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1
Which of the following statements is true of a self-directed brokerage account?
Investors receive guidance and support from a representative to identify and invest in profitable stocks.
Any stocks in the account that experience a downward trend in market value are automatically sold.
Investors do not have to pay fees or commissions on any of their stock trades.
Investors are solely responsible for their investment decisions.
RATIONALE
A self-directed brokerage account allows you to make your own investment decisions. Full-service brokerage firms, sometimes referred to as broker-dealers, match an investor with a broker—a financial professional who will provide guidance and support throughout the investing process.
CONCEPT
Brokerage Accounts
Ian2
is a graduate student who is looking to apply for a federal student loan to pay for education expenses not covered by his existing loan. He decides to opt for a direct PLUS loan.
Which of the following is true about Ian's choice?
Ian's loan will not need to be repaid because it is government-issued.
UNIT 3 MILESTONE 3
Ian will not need to show financial need to receive this type of loan.
If Ian is enrolled in school more than half-time, the interest on the loan will be paid by the federal government.
The annual amount that Ian can borrow is capped.
RATIONALE
Direct PLUS loans are available to graduate and professional students and parents of undergraduate students to help pay for education expenses more than the capped amounts available through the other federal student loan programs. Interest on the loan is added to the loan balance, or students can pay the interest only until they’re no longer attending school and repayment begins. Students don’t need to show financial need to receive these loans.
CONCEPT
Student Loans
stock price of Nickel Works Corp. is $25 per share. The formula for market capitalization is as follows: Market capitalization = Stock price per share × Total number of shares in marketplace
If the total number of shares in the stock market is 12 million, the market capitalization of Nickel Works Corp. is __________.
$25 million $480 million $300 million
The3
$12 million
RATIONALE
To calculate market capitalization, we use the following formula: Stock price per share × Total number of shares in marketplace = $25 × 12 million = $300 million
CONCEPT
Stock Valuation and Ownership
Shirin4
is looking to take a mortgage loan and gets a good faith estimate from several lenders.
Under which element of the good faith estimate will she find the title insurance costs?
Closing costs
Interest rate
Loan type
Monthly principal payment
RATIONALE
Closing costs include all of the loan and purchase fees associated with buying a house, such as appraisal fees and title insurance (insurance that protects either the lender or the borrower in case someone says they have a claim on the property after the buyer has purchased it).
CONCEPT
Buying a Home
5
In which of the following cases would prioritizing liquidity over returns be the most productive choice?
Chloe wants to buy a large piece of land as an investment.
Hanna needs to start an emergency fund for her household.
Anton, who is 33 years old, wants to begin investing for retirement. Julio wants to double his initial investment to pay off his mortgage quickly.
RATIONALE
Liquidity refers to how quickly an asset can be converted into cash. An emergency fund needs to be very liquid, that is, immediately accessible for use in case of unexpected expenses (such as a major car repair) or lost income (reduced number of hours worked).
CONCEPT
Risk and Return 6
Which of the following statements is true of a value-oriented investor?
A value-oriented investor relies on the investment decisions of other investors in the same mutual fund.
A value-oriented investor monitors the pattern of stocks in the market index and mirrors the investment.
A value-oriented investor looks to invest in undervalued stocks.
A value-oriented investor looks to invest in highly priced stocks.
RATIONALE
Value-oriented investors are a type of mutual fund investors that look for underpriced stocks or bargains. They tend to pick stocks that are selling for a lower price than their actual value.
CONCEPT Mutual Funds
Patricia7 is planning to attend college next semester. She has a low credit score and no savings in her bank account.
Which of the following loans will be a low-cost loan and prove to be a productive financial decision for Patricia?
A pawn shop loan
A subsidized
A title
A personal loan at the bank
RATIONALE
A subsidized loan means the federal government pays interest on the loan while the student is enrolled in school. While other loan options require a good credit score or charge a high interest rate, a subsidized student loan requires no credit check and charges interest at subsidized rates.
CONCEPT
Consumer Loans
student loan
loan
8
Sylvia has monetary assets of $24,000, and the minimum amount she needs to spend each month is $6,000. The formula for emergency fund ratio is as follows: Emergency Fund Ratio = Monetary Assets / Monthly Living Expenses
For how long will Sylvia's emergency fund last? 4 months 2 years 12 months 3 months
RATIONALE
Emergency Fund Ratio = Monetary Assets / Monthly Living Expenses
Sylvia's emergency fund ratio, which is the number of months her fund will last her, is 24,000/6,000 = 4. Therefore, Sylvia's fund will last her 4 months.
CONCEPT
Emergency Funds 9
Which of the following savings options offers low liquidity but allows an individual to deposit money several times?
A certificate of deposit
A money market account
A dedicated savings account
A savings account
RATIONALE
The early withdrawal penalty on a dedicated savings account helps stop the impulse to purchase unnecessary items using emergency funds while also providing access to the funds in the event you do experience an emergency. A dedicated savings account allows you to contribute additional money until the maturity date.
CONCEPT Savings Accounts
A10furniture
company plans to issue bonds to raise money to expand its operations to other states.
Which of the following should the company expect in the future?
The company's credit rating will remain the same from year to year.
The coupon rate of the bonds will change with changes in interest rates.
If the current interest rates rise, the fair market value of the bonds will fall.
If current interest rates fall, the fair market value of the bond will also fall.
RATIONALE
There is an inverse relationship between current interest rates and the fair market value of bonds. Thus, if current interest rates fall and are less than the coupon rate, then the fair market value of the bond will increase to an amount greater than the face value of the bond.
Introduction to Bonds
Sophie11
takes a nonqualifying distribution from her Roth IRA that includes a principal of $2,000 and earnings of $400. In a nonqualifying distribution, penalties are 10% of the taxable portion of the income.
Therefore, Sophie has to pay a penalty of __________. $180 $40 $240 $200
RATIONALE
An investor owes ordinary income taxes plus penalties on the earnings he or she withdraws. Penