. Positive aspects about bonds do not include a. high long-run return. b. desirable diversification properties. c. low risk. d. high current income. e. a and b ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 12-5 STA: DISC: Stocks and Bonds
57. Which of the following are characteristic of Treasury inflation-indexed bonds? a. They are short-term securities issued by the federal government. b. The interest paid is indexed for inflation. c. The face value of the bond is indexed for inflation d. The value of the bond could fall below the face value. e. b and c ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
58. Characteristics of corporate bonds include a. interest paid semi-annually. b. issued in $1,000 denominations. c. tax-free interest income. d. sinking funds are common. e. all of the above except c. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-5 STA: DISC: Stocks and Bonds
59. Zero-coupon bonds are issued by a. the federal government. b. municipalities. c. corporations. d. all of the above. e. b and c only. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
60. A convertible bond is usually a a. government bond. b. participating bond. c. debenture. d. mortgage bond. e. junk bond. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
61. Your convertible bond has a conversion ratio of 15 shares. Current market price of the common stock is $50/share. The conversion value of this bond is a. $150. b. $500. c. $650. d. $750. e. $900. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 12-6 STA: DISC: Stocks and Bonds
62. The best returns in the stock market will be achieved by a. remaining fully invested d. missing the fifteen best months b. missing the five best months e. missing the twenty best months c. missing the ten best months ANS: A PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 12-4 KEY: Bloom's: Analysis
63. The relevant sale or invoice price of a bond to the buyer is its a. par value d. dirty price b. clean price e. discount price c. negotiated price ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 12-6 KEY: Bloom's: Knowledge
64. A bond priced at 89 8/32. What is its price? a. $89.25 b. $890.25 c. $898.32 ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
d. $646.50 e. none of the above
DIF: Moderate OBJ: LO: 12-6 KEY: Bloom's: Application
65. Which of the following bond ratings would be for junk bonds? a. BBB d. AAA b. A e. AA c. BB ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 12-6 KEY: Bloom's: Knowledge
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 1. The possibility that a corporation might fail is [economic | business] risk. ANS: b PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
2. [Market | Business] risk results from the behavior of investors that may cause security prices to fluctuate. ANS: a PTS: 1 DIF: Moderate STA: DISC: Stocks and Bonds
OBJ: LO: 12-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
3. By holding stock in 5 companies, you are reducing [market | business] risk. ANS: b PTS: 1 DIF: Moderate STA: DISC: Stocks and Bonds
OBJ: LO: 12-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
4. [Bond | Common stock] prices would be most affected by interest rate risk. ANS: a PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
5. Long term [low | high] bond interest payments are subject to purchasing power risk. ANS: a PTS: 1 DIF: Challenging STA: DISC: Stocks and Bonds
OBJ: LO: 12-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
6. A potential high return on an investment will signal a [high | low] risk exposure. ANS: a PTS: 1 DIF: Moderate STA: DISC: Stocks and Bonds
OBJ: LO: 12-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
7. Past returns on an investment are [an indication | a guarantee] of future returns. ANS: a
PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
8. Preferred stockholders will receive their share of company earnings [before | after] bond interest is paid. ANS: b PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
9. Stock dividends are usually paid [monthly | annually | semi-annually]. ANS: c PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
10. Stock dividends represent [taxable | nontaxable] income. ANS: a PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
11. Dividend income is taxed [as ordinary income | at capital gains rates]. ANS: a PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
12. Tax on capital gains is paid [as the stock appreciates | in the year the stock is sold]. ANS: b PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
13. Common stockholders usually receive one vote per [person | share]. ANS: b PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
14. Annual dividends per share divided by market price per share equals [total yield | dividend yield]. ANS: b PTS: 1 DIF: Challenging STA: DISC: Stocks and Bonds
OBJ: LO: 12-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
15. Dividends and earnings per share [refer | do not refer] to the same thing. ANS: b PTS: 1 DIF: Challenging STA: DISC: Stocks and Bonds
OBJ: LO: 12-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
16. The [higher | lower] the PE ratio, the less confidence investors are said to have in the corporation. ANS: b PTS: 1 DIF: Moderate STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
17. The stock market as a whole has a beta of [+1.0 | -1.0]. ANS: a PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
18. The lower a stock's beta, the [less | more] volatile you can expect its price fluctuations to be. ANS: a PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
19. More conservative investors would prefer stocks with [higher | lower] betas. ANS: b PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
20. One should look for companies with steadily [increasing | decreasing] book value per share. ANS: a PTS: 1 DIF: Moderate STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
21. Stocks of stable, older companies are called [earnings | blue chip] stocks. ANS: b PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
22. A growth stock would be expected to pay a [high | low] level of dividends. ANS: b PTS: 1
DIF: Moderate
OBJ: LO: 12-4
NAT: BUSPROG: Analytic skills
STA: DISC: Stocks and Bonds
KEY: Bloom's: Analysis
23. The best way to invest in foreign stocks is to buy [them directly on the foreign exchanges | ADR's]. ANS: b PTS: 1 DIF: Challenging STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
24. A [cyclical | defensive] stock's price would tend to move in the same direction as the entire market. ANS: a PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
25. Most publicly traded stocks represent [a liquid | an illiquid] investment. ANS: a PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
26. You are looking for a relatively steady stream of income with some potential for growth; you should invest in [income stocks | growth stocks]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
27. Tech stocks are nearly always [speculative | growth | speculative or growth] stocks. ANS: c PTS: 1 DIF: Moderate STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
28. You are looking for a guaranteed steady stream of income; you should invest in [stocks | bonds]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
29. ACE, Inc. has a market capitalization of $500 million. It would be classified as a [small-cap | mid-cap]. ANS: a PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
30. Treasury securities are yielding 6%. A growth stock with an expected return of 8% [would | would not] be considered a viable investment candidate by most investors. ANS: b PTS: 1 DIF: Challenging STA: DISC: Stocks and Bonds
OBJ: LO: 12-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
31. The usual face value of a corporate bond is [$1,000 | $500]. ANS: a PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
32. The issuer of your corporate bond has the right to retire it before maturity. You have a [callable | retireable] bond. ANS: a PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
33. The safest bond you could purchase would be a [corporate | Treasury] bond. ANS: b PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
34. Most purchasers of [Treasury | municipal] bonds invest in them because of their tax-free interest. ANS: b PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
35. Zero coupon bonds will pay interest [at maturity | annually]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Stocks and Bonds
OBJ: LO: 12-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
36. The [lower | higher] a bond's rating, the more likely the issuer will default. ANS: a PTS: 1 DIF: Easy STA: DISC: Stocks and Bonds
OBJ: LO: 12-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
37. You would expect the higher rate of interest from a bond with a [AAA | C] bond rating. ANS: b
PTS: 1 DIF: Moderate STA: DISC: Stocks and Bonds
OBJ: LO: 12-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
38. [Raising | Lowering] a bond rating will result in higher current yields. ANS: b PTS: 1 DIF: Moderate STA: DISC: Stocks and Bonds
OBJ: LO: 12-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
39. If you buy a bond at a premium, its yield to maturity will be [higher | lower] than the coupon yield. ANS: b PTS: 1 DIF: Moderate STA: DISC: Stocks and Bonds
OBJ: LO: 12-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
40. Zero-coupon bonds would be more appropriate for a [tax-deferred retirement account | taxable account]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Stocks and Bonds
OBJ: LO: 12-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
41. Annual interest income divided by market price of the bond equals [current yield | yield to maturity]. ANS: a PTS: 1 DIF: Challenging STA: DISC: Stocks and Bonds
OBJ: LO: 12-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
42. If the value of the underlying stock dropped drastically, the owner of a convertible bond [would still receive $1,000 | would receive the market value of the stock] at maturity. ANS: a PTS: 1 DIF: Challenging STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
43. Individuals invest in preferred stock for its high [current income | potential gain]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Stocks and Bonds
OBJ: LO: 12-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
44. The longer money is not invested during the best months, the [higher | lower] is the percent return. ANS: b PTS: 1 DIF: Moderate KEY: Bloom's: Analysis
OBJ: LO: 12-1
NAT: BUSPROG: Analytic skills
45. Municipal bonds are exempt from [income tax | capital gains tax]. ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge
OBJ: LO: 12-6
NAT: BUSPROG: Analytic skills
46. The yields on municipal bonds are usually [lower | higher] than the returns available from fully taxable issues. ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge
OBJ: LO: 12-6
NAT: BUSPROG: Analytic skills
47. [General obligation bonds | revenue bonds] are the least risky municipal bond category. ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge
OBJ: LO: 12-6
NAT: BUSPROG: Analytic skills
48. When a bond is sold between coupon payment dates, the [buyer pays the seller | seller pays the buyer] for the accrued interest. ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Analysis
OBJ: LO: 12-6
NAT: BUSPROG: Analytic skills
49. The commonly-cited price for a bond is usually its [clean | dirty] bond price. ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge
OBJ: LO: 12-6
NAT: BUSPROG: Analytic skills
PROBLEM 1. Calculate the approximate yield on the common stock of Bowl Game that Matty Smelt has owned for 4 years. She bought it for $10 per share and sold it for $25. The dividend was $1.50 each year. (Show all work.) ANS:
PTS: 1
DIF: Challenging
OBJ: LO: 12-4
NAT: BUSPROG: Analytic skills
STA: DISC: Stocks and Bonds
KEY: Bloom's: Evaluation
2. Monte Jackson is considering the purchase of XYZ stock and would like to estimate its approximate yield if he holds it 5 years. The current price is $20 and Monte expects it would rise to $30 over the 5-year holding period. The expected dividend is $1.00 each year. (Show all work.) ANS:
PTS: 1 DIF: Challenging STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
3. Calculate the dividend yield on OPQ stock. Earnings per share are $2.75 and the quarterly dividend is 25 cents. The book value is $15.20 per share while the market value is $25.00. (Show all work.) ANS: Dividend yield =
= .04 or 4.0%
PTS: 1 DIF: Challenging STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
4. Calculate the earnings per share of a company with the following information? (Show all work.) Sales Net Profits Preferred Dividends Common Dividends Common shares outstanding
$200,000 $ 50,000 $ 1,000 $ 6,000 12,000 shares
ANS:
PTS: 1 DIF: Challenging STA: DISC: Stocks and Bonds
OBJ: LO: 12-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
5. You have the chance to buy either one of two bonds. The first is a tax-free municipal with a coupon yield of 6.5%. The second is a corporate bond with a yield of 8.5%. Both bonds are rated AA. Your tax rate is 28%. Which would you choose? (Show all work.) ANS: Yield on corporate bond = 8.5% After-tax yield on municipal =
= 9.03%
The municipal bond is a better choice. PTS: 1 DIF: Challenging STA: DISC: Stocks and Bonds
OBJ: LO: 12-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
Chapter 13—Investing in Mutual Funds TRUE/FALSE 1. Closed-ended mutual funds are guaranteed, they cannot lose value. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 13-2 STA: DISC: Derivatives
2. Investors select and purchase securities held within mutual funds. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-1 STA: DISC: Derivatives
3. Exchange traded mutual funds are known as closed-end mutual funds. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
4. Closed-end mutual funds always charge an upfront fee to make a purchase. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
5. Open ended mutual funds typically offer more diversification than an individual security. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 13-2 STA: DISC: Derivatives
6. Open ended mutual funds companies buy their shares back from investors at NAV. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
7. Closed end mutual funds companies buy their shares back from investors at NAV. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
8. Exchange traded funds can create new shares to meet demand. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
9. Spiders and Diamonds are examples of ETF's. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
10. Open ended mutual funds can be traded on an intraday basis. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
11. ETF often distribute large capital gains to their shareholders. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
12. A closed-end investment company can create an unlimited number of shares. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-2 STA: DISC: Derivatives
13. There are more closed-end investment companies than there are open-end companies. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-2 STA: DISC: Derivatives
14. An open-end investment company is commonly known as a mutual fund. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-2 STA: DISC: Derivatives
15. The most important advantage of a mutual fund is pooled diversification. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-1 STA: DISC: Derivatives
16. It is almost impossible to lose money in a mutual fund as the result of fraud or the mutual fund company's bankruptcy. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-1 STA: DISC: Derivatives
17. Closed-end mutual funds can trade at either a discount or a premium from their net asset value. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
18. The net asset value (NAV) per share is found by dividing the market value of the fund's securities less the fund's liabilities by the number of shares outstanding. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
19. The price an investor can sell his shares of an open-end mutual fund share is the net asset value. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
20. Mutual funds are actually comprised of two or more companies. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-1 STA: DISC: Derivatives
21. Exchange-traded funds have characteristics of both closed-end and open-end funds. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-2 STA: DISC: Derivatives
22. A fund's objective must be stated in its prospectus. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-1 STA: DISC: Derivatives
23. Low-load funds do not charge a commission upon initial purchase. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
24. By definition, all ETF are no-load funds. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
25. Back-ended load funds offer more liquidity to investors than no-load funds. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
26. A mutual fund with a high 12(b)-1 fee will have a low expense ratio. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
KEY: Bloom's: Knowledge 27. A mutual fund prospectus is required to fully disclose all fund fees and expenses. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-2 STA: DISC: Derivatives
28. A hybrid REIT would invest only in real estate mortgages. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
29. A real estate investment trust that invests only in mortgages is called an equity trust. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
30. When you buy shares in a load fund, you will pay the NAV. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
31. When you buy shares in a no-load fund, you will pay the NAV. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
32. The difference between the NAV and the offer price represents the commission charge for buying the mutual fund shares. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
33. A mutual fund quotation shows NAV $3.16, offer $3.80. If you want to buy 100 shares, you will pay $380. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
34. The price per share of a closed-end investment fund could be lower than its NAV. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
35. Loads are transaction charges for mutual funds.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-2 STA: DISC: Derivatives
36. All no load funds charge an upfront fee to purchase shares of a mutual fund. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 13-2 STA: DISC: Derivatives
37. A 12(b)-1 fee can only be charged by a load mutual fund. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
38. A fund's prospectus would provide information about a fund's fee structure. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-2 STA: DISC: Derivatives
39. No-load funds are generally sold directly to the investor without a salesperson. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-2 STA: DISC: Derivatives
40. Load fees charged on mutual funds help insure that the fund is well managed and that the investor's yields will be greater than those on no-load funds. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
41. Mutual funds may be classified by the types of securities they purchase. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-3 STA: DISC: Derivatives
42. Growth funds are mutual funds designed for short term investing. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 13-3 STA: DISC: Derivatives
43. Aggressive growth funds typically buy stocks with high PE ratios and stocks with volatile price fluctuations. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
44. Value funds typically invest in stocks that do not pay dividends and have a high price/earning ratio. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
45. Balanced funds invest in a proportionate amount of common and preferred stocks and bonds. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 13-3 STA: DISC: Derivatives
46. Bond mutual funds are always less risky than stock mutual funds. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 13-3 STA: DISC: Derivatives
47. Growth-and-Income funds invest most of their capital in common stocks. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
48. Money market funds are traded on the Money Market, just as closed-end stock funds are traded on the stock market. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 13-3 STA: DISC: Derivatives
49. Indexed funds have high realized capital gains. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 13-3 STA: DISC: Derivatives
50. Sector funds may include stocks from different indexes. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
51. Generally speaking, socially responsible funds abstain from investing in alcohol, gambling, or tobacco stocks. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 13-3 STA: DISC: Derivatives
52. Equity-income funds emphasize capital appreciation in their investment goals. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
KEY: Bloom's: Comprehension 53. Balanced funds invest in a mix of utility and growth equities. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
54. The objective of bond and money market funds is growth. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
55. For most investors, the best way to deal in foreign securities is through an international mutual fund. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-3 STA: DISC: Derivatives
56. Sector funds usually restrict their investments to specific industries. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's:Comprehension
DIF: Easy OBJ: LO: 13-3 STA: DISC: Derivatives
57. A technology fund is an example of a sector fund. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
58. Index funds are actively managed. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-3 STA: DISC: Derivatives
59. Socially responsible funds have experienced lower return than other types of funds of similar risk. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-3 STA: DISC: Derivatives
60. The major reason that investors use mutual funds is their contractual plans which force regular investing. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-4 STA: DISC: Derivatives
61. The major benefit to small investors of mutual funds is diversification. ANS: T
PTS: 1
DIF: Easy
OBJ: LO: 13-4
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
STA: DISC: Derivatives
62. A mutual fund always provides active professional investment management. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-4 STA: DISC: Derivatives
63. Global mutual funds can invest both in domestic and international stocks. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-4 STA: DISC: Derivatives
64. Asset allocation funds invest in stocks, bonds, and cash. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-4 STA: DISC: Derivatives
65. By using automatic reinvestment plans, dividend and capital gains are used to automatically buy additional shares in the fund. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-4 STA: DISC: Derivatives
66. Conversion privileges allow investors to exchange one fund's shares for that of another, as long as the funds are in the same fund family. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-4 STA: DISC: Derivatives
67. An investor with a small amount of money should stick to using loaded-funds instead of no-load funds. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-4 STA: DISC: Derivatives
68. Dividend income, capital gains distributions, and changes in the fund's share price are all sources of return for a mutual fund. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-5 STA: DISC: Derivatives
69. Dividend income and capital gains distributions are taxed at identical tax rates. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-5 STA: DISC: Derivatives
70. A mutual fund's price per share will increase if its underlying holdings increase in value. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 13-5 STA: DISC: Derivatives
71. If a mutual fund provides for automatic reinvestment, the reinvested dividends will not be taxed until the shares are redeemed. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 13-3 STA: DISC: Derivatives
72. Mutual fund conversion privileges can often be exercised using 800 numbers. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-3 STA: DISC: Derivatives
73. Investment company earnings result solely from dividends. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-5 STA: DISC: Derivatives
74. The approximate yield on a mutual fund depends only on the fund's dividend income and capital gains distributions. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-5 STA: DISC: Derivatives
75. Mutual fund performance is usually evaluated by viewing a given size investment for a certain time period. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 13-5 STA: DISC: Derivatives
76. The individual manager of a mutual fund has little to do with a fund's success. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-5 STA: DISC: Derivatives
77. A guarantee of expected fund's future performance is its past performance. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-5 STA: DISC: Derivatives
78. Index funds, while trying to match market performance, consistently underperform market benchmarks.
ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 13-3 KEY: Bloom's: Comprehension
79. Advantages of exchange traded funds over mutual funds include a broader market focus. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 13-4 KEY: Bloom's: Synthesis
80. ETFs are set up to protect investors from capital gains taxes better than most mutual funds can. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 13-4 KEY: Bloom's: Analysis
81. As of mid-2012 housing prices have shown a significant, consistent upward trend indicating a recovery. ANS: F PTS: 1 KEY: Bloom's: Knowledge
DIF: Moderate
NAT: BUSPROG: Analytic skills
82. Asset allocation funds invest entirely in U.S. and foreign stock and bonds. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 13-3 KEY: Bloom's: Knowledge
MULTIPLE CHOICE 1. Another name for a mutual fund is a. a closed-end investment company. b. an open-end investment company. c. a mutual investment company. d. an open investment company. e. a closed investment company. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-1 STA: DISC: Derivatives
2. A mutual fund allows investors to a. Trade stocks on the NASDAQ b. Instruct the purchase of specific securities c. Become owners of a widely diversified portfolio of securities d. Deduct unrealized losses from their taxes e. All of the above ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-1 STA: DISC: Derivatives
3. The current market value of all the securities a mutual fund owns is called the a. market value. b. par value. c. net asset value. d. book value. e. liquidation value.
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-1 STA: DISC: Derivatives
4. Investors tend to use mutual funds for which of the following reasons a. Diversification b. Professional Management c. Financial Returns d. convenience e. all of the above ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-1 STA: DISC: Derivatives
5. A(n) ____ sells fund shares, either directly to the public or through certain authorized dealers a. investment advisor b. custodian c. transfer agent d. distributor e. money manager ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 13-1 STA: DISC: Derivatives
6. A(n) ____ actually runs the portfolio and makes the buy and sell decisions a. transfer agent b. distributor c. money manager d. investment advisor e. c and d ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-1 STA: DISC: Derivatives
7. Closed-end investment companies are characterized by a. number of shares determined by demand. b. price based on net asset value per share. c. variable transaction costs. d. availability for sale or purchase on security markets. e. value dependent on quantity of shares held. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
8. A closed-end investment company that invests in various types of real estate and mortgages is a a. hybrid real estate investment trust. b. blind pool syndicate. c. real estate general partnership. d. hybrid limited partnership. e. mortgage real estate investment trust.
ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
9. Which of the following combines the operating characteristics of an open-end fund with some of the trading characteristics of a closed-end fund? a. preferred fund b. common fund c. exchange traded fund d. net-asset fund e. Unit Investment Trust ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
10. A mutual fund's NAV is its a. normal average value. b. nationally advertized value. c. noted assessment vision. d. net asset value. e. none of these ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-1 STA: DISC: Derivatives
11. Which of the following are characteristic of exchange-traded mutual funds? a. traded on listed exchanges b. closed-end funds c. generally organized as sector funds d. actively managed funds e. all of the above ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
12. What type of REIT is most attractive to income oriented investors? a. equity b. mortgage c. hybrid d. unit trust e. exchange-traded ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
13. The maximum sales charge a no load mutual fund can charge a. 7% of the net asset value. b. 7% of the purchase price. c. 8 1/2% of the net asset value. d. 8 1/2% of the purchase price. e. none of these.
ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
14. Redeeming your mutual fund shares might result in a charge called a. a back-end load. b. a front-end load. c. a redemption tax. d. a management fee. e. none of these. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
15. Back end loaded mutual funds are most appropriate for a. An investor with a short time horizon b. An investor with a long time horizon c. An investor who wants to purchase a no-load product d. All investors e. Back end loaded mutual funds are never appropriate ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
16. A no-load fund has no a. sales charges. b. administrative charges. c. management charges. d. tax charges. e. 12(b)-1 fees. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-2 STA: DISC: Derivatives
17. An annual fee charged by some mutual funds to cover marketing and distribution expenses is the a. management fee. b. back-end load. c. transaction fee. d. 12(b)-1 fee. e. low-load. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-2 STA: DISC: Derivatives
18. Both load and no-load funds will always charge a a. transaction fee. b. 12(b)-1 fee. c. management fee. d. fee on the sale of the shares. e. redemption fee.
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-2 STA: DISC: Derivatives
19. Mutual funds may be bought and sold through a. mutual savings banks and brokerage firms. b. funds salespeople and mutual savings banks. c. brokerage firms and fund salespeople. d. brokerage firms and funds exchange. e. fund exchange and fund salespeople. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
20. In the Wall Street Journal's listing of mutual funds, an "r" after the mutual fund name and before the NAV means that the particular mutual fund has a ____ associated with it. a. front-end load b. back-end load c. 12b-1 fee d. management fee e. none of the above ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
21. In the Wall Street Journal's listing of mutual funds, a "t" after the mutual fund name and before the NAV means that the particular mutual fund has a ____ associated with it. a. front-end load b. back-end load c. 12b-1 fee d. management fee e. b and c ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
22. In the Wall Street Journal's listing of mutual funds, a "p" after the mutual fund name and before the NAV means that the particular mutual fund has a ____ associated with it. a. front-end load b. back-end load c. 12b-1 fee d. management fee e. none of the above ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
23. The following mutual fund fees are paid directly from the investor a. Other and administrative expenses b. Fund manager profits c. Annual Account Maintenance Fee
d. Management Fee e. 12b-1 Fee ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
24. The NAV of an open-ended mutual fund priced at $10 be if the load is 4%? a. $10.40 b. $10.00 c. $9.60 d. $9.40 e. $9.20 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
25. To be a true no-load fund, there can be a maximum ____ load and a maximum ____ 12(b)-1 fee. a. 0%; 0.00% b. 0%; 0.25% c. 0%; 1.00% d. 3%; 0.25% e. 3%; 1.00% ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 13-2 STA: DISC: Derivatives
26. Investment company earnings come from a. capital gains. b. dividend from stocks. c. interest from bonds. d. interest and dividends. e. interest, dividends, and capital gains. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-2 STA: DISC: Derivatives
27. The fund whose main objective is growth is known as a(n) ____ fund. a. balanced b. preferred stock c. money market d. index e. none of these ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
28. The fund whose main objective is to simply match the market known as a(n) ____ fund. a. balanced b. preferred stock c. money market
d. index e. none of these ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
29. A(n) ____ fund is quite speculative. a. balanced b. growth c. equity income d. aggressive growth e. money market ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
30. A fund that invests only in a particular industry would be a ____ fund. a. money market b. maximum capital c. sector d. balanced e. bond ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
31. Which of the following bond mutual funds would provide tax-free income? a. government bond fund b. municipal bond fund c. convertible bond fund d. mortgage-backed bond fund e. all of the above ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
32. Socially Responsible Funds typically avoid investing in a. Environmentally sound companies b. Alcohol and Tobacco stocks c. Car companies that do not promote safety d. Fast food chains that sell meat e. All of the above ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-3 STA: DISC: Derivatives
33. Index funds have provided competitive rates of return because a. their costs are lower than other stock funds. b. it is difficult to outperform the market. c. they have very low turnover rates.
d. they are tax efficient. e. all of the above. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
34. A(n) ____ fund invests primarily in a portfolio of common stocks for the income they provide. a. balanced b. money market c. growth d. sector e. equity-income ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
35. A mutual fund with an objective of both growth and income is a(n) a. bond fund. b. equity-income fund. c. growth fund. d. sector fund. e. balanced fund. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
36. A balanced fund that emphasizes growth in capital is called a(n) a. bond and preferred stock fund. b. diversified common stock fund. c. equity-income fund. d. money market fund. e. growth and income fund. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
37. ____ would not be a reason for purchasing mutual funds. a. Diversification b. Professional management c. Tax advantage d. Financial return e. Convenience ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 13-1 STA: DISC: Derivatives
38. Most mutual funds allow investors to participate in a. Automatic reinvestment plans b. Automatic investment plans c. DRIP plans
d. a and b above e. a and c above ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 13-3 STA: DISC: Derivatives
39. The major advantage of mutual funds to the small investor is a. diversification. b. professional management. c. low cost. d. convenience. e. liquidity. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 13-1 STA: DISC: Derivatives
40. Which of the following is not a source of mutual fund returns a. dividend income b. capital gains c. changes in NAV d. changes in IDB e. All of the above are sources of mutual fund returns ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-5 STA: DISC: Derivatives
41. Mutual funds do not offer a. automatic reinvestment plans. b. guaranteed performance. c. regular income programs. d. conversion privileges. e. retirement plans. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-3 STA: DISC: Derivatives
42. The ____ is a service offered by mutual funds that helps an investor earn compound interest on their investments. a. retirement plan b. automatic withdrawal plan c. automatic reinvestment plan d. conversion privilege e. automatic investment plan ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
43. If you are a mutual fund investor who needs steady income, you might take advantage of a fund's a. retirement plans. b. exchange privileges.
c. automatic reinvestment plans. d. systematic withdrawal plans. e. none of these. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
44. A group of funds managed by a single company which offers conversion privileges is called a a. management group. b. fund family. c. brokerage group. d. switched funds. e. convenience group. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 13-3 STA: DISC: Derivatives
45. Future fund performance is the real key to investment success with mutual funds. One important element to examine when attempting to predict a fund's future performance is the a. performance of other funds. b. nature of the fund being considered. c. future course of the market. d. fund's past performance. e. all of the above. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 13-4 STA: DISC: Derivatives
46. Having money taken automatically from your paycheck and put into a mutual fund is an example of a. an automatic investment plan. b. an automatic reinvestment plan. c. a systematic withdrawal plan. d. a conversion privilege. e. none of these. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 13-3 STA: DISC: Derivatives
47. Value funds look for stocks with relatively all the following except a. high dividend yields d. rapid growth b. moderate amounts of leverage e. undiscovered companies c. low P/E ratios ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 13-3 KEY: Bloom's: Knowledge
48. Advantages of exchange traded funds over mutual funds include all of the following except a. narrow geographic region d. industry focus b. single foreign countries e. sector focus c. better diversification ANS: C
PTS: 1
DIF: Moderate
OBJ: LO: 13-4
NAT: BUSPROG: Analytic skills
KEY: Bloom's: Knowledge
49. Advantages of exchange traded funds over mutual funds include all of the following except a. lower overhead expenses d. better diversification b. lower capital gains tax e. longer time horizon c. lower expense ratio ANS: D PTS: 1 NAT: BUSPROG: Analytic skills 50. Asset allocation funds invest money in a. stocks b. bonds c. real estate ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 13-4 KEY: Bloom's: Knowledge d. a and b only e. all of the above DIF: Moderate OBJ: LO: 13-3 KEY: Bloom's: Knowledge
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 1. [Open-end | Closed-end] mutual funds always redeem shares at NAV. ANS: a PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
2. There are [more | fewer] mutual funds than there are stocks listed on the New York Stock Exchange. ANS: a PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
3. The value of your shares in a closed-end fund is determined by [the fund's NAV | supply and demand factors]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
4. The market value of your mutual fund shares will move in the [same | opposite] direction as the market value of the underlying securities. ANS: a PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
5. Usually the management firm of a mutual fund also serves as the [custodian | investment advisor] of the fund. ANS: b PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
6. The actual ownership of a mutual fund is in the hands of the [management company | shareholders]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
7. You can lose money in a mutual fund because of [fraud of the management company | a downturn in the market]. ANS: b PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
8. The securities owned by a mutual fund are in the custody of [the management company | an independent bank]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
9. Mutual funds must value their securities [monthly | daily]. ANS: b PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
10. "Mutual Fund" technically refers to [an open-end | a closed-end] investment company. ANS: a PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
11. Individuals would not trade among themselves in [a closed end | an open end] investment company. ANS: b PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
12. The NAV would indicate the price at which you could buy shares in a [load | no load] mutual fund.
ANS: b PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
13. The NAV indicates the guaranteed price at which you could [buy | redeem] your mutual fund shares in a load fund. ANS: b PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
14. Exchange-indexed funds are [actively | passively] managed pools of investments. ANS: b PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
15. [Both load and no-load | Only no-load] funds can charge a redemption fee. ANS: a PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
16. A growth mutual fund invests in stocks that are very likely to [pay | not pay] dividends. ANS: b PTS: 1 DIF: Challenging STA: DISC: Derivatives
OBJ: LO: 13-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
17. A quotation for a mutual fund shows a NAV of $9.60 and an offer price of $10.00. With an investment of $1,000, you could buy [104.17 | 100] shares. ANS: b PTS: 1 DIF: Challenging STA: DISC: Derivatives
OBJ: LO: 13-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
18. The cost of buying shares in a load fund is [high | low] compared to the commissions charged for buying stock. ANS: a PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
19. All funds will have [management | 12(b)-1] fees. ANS: a
PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
20. You [could | could not] learn in the financial press whether your fund charged a redemption fee. ANS: a PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
21. You could discover the actual fees charged by your mutual fund in the [daily Wall Street Journal | fund prospectus]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
22. A no-load mutual fund would most likely be sold by [a broker | calling the mutual fund company]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
23. [Growth | Equity-income] funds would be more speculative. ANS: a PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
24. The primary investment objective of bond mutual funds is [growth | income]. ANS: b PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
25. A fund that invests only in utility stocks could be classified as [an industry | a sector] fund. ANS: b PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
26. Value funds are comprised of stocks with [low | high] PE ratios. ANS: a PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
27. One type of [stock | bond] fund provides tax-free income.
ANS: b PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
28. A fund that invests both in foreign and U.S. Securities would be known as [an international | a global] fund. ANS: b PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
29. The primary reason for investing in mutual funds is [professional management | diversification]. ANS: b PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
30. If you choose to have your mutual fund dividends automatically reinvested, you [may defer taxes on the dividends until you redeem some shares | still owe taxes for the year the dividends were earned]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
31. You [could | could not] switch your investments from your Fidelity income fund to another Fidelity fund by making a phone call. ANS: a PTS: 1 DIF: Moderate STA: DISC: Derivatives
OBJ: LO: 13-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
32. You could drop an automatic investment plan [at any time | only by fulfilling the original agreement]. ANS: a PTS: 1 DIF: Easy STA: DISC: Derivatives
OBJ: LO: 13-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
33. A [global | international] fund invest exclusively in foreign securities. ANS: b PTS: 1 DIF: Moderate KEY: Bloom's: Knowledge
OBJ: LO: 13-3
NAT: BUSPROG: Analytic skills
34. Index funds, while trying to match market performance, consistently [perform well | perform poorly] against market benchmarks.
ANS: a PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 13-3
NAT: BUSPROG: Analytic skills
35. Value funds look for stocks with relatively [high | low] P/E ratios. ANS: b PTS: 1 DIF: Moderate KEY: Bloom's: Analysis
OBJ: LO: 13-3
NAT: BUSPROG: Analytic skills
36. Value funds look for stocks with relatively [high | low] dividend yields. ANS: b PTS: 1 DIF: Moderate KEY: Bloom's: Analysis
OBJ: LO: 13-3
NAT: BUSPROG: Analytic skills
37. Advantages of exchange traded funds over mutual funds include [narrow | broad] industry selection. ANS: a PTS: 1 DIF: Moderate KEY: Bloom's: Comprehension
OBJ: LO: 13-4
NAT: BUSPROG: Analytic skills
38. Advantages of exchange traded funds over mutual funds include [lower | higher] expense ratio. ANS: a PTS: 1 DIF: Challenging KEY: Bloom's: Comprehension
OBJ: LO: 13-4
NAT: BUSPROG: Analytic skills
39. Exchange traded funds are investment company shares that trade [at day’s close | throughout the day] on stock exchanges. ANS: b PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 13-1
NAT: BUSPROG: Analytic skills
PROBLEM 1. The KLM Mutual Fund has a net asset value of $12.34 and an offer price of $13.34. Use this information to answer the following questions. (Show all work.) a. b. c.
How many shares will you receive when you invest $1,000? What is the immediate asset value of these shares? What is the load charge for this transaction?
ANS: a. investment/offer price: $1,000/$13.34 = 74.9625 shares b. # of shares NAV: 74.9625 $12.34 = $925.04 asset value
c.
$1,000 - 925.04 = $74.96 load charge OR $13.34 - $12.34 = 1.00 per share
PTS: 1 DIF: Challenging STA: DISC: Derivatives
OBJ: LO: 13-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
2. Creviston Mutual Fund, a load fund, holds securities valued at $90,000,000 on August 30. The fund had liabilities of $2,000,000 and 4,800,000 shares outstanding. Calculate the net asset value per share on this day. (Show all work.) ANS: Market value Less: liabilities Net value
$ 90,000,000 2,000,000 $ 88,000,000
Net asset value per share PTS: 1 DIF: Challenging STA: DISC: Derivatives
OBJ: LO: 13-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
3. RACE Mutual fund is a no-load fund that had a net asset value one year ago of $25.60. Today the NAV is $28.83. During the year dividends of $0.72 were paid out and a capital gains distribution of $0.65 was made. Calculate the approximate yield for RACE. (Show all work.) ANS:
PTS: 1 DIF: Challenging STA: DISC: Derivatives
OBJ: LO: 13-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
Chapter 14—Planning for Retirement TRUE/FALSE 1. Most people are too conservative when investing their retirement funds. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-1 STA: DISC: Risk and Return
2. It really makes little difference whether you start retirement savings at age 25 or at age 45. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Easy OBJ: LO: 14-1 STA: DISC: Risk and Return
3. Starting later in life and being too conservative when investing are both common retirement planning mistakes. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-1 STA: DISC: Risk and Return
4. The third step in retirement planning is to formulate an investment program. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-1 STA: DISC: Risk and Return
5. The first step in retirement planning is to identify retirement goals. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-1 STA: DISC: Risk and Return
6. In short-term retirement planning you estimate the required level of retirement income as a percentage of current income, fund that amount, and then adjust that number every 3 to 5 years. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 14-2 STA: DISC: Risk and Return
7. In long-term retirement planning you decide on the required level of retirement income and funds needed over a 3 to 5 year series of intervals. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-2 STA: DISC: Risk and Return
8. Having an accurate current income and expenditures statement would be very useful when calculating retirement needs.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 14-2 STA: DISC: Risk and Return
9. When one estimates retirement needs, you start with a projection of expenses stated in current dollars. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-2 STA: DISC: Risk and Return
10. Even the best retirement plan needs to be reviewed every few years. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 14-2 STA: DISC: Risk and Return
11. If one is unsure about the facts needed to estimate retirement needs, it is better to do nothing for a few years. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 14-2 STA: DISC: Risk and Return
12. When estimating retirement needs, you use the before-retirement investment return rate to adjust the current dollar shortfall to the actual shortfall at retirement. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 14-2 STA: DISC: Risk and Return
13. An investor's principal source of retirement income is social security retirement funds. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 14-2 STA: DISC: Risk and Return
14. Government assistance, primarily Social Security, is the largest single source of income for the average retiree. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-2 STA: DISC: Risk and Return
15. Household expenses usually increase after retirement. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-2 STA: DISC: Risk and Return
16. Social security benefits alone can usually fund a comfortable retirement. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-2 STA: DISC: Risk and Return
17. Your social security withholdings are placed in an account with your name on it. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
18. Social security benefits may be available to dependents of the retired, disabled, or deceased worker. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-3 STA: DISC: Risk and Return
19. To be eligible for social security retirement benefits, 30 quarters of covered employment are generally needed. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
20. Integrating a retirement plan with Social Security benefits typically increases a retiree's retirement income. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 14-3 STA: DISC: Risk and Return
21. Whether or not social security benefits will be subject to income taxes depends on the age of the recipient. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 14-3 STA: DISC: Risk and Return
22. Whether or not your social security benefits will be subject to income taxes depends on how much other income you received during the year. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-3 STA: DISC: Risk and Return
23. Self-employed workers pay twice as much for Social Security coverage compared to employed workers. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
24. The two most common sources of retirement income for most people are social security and pensions. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
25. Once you begin drawing social security benefits, you will receive a fixed level of income for the remainder of your life. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 14-3 STA: DISC: Risk and Return
26. Depending on your age, Social security retirement benefits could be reduced because of employment income. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
27. Social security is meant to be a retirement income supplement. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 14-3 STA: DISC: Risk and Return
28. By itself, Social Security is sufficient to allow a worker and spouse to maintain their preretirement standard of living. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-3 STA: DISC: Risk and Return
29. For most workers, participation in the social security system is mandatory. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-3 STA: DISC: Risk and Return
30. It is legal for employers to reduce an employee's pension as a result of receiving Social Security benefits. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
31. Upon retirement, married couples automatically receive 1.5 times the higher earning spouse's Social Security benefit. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 14-3 STA: DISC: Risk and Return
32. Reduced early retirement Social Security benefits can be received at age 60. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
33. Reduced early retirement benefits can be received at age 62.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-3 STA: DISC: Risk and Return
34. More than 50 percent of all wage earners and salaried workers today are covered by some type of employer-sponsored retirement or profit-sharing plan. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-4 STA: DISC: Risk and Return
35. With a non-contributory pension plan, the employer makes no financial contribution to the account. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
36. The current trend in retirement plans is towards contributory plans. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
37. Qualified retirement plans provide employees with tax benefits. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
38. As social security covers more employees, employer-provided pensions and individual retirement plans are covering fewer. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
39. Eligibility requirements for pension and retirement plans are typically determined by the employee's age and years of service. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
40. A vested employee has a right to receive benefits from an employer's retirement funds even if he no longer works there. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
41. A graded vesting schedule would legally have to give you some vesting rights even though you worked at a company only 1 year.
ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
42. A graded vesting schedule would legally have to give you some vesting rights if you worked at a company for 2 or more years. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
43. A company using cliff vesting would legally have to give you vesting rights if you worked at a company 3 or more years. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
44. Payments from a defined benefits plan will be determined by the investment performance of the retirement funds. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
45. The amount accumulated in a defined contribution plan will be determined, at least in part, by the investment performance of the retirement funds. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
46. Supplemental retirement plans are usually voluntary. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
47. Age 65 is typically the "normal retirement" age on retirement plans. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-4 STA: DISC: Risk and Return
48. The cash balance retirement plan is being used to replace traditional defined benefit plans. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
49. Traditional defined benefit plans are better suited than cash balance plans for a mobile workforce. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
KEY: Bloom's: Comprehension 50. Profit sharing plans allow flexible employer contributions to the plan. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
51. The advantage of profit sharing plans that invest in their own company stock is that the minimum value of the stock is guaranteed. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
52. A 401(k) plan allows you to defer taxes on part of your income. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
53. 403(B) plans are the most common salary reduction plans. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
54. At the same time as employers are cutting back on traditional pension plans, more are offering defined benefit plans. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
55. At the same time as employers are cutting back on traditional pension plans, more are offering 401(k) plans. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
56. 403(b) and 457 plans are similar to 401(k) plans, but they are for employees of public and non-profit organizations. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-4 STA: DISC: Risk and Return
57. One can contribute up to $10,000 annually to a 401(k) plan. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
58. The employee contributions limits for 401(k) plans are the same as those for 403(b) and 457 plans. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
59. Employees who have 401(k) plans also have to decide how to invest the funds in their plan. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
60. It is extremely wise to contribute at least as much to a 401(k) plan as one's employer will match. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
61. Retirement plan portability is characterized by one's ability to move retirement plan investments from one investment to another investment while working for the company. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
62. The SEP is designed for self-employed individuals. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-5 STA: DISC: Risk and Return
63. A person who is self-employed on a part-time basis can qualify for a Keogh account. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-5 STA: DISC: Risk and Return
64. Like Keogh Plans, SEP plans are only for self-employed persons with no employees. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-5 STA: DISC: Risk and Return
65. Keogh and SEP plans provide tax deferred methods for the self employed to save for their retirement. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-5 STA: DISC: Risk and Return
66. The money you put into a Roth IRA is deductible from your taxable income in the year contributed. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 14-5 STA: DISC: Risk and Return
67. Miles has no retirement plan at work. Therefore, $2,000 contributed to his regular IRA will be tax deductible. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 14-5 STA: DISC: Risk and Return
68. A large selection of investment types can qualify as IRA investments. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-5 STA: DISC: Risk and Return
69. IRA withdrawals can be made without tax penalty any time after you reach the age of 59 1/2. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-5 STA: DISC: Risk and Return
70. Anyone with earned income can contribute to some type of IRA. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-5 STA: DISC: Risk and Return
71. An IRA is a type of an investment. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 14-5 STA: DISC: Risk and Return
72. Persons 50 and over are able to make larger contributions to IRAs than younger persons. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-5 STA: DISC: Risk and Return
73. Roth IRAs are the only IRAs that have the potential to produce tax-free earnings. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-5 STA: DISC: Risk and Return
74. ERISA was passed to protect employees participating in private employer retirement plans. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-5 STA: DISC: Risk and Return
75. Annuity premiums are paid to the company during the distribution period. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Challenging OBJ: LO: 14-6 STA: DISC: Risk and Return
KEY: Bloom's: Comprehension 76. Annuity premiums are paid to the insurance company during the accumulation period. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
77. Annuities may provide survivor's benefits. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
78. Single premium annuities result in single payment of proceeds. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 14-6 STA: DISC: Risk and Return
79. Early death results in the loss of annuity capital in a straight life annuity. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 14-6 STA: DISC: Risk and Return
80. Annuities may guarantee proceeds for a specific period or for a specific amount. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
81. Annuity proceeds are limited to the life of one person. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
82. Variable annuities are usually better choices than fixed annuities for risk tolerant investors during the withdrawal phase of the annuity. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 14-6 STA: DISC: Risk and Return
83. You would most likely purchase an annuity from a bank. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
84. You would most likely purchase an annuity from an insurance company. ANS: T
PTS: 1
DIF: Moderate
OBJ: LO: 14-6
NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
STA: DISC: Risk and Return
85. The cost of an annuity is greater for females than it is for males. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
86. A major advantage of an annuity is that you cannot outlive your financial resources. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
87. Investment returns on annuities have outperformed mutual fund returns over the past five year. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
88. The fees on annuities tend to be high compared to mutual funds. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
89. Government research indicates that about 60 percent of households approaching retirement age have 401(k) accounts. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 14-4 KEY: Bloom's: Knowledge
90. If you make a withdrawal from an IRA account before age 57 1/2, you generally owe a 20% penalty on that amount ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 14-5 KEY: Bloom's: Comprehension
91. Social Security is sufficient to enable a worker and spouse to maintain their pretirement standard of living. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 14-3 KEY: Bloom's: Knowledge
92. Earned income has accounted for a growing amount of total retirement income. ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 14-2 KEY: Bloom's: Knowledge
93. The median household approaching retirement has less than 25 percent of the money needed to maintain their standard of living in retirement.
ANS: T PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 14-1 KEY: Bloom's: Knowledge
94. In a Roth 401(k), contributions are tax deductible and withdrawals are taxable. ANS: F PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 14-5 KEY: Bloom's: Knowledge
MULTIPLE CHOICE 1. The need for retirement planning is increased by the uncertainties of a. inflation. b. social security benefits. c. the assets you hold. d. your pension benefits. e. all of these. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-1 STA: DISC: Risk and Return
2. The major financial benefit of beginning your retirement funding early is related to a. increased cost of living. b. compound interest. c. reduced anxiety. d. inflation. e. investment returns. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-1 STA: DISC: Risk and Return
3. The first step in retirement planning is to a. determine how large a nest egg is required. b. consider your longevity. c. define your investment program. d. determine your income-earning assets. e. set retirement goals ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-1 STA: DISC: Risk and Return
4. When setting retirement goals you should consider a. what you want to do in retirement. b. your expected standard of living. c. your proposed level of income. d. special retirement activities and projects. e. all of these. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-1 STA: DISC: Risk and Return
5. Short-term retirement planning usually involves a. 3 to 5 year time horizons. b. waiting until age 50 to start planning. c. the need to save large amounts annually. d. the use of more risky investments. e. reducing inflation projections. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-1 STA: DISC: Risk and Return
6. The biggest unknown factor that retirees have when estimating their retirement needs and income is a. social security. b. inflation. c. pension benefits. d. expenditures. e. retirement age. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 14-2 STA: DISC: Risk and Return
7. The major mistake(s) people make in retirement planning is(are) a. starting too early. b. saving too little. c. investing too aggressively. d. a and b e. a, b, and c ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-1 STA: DISC: Risk and Return
8. The major mistake(s) people make in retirement planning is(are) a. starting too late. b. saving too little. c. investing too conservatively. d. a and b e. a, b, and c ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-1 STA: DISC: Risk and Return
9. A $3,000 annual contribution to a retirement account earning 6% will be worth ____ in 20 years. a. $ 60,000 b. $ 96,780 c. $100,000 d. $110,340 e. $192,600 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 14-2 STA: DISC: Risk and Return
10. Major sources of retirement income include a. social security. b. annuities. c. individual savings plans. d. employer retirement and pension plans. e. all of these. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-2 STA: DISC: Risk and Return
11. Major sources of retirement income include all of the following except a. life insurance. b. annuities. c. individual savings plans. d. employer retirement and pension plans. e. social security. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-2 STA: DISC: Risk and Return
12. Gordon and Lisa estimate that they will need $1,875,000 in 40 years for their retirement years. If they can earn 8 percent annually on their funds, how much do they need to save annually? a. $7,238 b. $7,987 c. $8,103 d. $9,234 e. $9,875 ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 14-2 STA: DISC: Risk and Return
13. Funds to finance social security come from a. voluntary contributions from employee, employer, and self-employed. b. compulsory contributions from employee, employer, and self-employed. c. state and federal income tax. d. compulsory contributions from government, employee, and employer. e. Congressional appropriations. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-3 STA: DISC: Risk and Return
14. The amount of your social security contribution depends on a. age and income. b. income and current tax rate. c. age and current tax rate. d. current income and retirement income goal. e. employer's contribution and current tax rate. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
KEY: Bloom's: Knowledge 15. ____ do not have to be covered by Social Security coverage. a. Farmers and ministers b. Federal civilian employees hired before 1984 and employees of state and local governments c. Federal employees and ministers. d. Teachers and employees of universities. e. Ministers and professional athletes ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
16. Dr. Johnson is surgeon at University Hospital. She will pay ____ taxes on all of her $170,000 salary. a. Social Security b. Medicare c. Medicaid d. a and b e. a, b, and c ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 14-3 STA: DISC: Risk and Return
17. Mandy and Michael Tombs are retiring soon. Their projected month Social Security benefits are $800 and $1,800, respectively. Assuming they are married and they select the best benefit alternative for them, how much will they receive monthly? a. $ 800 b. $1,200 c. $1,800 d. $2,600 e. $2,700 ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 14-3 STA: DISC: Risk and Return
18. In the year 2027, a person will have to be ____ to be able to retire with full social benefits. a. 59 b. 62 c. 65 d. 67 e. 72 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
19. One can maximize the monthly Social Security benefit amount by delaying taking retirement benefits until age a. 62 b. 65 c. 67 d. 70
e. 75 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
20. The purpose of the social security retirement program is to a. increase retirement income to 75 percent of pre-retirement income. b. pay for health care costs. c. replace defunct pension fund plans. d. provide a basic adequate income to eligible retirees. e. none of these. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-3 STA: DISC: Risk and Return
21. Fully insured status requires 40 ____ of employment covered by social security. a. weeks b. months c. quarters d. periods e. years ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
22. Fully insured status for Social Security requires ____ quarters of coverage. a. 6 b. 10 c. 25 d. 40 e. 50 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
23. Of the following survivors of a fully insured worker, ____ would not be eligible for social security benefits. a. dependent children b. spouse age 47, no children c. spouse age 65, with dependent children d. spouse age 65, no children e. spouse age 26, with dependent children ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 14-3 STA: DISC: Risk and Return
24. The Personal Earnings and Benefit Estimate Statement from Social Security would contain information about a. year-by-year social security earnings credits. b. benefits at age 62.
c. benefits at age 65 to 67. d. benefits at age 70. e. all of these. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
25. Annual increases in the social security benefit check are related to the a. retiree's income. b. number of dependents. c. quality of life. d. current cost of living. e. pre-retirement cost of living. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
26. Social security benefits for retirees less than 65 years of age may be reduced if a. wages and salaries exceed certain limits. b. interest income exceeds limits. c. dividend and rental income exceed limits. d. assets exceed $60,000. e. a spouse's income exceeds certain limits. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 14-3 STA: DISC: Risk and Return
27. Earnings limitations on social security benefits cease at age a. 60. b. 62. c. 65. d. 70. e. 72. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
28. If you are gradually vested in a retirement plan over a 4-year period, the plan is a a. cliff plan. b. contributory plan. c. self-directed plan. d. graded plan. e. maximum vesting plan. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
29. Jamie has worked for ABC Printing for 5 years. During this period ABC Printing has contributed $25,000 to her non-contributory retirement plan. Assuming ABC uses cliff vesting, the longest period allowed, how much will Jamie be able to roll into an IRA if she left ABC Printing?
a. b. c. d. e.
$ 0 $ 5,000 $10,000 $20,000 $25,000
ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 14-5 STA: DISC: Risk and Return
30. Bill has worked for White Drywall for 4 years. During this period White Drywall has contributed $25,000 to his retirement plan. Assuming the company uses graded vesting, how much will Bill be able to roll into an IRA if he left White Drywall at the end of 3 years? a. $ 0 b. $ 5,000 c. $10,000 d. $15,000 e. $20,000 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 14-5 STA: DISC: Risk and Return
31. The amount of money in your defined contribution retirement portfolio will depend on a. the age at which you begin contributing. b. the amount of money you deposit each month. c. the rate of return on your savings. d. all of these. e. none of these really make much difference. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
32. Lillian has a defined benefit plan that promises an annual retirement benefit based on the average of her last three years of salary times 2 times years of service. At retirement Lillian has 15 years of service and an average salary over the last 3 years of $65,000. What will her annual benefit be? a. $65,000 b. $50,500 c. $35,400 d. $19,500 e. cannot determine ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
33. Henry has a defined benefit plan that promises an annual retirement benefit based on the average of his last five years of salary times 2.5 times years of service. At retirement Henry has 21 years of service and an average salary over the last 5 years of $95,000. What will his annual benefit be? a. $95,000 b. $60,500 c. $49,875 d. $28,500 e. cannot determine
ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
34. Melissa's retirement plan is described in her employee handbook as follows: -- Noncontributory -- Cliff vesting (100%) after 3 years of full-time employment -- Monthly retirement benefit based on average salary over the last 3 years of employment and the total number of years worked for the company Which of the following statements about this retirement plan is(are) true? a. Melissa will have to contribute to the plan. b. If Melissa leaves this company before working full-time for 3 years, she will not receive any benefits. c. Melissa will have to make investment decisions regarding her retirement plan. d. This is a defined contribution plan. e. All of the above. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
35. What are the tax characteristics of qualified retirement plans? a. Employers can deduct the contributions. b. Employees do not pay taxes on the employer contributions until funds are withdrawn. c. Employee contributions may or may not reduce taxable income in the year made. d. Earnings on both employee and employer contributions are tax-deferred. e. All of the above are characteristics. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
36. The Employee Retirement Income Security Act (ERISA) provides a. funding of retirement plans. b. insurance for retirement plans when employees change employers. c. for mandatory retirement plans. d. minimum standards for retirement plans. e. trust funds for retirement. ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
37. Normal retirement age is typically defined as ____ years of age. a. 50 b. 55 c. 60 d. 65 e. 70 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-4 STA: DISC: Risk and Return
38. An example of a type of plan where the amount the employee receives at retirement is dependent on investment return is a a. defined contribution plan. b. defined benefit plan. c. cash balance plan. d. a and b e. a, b, and c ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
39. Which of the following types of retirement plans is becoming less common? a. traditional defined contribution b. traditional defined benefit c. cash balance d. 401(k) e. Keogh ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-4 STA: DISC: Risk and Return
40. A ____ plan combines some of the features of a defined contribution plan with features of a defined benefit plan to produce a plan that is more portable than a traditional defined benefit plan. a. SEP b. Roth IRA c. cash balance d. profit sharing e. thrift and savings ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
41. The employer retirement plan that is intended to promote employee productivity and allows the employer to vary the amount of annual contributions is a a. Qualified defined contribution plan. b. Thrift and savings plan. c. Profit sharing plan. d. 401(k) plan. e. 403(b) plan. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
42. Employers who want flexibility in how much they contribute to their employees' retirement plans would want to consider adopting a ____ plan. a. Qualified defined contribution b. Cash balance c. Defined benefit d. Profit sharing e. 403(b)
ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
43. Employee contributions to ____ plans do not reduce taxable income. a. 403(b) b. Thrift and savings c. 457 d. 401(k) e. a, b, and c ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
44. Home Appliance Warehouse, Inc. would like to set up a retirement plan for its employees that encourage employees to save for their own retirement. The company is willing to match employee contributions. Which of the following plans would be appropriate in this situation? a. Cash balance plan b. 403(b) plan c. 457 plan d. 401(k) plan e. b, c, and d ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
45. Will works for Micro Lance Computer Company and participates in its thrift and savings plan. For every $1.00 Will contributes to the plan, up to 5 percent of his salary, the company contributes $0.25. If Will's salary is $40,000 and he decides to maximize the matching contributions, how much will be contributed to Will's plan in a year by both the employer and Will? a. $4,000 b. $3,500 c. $2,500 d. $2,000 e. $1,000 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
46. Marcia works for Telephonic Industries and participates in its thrift and savings plan. For every $1.00 Marcia contributes to the plan, up to 4 percent of her salary, the company contributes $0.50. Which of the following accurately describe this plan? a. It's a defined benefit plan. b. It's a non-contributory plan. c. It's a cash balance plan. d. It's a matching plan. e. It's a profit sharing plan ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Application
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
47. Employees of a nonprofit corporation can contribute to a(n) a. 401(k) b. Kehoe Plan c. 403(b) d. HR10 e. 501(c)3 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
48. If you work nine years under the social security system, you are a. fully insured. b. partially insured. c. privately insured. d. currently insured. e. uninsured. ANS: D PTS: 1 STA: DISC: Risk and Return
OBJ: LO: 14-3
NAT: BUSPROG: Analytic skills
49. Attractive features of a 401(k) plan can include a. guaranteed investment return and tax deferral. b. tax deferral and liquidity. c. liquidity and matching contributions. d. matching contributions and tax deferral. e. tax deferral and liquidity ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
50. Employer matching contributions are common with ____ plans. a. 401(k) b. 403(b) c. 457 d. a and b e. a and c ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
51. Mary Ann contributed $5,000 to her 401(k) plan. If Mary Ann is in the 15% marginal tax bracket, this retirement contribution saved her approximately ____ in federal income taxes. a. $5,000 b. $4,250 c. $2,500 d. $ 750 e. $ 0 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
52. With a graduated vesting schedule over five years, Marianne is likely to keep ____ of her employer's contribution if she leaves her company after four years. a. 10% b. 20% c. 40% d. 60% e. 80% ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
53. One often has to make investment decision if you have a ____ plan. a. Cash balance b. Defined benefit c. 401(k) d. a and b e. a and c ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
54. Self directed retirement accounts aimed at self-employed persons include a. Keogh plans. b. SEPs. c. 401(k) plans. d. a and b e. a, b, and c ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 14-5 STA: DISC: Risk and Return
55. ____ are exclusively for the self-employed person and his/her employees. a. Keogh plans. b. SEPs. c. 401(k) plans. d. a and b e. a, b, and c ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 14-5 STA: DISC: Risk and Return
56. Self directed retirement accounts such as Keogh and SEP accounts can be set up at a. banks. b. brokerage houses. c. insurance companies. d. mutual fund companies. e. All of the above ANS: E PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 14-5 STA: DISC: Risk and Return
KEY: Bloom's: Knowledge 57. In order to avoid penalties, one must typically start taking minimum distributions from most retirement accounts by age a. 50. b. 59 . c. 65 d. 70 . e. 75 ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-5 STA: DISC: Risk and Return
58. Jacque Solis (age 38) is leaving her current job and would like to take a long vacation before starting new employment. She has $58,000 in a qualified plan that she would like to live on during this period. If she is in a 25 percent marginal tax bracket, how much will she have left after paying taxes and penalties? a. $58,000 b. $43,500 c. $37,700 d. $29,000 e. $14,500 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
DIF: Challenging OBJ: LO: 14-5 STA: DISC: Risk and Return
59. A Roth IRA a. is funded with after tax dollars. b. allows interest or dividends to accrue tax free. c. permits you to withdraw your contribution at any time. d. provides for tax-free earnings if you hold the account 5 years and are 59 e. all of the above are true. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 14-4 STA: DISC: Risk and Return
60. If you withdraw funds from a pension plan before age 59 income tax penalty. a. 5%. b. 10% c. 15% d. 20% e. 25% ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
at withdrawal.
, you will have to pay a ____ federal
DIF: Moderate OBJ: LO: 14-3 STA: DISC: Risk and Return
61. Minimum distributions are not required from a. 401(k) plans. b. Traditional IRAs.
c. Roth IRAs. d. SEP plans e. Keogh plans. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
62. Tax-free earnings can be gotten from investments in a. Roth IRAs. b. Traditional IRAs. c. SEP plans. d. 401(k) plans. e. All of the above ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Moderate OBJ: LO: 14-4 STA: DISC: Risk and Return
63. Jason just quit his current job. He has $13,000 vested in that 401(k) plan. Which of the following is true? a. If Jason takes the money and spends it, he will have to pay taxes and penalties on all $13,000. b. If Jason takes the money and reinvests it in an IRA, the employer will write him a check for $13,000. c. If Jason arranges a transfer of funds from his employer directly to his IRA trustee, his employer will withhold 20%. d. a and b e. a, b, and c ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 14-3 STA: DISC: Risk and Return
64. Sally and Patrick are married with 4 young children. Patrick stays at home with the kids while Sally works as CEO of a small manufacturing firm earning $105,000 annually. Sally is covered by a 401(k) plan at work, but they would like to maximize their IRA contributions as well. Which of the following are true assuming their AGI is $105,897? a. Sally and Patrick could each contribute $3,000 to a Roth IRA. b. Sally and Patrick could each contribute $3,000 to a deductible traditional IRA. c. Only Sally can contribute to any type of IRA. Patrick has no earned income. d. Patrick could contribute $3,000 to either a deductible tradition IRA or a Roth IRA. e. a and d ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 14-5 STA: DISC: Risk and Return
65. An investment vehicle that systematically pays out benefits over an extended period of time is a(n) a. common stock. b. bonds. c. mutual funds. d. annuity. e. money market securities.
ANS: D PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
66. The period during which premiums are paid for the purchase of an annuity is called the a. installment period. b. accumulation period. c. survivor period. d. distribution period. e. contract period. ANS: B PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
67. The portion of the principal and interest of an annuity that has not been paid to the annuitant prior to death is the ____ benefit. a. principal b. distribution c. survivorship d. installment e. accumulated ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 14-6 STA: DISC: Risk and Return
68. The two ways to buy annuities are single premium and a. multi-premium. b. future premium. c. installment premium. d. guaranteed premium. e. lateral premium. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
69. You will receive the largest monthly payment under an annuity contract when the selected payment option is the a. life annuity with no refund. b. life annuity, period certain. c. refund annuity. d. annuity certain. e. temporary life annuity. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 14-6 STA: DISC: Risk and Return
70. If an annuity plan is designed so that the monthly payment is adjusted by the actual investment experience of the insurer, it is a. a fixed dollar annuity. b. an equity annuity. c. a variable annuity.
d. an uncertain annuity. e. a temporary annuity. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
71. The proceeds of a variable annuity are dependent on the a. cost of living. b. Consumer Price Index. c. investment return. d. tax rate. e. actual investment. ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
72. The cost of an annuity varies with the a. age of the annuitant at issue. b. age of the annuitant when payment begins. c. method of proceeds distribution. d. sex of the annuitant. e. all of the above. ANS: E PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
73. Early withdrawal of funds from an annuity may result in IRS penalties and a. surrender fees. b. bailout fees. c. 12(b) fees. d. guarantee fees. e. discontinuance insurance. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 14-6 STA: DISC: Risk and Return
74. There are early withdrawal penalties for all of the following except a. Roth IRA contributions. b. Traditional IRA contributions. c. Annuity contributions. d. SEP contributions. e. 401(k) contributions. ANS: A PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis 75. Annuities are administered by a. banks. b. brokerage houses. c. insurance companies.
DIF: Moderate OBJ: LO: 14-5 STA: DISC: Risk and Return
d. mutual fund companies. e. All of the above ANS: C PTS: 1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 14-6 STA: DISC: Risk and Return
76. Government research indicates that about ___ percent of households approaching retirement age have 401(k) accounts. a. 20 d. 80 b. 40 e. 90 c. 60 ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 14-4 KEY: Bloom's: Knowledge
77. Workers who elect to retire early—at age 62—will receive reduced Social Security benefits, currently ________ of the full amount a. 20% to 30% d. 70% to 80% b. 50% to 60% e. 80% to 90% c. 60% to 70% ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 14-2 KEY: Bloom's: Knowledge
78. Which is not a common mistake people make when planning for retirement? a. starting too late d. having too little when reaching retirement b. putting away too little e. none of the above c. assuming too much risk ANS: C PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 14-1 KEY: Bloom's: Knowledge
79. Which of the following has accounted for a growing amount of total retirement income? a. Social security d. earned income b. 401k e. real estate investing c. personal savings ANS: D PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Moderate OBJ: LO: 14-2 KEY: Bloom's: Knowledge
80. The median household approaching retirement has less than ___ percent of the money needed to maintain their standard of living in retirement. a. 10 d. 80 b. 25 e. most have sufficient income c. 50 ANS: B PTS: 1 NAT: BUSPROG: Analytic skills
DIF: Easy OBJ: LO: 14-1 KEY: Bloom's: Knowledge
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
1. Most people invest their retirement funds too [aggressively | conservatively]. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 14-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
2. The first step in retirement planning is to [set retirement goals | decide how much money you cam afford to set aside for retirement]. ANS: a PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 14-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
3. Beginning to put aside retirement funds at age 35 instead of 45 will make [very little | a great] difference in your total accumulated funds. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 14-1 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
4. The initial estimates of retirement expenses and income should be done in [today's | future] dollars. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
5. Inflation will have [little | great] impact on your retirement plans. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 14-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
6. You can expect to spend [more | fewer] years in retirement than you spent in your parent's home. ANS: a PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 14-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
7. The major source of retirement income for current retirees is [Social Security | personal savings]. ANS: a PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 14-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
8. Social security alone [will | will not] provide a comfortable standard of living at retirement.
ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 14-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
9. Money to make social security benefit payments comes from contributions from [employees only | employers only | employees and employers]. ANS: c PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 14-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
10. The income base on which social security tax is computed [increases each year | remains the same for long periods of time]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
11. For most people, participation in the social security system is [voluntary | mandatory]. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 14-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
12. Most people today must have worked in a job covered by social security for the equivalent of at least [4 years | 10 years] to be fully insured and therefore eligible for retirement benefit payments. ANS: b PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 14-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
13. The social security administration [can | cannot] give you a fairly accurate estimate of benefits you can expect in the future. ANS: a PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 14-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
14. Lois, age 67, is receiving social security benefits. She received $25,000 in interest and dividends this year. Her social security benefits [will | will not] be reduced because of these earnings. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
15. Judy, age 68, is receiving social security benefits. She received $45,000 in consulting income this year. Her social security benefits [will | will not] be reduced because of these earnings.
ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
16. Kurt receives social security benefits and also received $55,000 wages during the year. His social security benefits will be [totally | partially] taxable. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
17. The Social Security administration provides estimates of retirement benefits one could expect to receive in [current | inflated] dollars. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
18. Harry starts taking reduced retirement benefits at age 62. Those benefits [will | will not] be increased when he reaches normal retirement age. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-3 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
19. Vested rights are [forfeitable | non-forfeitable] rights to receive some pension benefits. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
20. Under a defined contribution pension plan, an employee [is | is not] able to estimate what his pension payment would be upon retirement. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
21. Under a defined benefit pension plan, an employee [is | is not] able to estimate what his pension payment would be upon retirement. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
22. The employee is subject to the investment risk in a defined [contribution | benefit] plan.
ANS: a PTS: 1 DIF: Challenging STA: DISC: Risk and Return
OBJ: LO: 14-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
23. A defined [contribution | benefit] retirement plan would usually be better for an older worker who has been employed for a long time with the same employer. ANS: b PTS: 1 DIF: Challenging STA: DISC: Risk and Return
OBJ: LO: 14-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
24. A defined [contribution | benefit] retirement plan would usually be better for a younger worker who changes employers every five years. ANS: a PTS: 1 DIF: Challenging STA: DISC: Risk and Return
OBJ: LO: 14-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
25. If your employer matches your 401(k) contributions, you should contribute at least [the maximum allowed for tax deferrable | the amount matched by your employer]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
26. The employee will be responsible for making investment choices when the employer offers a [401(k) plan | defined benefit plan]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
27. You have just begun working at ABC Corporation. Participation in the company's 401(k) plan will probably be [voluntary | mandatory]. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
28. [401(k) | 403(b)] plans would be available for employees of a public, non-profit organization. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
29. A self-employed person could set up a [Keogh | 403(b)] retirement plan.
ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
30. [SEP | Keogh] plans are easier to establish. ANS: a PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 14-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
31. In general, the tax law changes made in 2001 [increased | decreased] the tax advantages for retirement accounts. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
32. There is a [5% | 10%] federal income tax penalty for pension plan withdrawals before age 59. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
33. The [Roth | traditional] IRA is typically recommended for people in their 30s or 40s. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
34. [Any gainfully employed person | Only certain employees] can put money into an IRA. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
35. You are age 45 and healthy, and you are withdrawing money from your IRA. There [will | will not] be a tax penalty for doing this. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
36. A Roth IRA will be funded with [pre | post] tax dollars. ANS: b
PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
37. You can withdraw [your contribution | the total balance] of your Roth IRA at any time without penalty. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
38. The Pension Benefit Guarantee Corporation (PBGC) protects employees pensions from [inflation | bankruptcy]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
39. The period during which annuity payments are made to the individual is called the [distribution | survivorship] period. ANS: a PTS: 1 DIF: Easy STA: DISC: Risk and Return
OBJ: LO: 14-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
40. A straight life annuity payment option will result in the [highest | lowest] possible monthly payments to the annuitant. ANS: a PTS: 1 DIF: Challenging STA: DISC: Risk and Return
OBJ: LO: 14-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
41. With a life annuity, period certain, a payment will be made for a stated period of time [only to the annuitant if she lives | to someone else if the annuitant dies]. ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
42. With a [fixed rate | variable] annuity, you would receive a guaranteed payment regardless of the investment activity of the investment funds. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
43. If you need to withdraw your money from an annuity very soon after you begin making contributions, there most likely will be a [small | large] surrender fee.
ANS: b PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
44. The costs of investing in a variable annuity is typically [higher | lower] than investing in mutual funds. ANS: a PTS: 1 DIF: Moderate STA: DISC: Risk and Return
OBJ: LO: 14-6 NAT: BUSPROG: Analytic skills KEY: Bloom's: Synthesis
45. Government research indicates that about [30 | 60] percent of households approaching retirement age have 401(k) accounts. ANS: b PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 14-4
NAT: BUSPROG: Analytic skills
46. It usually makes less sense to convert a traditional IRA to a Roth IRA the [younger |older] you are. ANS: b PTS: 1 DIF: Moderate KEY: Bloom's: Analysis
OBJ: LO: 14-5
NAT: BUSPROG: Analytic skills
47. [Social Security | 401k] is the single largest source of income for the average U.S. retiree. ANS: a PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 14-2
NAT: BUSPROG: Analytic skills
48. [Earned income | 401k’s] has accounted for a growing amount of total retirement income. ANS: a PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 14-2
NAT: BUSPROG: Analytic skills
49. The median household approaching retirement has less than [25 | 50] percent of the money needed to maintain their standard of living in retirement. ANS: a PTS: 1 DIF: Easy KEY: Bloom's: Knowledge
OBJ: LO: 14-2
NAT: BUSPROG: Analytic skills
50. In a Roth 401(k), contributions [are | are not] tax deductible. ANS: b PTS: 1
DIF: Easy
OBJ: LO: 14-5
NAT: BUSPROG: Analytic skills
KEY: Bloom's: Knowledge PROBLEM 1. Marshall has calculated that he will need $1,250,000 in his retirement fund in 40 years when he plans to retire. If Marshall can earn 8% annually over this period, how much does Marshall need to save annually to meet that goal? ANS: FV I N PMT
= = = =
1,250,000 8 40 4,825
or
PTS: 1 DIF: Challenging STA: DISC: Risk and Return
1,250,000/259.052 = 4,825
OBJ: LO: 14-2 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
2. Julie's employer has a defined benefits retirement plan which pays 3.2 percent of her last year's salary for each year of employment. Julie estimates her final salary will be $85,000 and she will have worked for 20 years. What is her expected retirement benefit? (Show all work.) ANS: Retirement benefit = .032 20 $85,000 = $54,400 PTS: 1 DIF: Challenging STA: DISC: Risk and Return
OBJ: LO: 14-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
3. Eric works for a company with a defined contribution benefit pension plan. He will retire in ten years (at age 65) and expects his salary to be $100,000 in his last year of work. Social security should pay him $1,325 per month at that time. If he needs 80 percent of his income to maintain his standard of living upon retirement, how much annual income will he need from his employer's plan and from his own planning when he retires? (Show all work.) ANS: Social security = $1,325 12 = $15,900 annually Total needed = $100,000 .80 = $80,000 Amount required from employer and other plans = $80,000 - $15,900 = $64,100 PTS: 1 DIF: Challenging STA: DISC: Risk and Return
OBJ: LO: 14-4 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
4. Danielle puts 8 percent of her paycheck in a 401(k) plan administered by her employer. Danielle earns $55,000 per year and is in the 28 percent tax category. What annual tax savings does she get from her contribution? If her employer matches contributions on the first 5% of her salary dollar for dollar and the second 5% 50 cents on the dollar, how much will her employer put into her account this year? (Show all work.) ANS: Contribution = .08 $55,000 = $4,400 Tax savings = $4,400 .28 = $1,232
.05 $55,000 = $2,750 fully matched plus another $1,650 (.03 55,000) matched 222% = $825. Her employer would put $3,575 (2.750 + 825) into her account this year. PTS: 1 DIF: Challenging STA: DISC: Risk and Return
OBJ: LO: 14-5 NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
Chapter 15—Preserving Your Estate TRUE/FALSE 1. The main objective of estate planning is to save attorney's fees. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
2. Estate planning requires knowledge of wills, trusts, and investments. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
3. A potential estate planning problem is improper distribution of assets. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
4. People planning means providing sustenance and resources for family members. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
5. Insufficient capital can cause problems paying estate taxes. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
6. More damage is done to estates by doing nothing than by doing the wrong thing. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
7. Custodial accounts are used to protect the property of minor children. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
8. Funeral expenses are examples of second-level death-related costs. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
9. Minors can handle large sums of money and property. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
10. Property held in different states does not complicate the estate planning process. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
11. Knowing where parents keep important documents is essential to the estate planning process. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
12. Using a trust can help shield an estate from using improper vehicles of transfer. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
13. Disability is a common reason for estates to break up. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
14. Inflation is a common reason for estates to break up. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
15. Life insurance comprises a large portion of most individuals probate estates. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
16. Liquidity is important in an estate to pay for death costs and possible taxes. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Moderate OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
17. Probate property includes only real property. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
18. Your gross estate is all property subject to federal tax at your death. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
19. Your gross estate is composed only of nonprobate property. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
20. The gross estate includes all the property subject to federal estate tax at a person's death. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
21. Updating an estate plan is a critical part of the estate planning process. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
22. The adoption of a child will cause estate transfer costs to change. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
DIF: Challenging OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
23. Dying intestate means dying with a valid will. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
24. An estate plan is good only as long as it fits the needs, desires, and circumstances of the parties involved. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
25. A will is required by state law. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
26. Intestacy results from dying without a valid will. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
27. If you die intestate, federal law dictates the disposition of your estate. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
28. Only the wealthy need an attorney to prepare their wills. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
29. The intestate process is federally mandated, and is similar from state to state. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
30. The federal estate tax is similar from state to state. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
31. Gathering data on all aspects of the family is an important estate planning function. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
32. The testator of a will always receives property from the will. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
33. The appointment clause affirms that the will in question was really made out by the deceased. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
34. A will may be invalid if the testator was under undue influence of another person. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
35. Typically, a will must be signed by two witnesses to be valid. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
36. A codicil is a simple and convenient legal means of modifying a will. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
37. A new will revokes previous wills only if a statement such as "This will revokes all previous wills" appears. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
38. In most states, divorce creates an automatic revocation or modification of a will. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
39. A valid will cannot be contested. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
40. In most states, the surviving spouse may be entitled to a portion of the estate beyond that granted in the will through the right of election. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
41. One should make copies of his will and store them in different places. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
42. A letter of last instruction is a legal document. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
43. Mental capacity requires an individual to be at least 21. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
44. Proof of mental capacity lies on the person contesting a will, not the individual writing a will. ANS: T
PTS: 1
DIF: Challenging
OBJ: LO: 15-2
NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
STA: DISC: Financial Analysis and Cash Flows
45. Witnesses to a will may not be family members. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
46. A will can be destroyed after a codicil is written. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
47. A will is revoked if a second legitimate will is created. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
48. Death will erase any debts existing at that time. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
49. Joint ownership of assets is an effective substitute for a will. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
50. A trust is a means of transferring property. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
51. The best choice for a trustee is a family member. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
52. All living trusts are revocable. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
53. A testamentary trust is established in a will. ANS: T
PTS: 1
DIF: Moderate
OBJ: LO: 15-3
NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
STA: DISC: Financial Analysis and Cash Flows
54. The recipient of the gift will pay any gift tax that is due. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
55. A gift is given when the donor relinquishes control over the asset. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
56. A power of attorney allows an individual to write a will. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
57. An executor plays an important function during the probate process. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
58. A durable power of attorney for health care allows loved ones to terminate life support. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
59. A husband and wife together could give $20,000 to their niece with no gift tax liability even if the entire $20,000 came from the wife's checking account. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
60. Gift giving can reduce estate tax liability. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-4 STA: DISC: Financial Analysis and Cash Flows
61. The taxable estate is less than the adjusted gross estate. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 15-5 STA: DISC: Financial Analysis and Cash Flows
62. Estate tax liability may be reduced by a state death tax credit.
ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-4 STA: DISC: Financial Analysis and Cash Flows
63. Inheritance tax is the same as estate tax. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 15-5 STA: DISC: Financial Analysis and Cash Flows
64. Maxine's estate is worth $600,000. It will not be subject to federal estate taxes. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 15-5 STA: DISC: Financial Analysis and Cash Flows
65. With the passage of the 2001 tax laws, there is now an advantage to incurring estate tax rather than gift tax liabilities. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-4 STA: DISC: Financial Analysis and Cash Flows
66. Spouses who are U.S. citizens are treated the same as non-citizen spouses for estate tax purposes. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-5 STA: DISC: Financial Analysis and Cash Flows
67. Jill and Jack are siblings. Jill wants to gift $15,000 to Jack's daughter. She and Jack can join in that gift to take advantage of gift splitting. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 15-4 STA: DISC: Financial Analysis and Cash Flows
68. Trust services are used exclusively by those who cannot handle large sums of money, such as minors. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 15-3 KEY: Bloom's: Comprehension
69. The top federal gift and estate tax rate for 2013 is expected to be 45 percent. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 15-4 KEY: Bloom's: Knowledge
70. The gift tax law allows a person to give gifts up to $10,000 tax free. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 15-4 KEY: Bloom's: Knowledge
71. Most commentators believe the annual exclusion amount from estate tax will be set at $3,500,000 for 2013.
ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 15-5 KEY: Bloom's: Knowledge
72. The unlimited marital deduction requires the filing of a separate tax return. ANS: F PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 15-5 KEY: Bloom's: Comprehension
73. When a father deposits cash in a bank account held jointly with his daughter, a gift is made when the daughter withdraws it. ANS: T PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Challenging OBJ: LO: 15-4 KEY: Bloom's: Application
MULTIPLE CHOICE 1. Estate planning is closely related to a. retirement and investment planning. b. tax and retirement planning. c. tax and investment planning. d. retirement and insurance planning. e. insurance and investment planning. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
2. The goal of estate planning is to: a. accumulate b. preserve c. distribute d. all of the above e. none of the above ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
3. This situation calls especially for an estate plan based on the people planning perspective. a. working couple with handicapped child b. married man with no dependents c. single person, no dependents, some property d. single person, no property e. mother and daughter, independent, ages 65 and 43, share housing ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application 4. Estate planning us designed to: a. administer and distribute assets b. minimize taxes c. increase size of estate
DIF: Challenging OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
d. all of the above e. none of the above ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
5. ____ would be a first-level death-related cost. a. Funeral expenses b. Federal estate taxes c. Probate expenses d. Inheritance taxes e. Administrative costs ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
6. Why does an estate "Break Up" a. Death related costs b. Inflation c. Improper use of vehicles of transfer d. Lack of liquidity e. all of the above ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
7. ____ would represent a second level death-related cost. a. Unpaid bills b. Health related bills c. Federal estate taxes d. Inflation e. none of the above ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
8. Life insurance could alleviate estate problems caused by a. inflation. b. improper management. c. disabilities. d. lack of liquidity. e. incorrect vehicle of transfer. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Challenging OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
9. The probate estate consists of a. real property b. personal property c. regulated by interstate laws if you have no valid will
d. all of the above e. none of the above ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
10. You should review your estate plan every a. 1-2 years b. 2-3 years c. 3-5 years d. 5-10 years e. Never ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
11. A will is used to a. name a personal representative to guide the distribution of the estate b. name a guardian for persons and property c. specify the distribution of tax burdens to beneficiaries d. all of the above e. none of the above ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
12. Your real and personal property that can be transferred according to the terms of a will is called your a. gross estate. b. probate estate. c. net estate. d. estate. e. proper estate. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
13. An estate plan would be least likely to need revision when a. a child was born. b. people moved from one state to another. c. a son graduated from college. d. a spouse became disabled. e. the tax laws changed. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
14. One of the aspects of disposition of property consists of a. distribution of residual assets after specific gifts have been made b. allocating the burden of taxes among the beneficiaries c. determining which county will have legal jurisdiction
d. naming the executors of the estate e. none of the above ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
15. A will is a legal document outlining the plan for a. your funeral. b. disposition of your assets. c. payment of taxes. d. management of your assets. e. survivors goals. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
16. Which of the following is not a section of the last will and testament a. direction of payments b. appointment clause c. simultaneous death clause d. contest and dispose clause e. execution and attestation clause ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
17. If you die without a will you are said to have died a. improperly. b. without heirs. c. without estate. d. intestate. e. in probate. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
18. In the absence of a valid will, the heir most generally favored would be the a. spouse. b. children. c. parents. d. grandchildren. e. All of these are treated as equals. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
19. You have a spouse, two children, one grandchild, and a living father. If you died without a valid will, the person(s) most likely to receive the proceeds of your estate would be a. grandchildren. b. children.
c. spouse. d. father. e. spouse and children. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
20. When you die intestate, you have given the court or state the privilege of determining a. tax deadlines. b. burial arrangements. c. guardians of dependents. d. beneficiary needs. e. divisions of estate to charities. ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
21. Which of the following are requirements of a valid will a. mental capacity b. freedom of choice c. proper execution d. all of the above e. none of the above ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
22. The person or guardian you chose for your children should a. be willing to relocate to your home state b. have at least $100,000 in assets c. be willing to take care of your children according to your wishes d. be a partial beneficiary of your estate e. none of the above ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
23. The person who writes a will is called the a. testator. b. attorney. c. probater. d. estate planner. e. grantor. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
24. When writing a will, you should seek the professional services of a. tax accountants. b. attorneys.
c. executors. d. intestate administrators. e. trustees. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
25. Requirements for a valid will do not include a. The testator must be of sound mind. b. The testator must not be unduly influenced. c. The will must be properly executed. d. There must be no fraud in the execution of the will. e. The will must be drawn up by an attorney. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
26. Writing a valid will does not require a. full knowledge of the act. b. clear mental capacity. c. no undue influence on the testator. d. mentally competent heirs. e. proper execution. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
27. A testator can revoke a will in the following ways: a. making a later will that will revoke prior wills b. making a codicil that revokes prior wills c. burning the will d. all of the above e. a & b ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
28. A letter of last instruction might provide directions for a. location of the will b. legal and accounting services c. explanation of the actions taken in the will d. location of jewelry and family affects e. all of the above ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application 29. A codicil is a(n) a. means to revoke a will. b. court-named guardian.
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
c. survivors' response to a will. d. revision to a will. e. executor's revision of a will. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
30. A letter of last instructions could include this information. a. revisions to will. b. establishment of trusts. c. naming of guardians. d. distribution of assets. e. funeral and burial wishes. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
31. Your will would appoint ____ to carry out the terms of the will. a. a family attorney b. an executor c. a tax accountant d. a life insurance beneficiary e. an administrator ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
32. When selecting a trustee, you should consider her a. investment and trust management skills. b. business knowledge and judgment. c. relationship of the person to the family. d. a and b e. b and c ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
33. The decedent's personal representative is called a(n) a. guardian. b. administrator. c. attorney. d. executor. e. successor. ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
34. A joint tenancy with right of survivorship may consist of a. a parent and child. b. a husband and wife.
c. a brother and sister. d. none of these. e. any of these. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
35. A form of joint ownership that may exist only between husband and wife is a. joint tenancy. b. joint tenancy with right of survivorship. c. joint tenancy without right of survivorship. d. tenancy in common. e. tenancy in the entirety. ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
DIF: Challenging OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
36. Which of the following forms of ownership do not have rights of survivorship? a. community property b. joint tenancy c. tenants by the entirety d. tenancy in common e. a and d ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
37. The living will states; a. distribution of assets while alive b. duration of medical treatments c. agent may make health care decisions if you are unable to do so d. while alive you and only you may make changes to your will e. all of the above ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
38. A trust designed to help couples gain full use out of each spouse's exclusion is the ____. a. Crummey b. Credit shelter c. Charitable lead d. Special needs e. Charitable remainder ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge 39. Tenancy of the entirety consist of a. Husband and wife only b. Immediate family
DIF: Challenging OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
c. Immediate and extended family d. all of the above e. none of the above ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
40. A trust that provides continuity and management of asset management and allows assets to bypass probate, but which provides no income or estate tax advantages is a(n) ____ trust. a. revocable living b. irrevocable living c. testamentary d. charitable lead e. credit shelter ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
41. A "trustee" is also called the a. Settlor b. Trustor c. Creator d. All of the above e. None of the above ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Challenging OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
42. Which of the following qualities are essential in a trustee a. Impartial family member b. Possess sound business knowledge and judgment c. Partial beneficiary d. All of the above e. None of the above ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
43. Which of the following is not a type of trust a. credit shelter trust b. qualified terminable interest property trust c. crummey trust d. charitable remainder trust e. credible property sharing trust ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
44. Which of the following are reasons for making lifetime gifts a. appreciation in value
b. c. d. e.
credit limit impact of marital deduction gift exclusion all of the above
ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-4 STA: DISC: Financial Analysis and Cash Flows
45. A trust designed to provide liquidity for an estate without increasing the size of the estate is a(n) ____. a. revocable living b. irrevocable life insurance c. testamentary d. charitable lead e. credit shelter ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
46. The unified rate schedule applies to federal ____ taxes. a. inheritance and gift b. gift and income c. gift and estate d. income and estate e. estate and inheritance ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-4 STA: DISC: Financial Analysis and Cash Flows
47. Gift tax liability could be incurred on this transaction: a. providing rent-free apartment for mother b. 1,000 hours of babysitting for grandchild c. son's deposit into husband-wife joint checking account d. setting up a revocable trust e. $35,000 given to son ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
48. The gift tax exclusion applies a. per recipient annually. b. per donor annually. c. per recipient per lifetime. d. per donor per lifetime. e. to all spouses' gifts to each other. ANS: A PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Moderate OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
49. Your gross estate is reduced by the ____ to determine the adjusted gross estate. a. state death tax credit
b. c. d. e.
orphan's deduction marital deduction funeral and administrative expenses previous year's income tax
ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 15-4 STA: DISC: Financial Analysis and Cash Flows
50. The most favorable tax treatment results when you transfer your estate (after death) to your a. children. b. spouse. c. parent. d. employer. e. siblings. ANS: B PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
DIF: Easy OBJ: LO: 15-6 STA: DISC: Financial Analysis and Cash Flows
51. Mike gave his 25 year old son $13,000 worth of stock in 2009. When Mike died in 2010, that stock was worth $15,000. How much of that gift would potentially be subject to the federal gift and estate tax? a. $30,000 b. $15,000 c. $13,000 d. $ 2,000 e. $ 0 ANS: C PTS: 1 NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
DIF: Moderate OBJ: LO: 15-6 STA: DISC: Financial Analysis and Cash Flows
52. Those who could use trust services include all the following except a. minors d. spendthrifts b. busy executives e. all the above need trust services c. the mentally incompetent ANS: E PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Moderate OBJ: LO: 15-3 KEY: Bloom's: Application
53. Most commentators believe the annual exclusion amount from estate tax will be set at $3,500,000 for 2013. a. $500,000 d. $3,500,000 b. $1,000,000 e. $5,000,000 c. $2,000,000 ANS: D PTS: 1 NAT: BUSPROG: Reflective thinking
DIF: Easy OBJ: LO: 15-4 KEY: Bloom's: Knowledge
54. When a father deposits cash in a bank account held jointly with his daughter, when is a give made? a. at time of deposit d. when the daughter makes a withdrawal b. never e. when the father makes a withdrawal c. once interest begins to be earned ANS: D
PTS: 1
DIF: Easy
OBJ: LO: 15-4
NAT: BUSPROG: Reflective thinking
KEY: Bloom's: Knowledge
COMPLETION INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 1. [Most | Very few] people need to do estate planning. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
2. If you consider wealth only, anyone with an estate expected to exceed [$500,000 | $1,000,000] in 2012 must consider estate planning. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
3. Most estates are dissipated because the deceased had [an improper estate plan | no estate plan]. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
4. [Married | Unmarried] couples have the greater need for estate planning. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Analysis
OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
5. If you die with no valid will in existence, you have died [intestate | testate]. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
6. Your [gross | probate] estate consists of your real and personal property that will be transferred at death. ANS: b
PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
7. Property held jointly with the right of survivorship [would possibly | would not] be part of your gross estate subject to federal estate taxes. ANS: a PTS: 1 DIF: Challenging NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
8. A valid will [must be written | can be oral or written]. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
9. You are married with a 3-year old child. If you die without leaving a will, in most states [your spouse will inherit your entire estate | your spouse and child will share your estate]. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
10. The person writing a will is called the [decedent | testator]. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
11. If you have a small estate, you should [contact an attorney | write your will yourself]. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
12. When your die, your debts will be paid [only if you so direct in your will | because state laws protect creditors' rights]. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
KEY: Bloom's: Knowledge 13. Claudia had not yet signed her newly written will when she died. This [still would | would not] be valid. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
14. You need to make major revisions in your will. You should write a [codicil | new will]. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
15. You need to make a minor revision in your will. You should write a [codicil | new will]. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
16. When Jessica gets a divorce, her will leaving everything to her former husband usually will be [nullified | still valid] in most states. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
17. Walter left nothing to his wife in his will. His wife [is out of luck | can get the amount that the state intestacy laws would have given her]. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
18. A letter of last instruction [is | is not] a legally enforceable document. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
19. Funeral instructions should be included in a [letter of instructions | your will].
ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
20. Theresa and Ella, mother and daughter, own property as joint tenants with the right of survivorship. Ella [can | cannot] write a valid will leaving her part of this property to Bob Shockey. ANS: b PTS: 1 DIF: Challenging NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
21. Mike and Tristan, father and son, own property as tenants in common. Tristan [can | cannot] write a valid will leaving his part of this property to Ella Fitzgerald. ANS: a PTS: 1 DIF: Challenging NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
22. The person setting up a trust is called the [grantor | trustee]. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
23. Legal title to the property in a trust is held by the [grantor | trustee]. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
24. You would create a [living | testamentary] trust to be used during your lifetime. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
25. You would create a [living | testamentary] trust to be used after you die. ANS: b PTS: 1
DIF: Moderate
OBJ: LO: 15-3
NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
STA: DISC: Financial Analysis and Cash Flows
26. Assets held in a trust created during a person's lifetime [will | will not] go through the probate process after the death of the creator. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
27. If you want to create a living trust that provides tax advantages, you will need to establish [a revocable | an irrevocable] trust. ANS: b PTS: 1 DIF: Challenging NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
28. An appropriate trust to set up with a disabled child being the beneficiary would be the [Special Needs | Minor's Section 2503(c)] trust. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
29. Funds from the [Minor's Section 2503(c) | Crummy] trust must be distributed by the time the beneficiary turns 21. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
30. If a gift tax has to be paid, the [giver | recipient] of the gift will pay it. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
31. An inheritance tax is paid by the [estate | recipient] of the inheritance. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Comprehension
OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
32. Your will [may | may not] contain a testamentary trust. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Synthesis
OBJ: LO: 15-3 STA: DISC: Financial Analysis and Cash Flows
33. A person can give [a limited | any] number of tax free gifts per year. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-4 STA: DISC: Financial Analysis and Cash Flows
34. You could give any number of people [$13,000 | $25,000] per year without having to pay any gift taxes. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-4 STA: DISC: Financial Analysis and Cash Flows
35. You could give an unlimited amount of assets to your [children | spouse] without incurring any gift taxes. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-4 STA: DISC: Financial Analysis and Cash Flows
36. Your estate is more likely to be subject to [state | federal] death taxes. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-5 STA: DISC: Financial Analysis and Cash Flows
37. For 2012, your net estate value must exceed [$1,650,000 | $3,500,000] before any federal estate taxes will be due. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-5 STA: DISC: Financial Analysis and Cash Flows
38. The [inheritance | pickup estate] tax costs neither the estate or the recipients of the estate anything in addition to the federal estate tax.
ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-5 STA: DISC: Financial Analysis and Cash Flows
39. Real estate is taxed by [the state of residence | the state where the property is located]. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-5 STA: DISC: Financial Analysis and Cash Flows
40. [Busy executives | minors | those willing to spend countless hours handling large sums of money] do not need trust services. ANS: c PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 15-3 KEY: Bloom's: Knowledge
41. The top federal gift and estate tax rate for 2013 is expected to be [35 | 45] percent. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 15-5 KEY: Bloom's: Knowledge
42. The gift tax law allows a person to give gifts up to [$10,000 | $13,000] tax free. ANS: b PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 15-4 TOP: Bloom's: Knowledge
43. Most commentators believe the annual exclusion amount from estate tax will be set at [$3,500,000 | $1,000,000] for 2013. ANS: a PTS: 1 DIF: Easy NAT: BUSPROG: Reflective thinking
OBJ: LO: 15-4 KEY: Bloom's: Knowledge
44. The unlimited marital deduction is available only if the recipient spouse is a [U.S. citizen and files a gift tax return | legal resident and does not have to file a gift tax return]. ANS: a PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking
OBJ: LO: 15-4 KEY: Bloom's: Knowledge
45. When a father deposits cash in a bank account held jointly with his daughter, a gift is made with the [father’s deposit | daughter’s withdrawal]. ANS: b PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking
OBJ: LO: 15-4 KEY: Bloom's: Application
PROBLEM 1. Put the following steps of the estate planning process in order: a. b. c. d. e. f. g.
Assess your family situation and set estate planning goals Formulate and implement your plan Gather comprehensive and accurate data Designate beneficiaries of your estate's assets List all assets and determine value of your estate Estimate estate transfer costs Review the plan periodically and revise as necessary
ANS: a, c, e, d, f, b, g PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Knowledge
OBJ: LO: 15-1 STA: DISC: Financial Analysis and Cash Flows
2. If a person dies intestate (without a valid will), the estate is distributed according to established state laws of intestate succession. According to Utah's probate code (as described in Exhibit 15.4 of your textbook), what is the estate distribution for a spouse with no offspring? ANS: 100% to spouse PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
3. If a person dies intestate (without a valid will), the estate is distributed according to established state laws of intestate succession. According to Utah's probate code (as described in Exhibit 15.4 of your textbook), what is the estate distribution for a spouse and offspring? ANS: 50% to surviving spouse and 50% to offspring, per stipes (right of representation) PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
4. If a person dies intestate (without a valid will), the estate is distributed according to established state laws of intestate succession. According to Utah's probate code (as described in Exhibit 15.4 of your textbook), what is the estate distribution for no spouse but offspring?
ANS: 100% to offspring (per right of representation) PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
5. If a person dies intestate (without a valid will), the estate is distributed according to established state laws of intestate succession. According to Utah's probate code (as described in Exhibit 15.4 of your textbook), what is the estate distribution for no spouse and no offspring but parents? ANS: To surviving parents equally. PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows
6. If a person dies intestate (without a valid will), the estate is distributed according to established state laws of intestate succession. According to Utah's probate code (as described in Exhibit 15.4 of your textbook), what is the estate distribution for no spouse, no offspring, no parents, but offspring of parents? ANS: To parent's decedents, per stipes (right of representation) PTS: 1 DIF: Moderate NAT: BUSPROG: Reflective thinking KEY: Bloom's: Application
OBJ: LO: 15-2 STA: DISC: Financial Analysis and Cash Flows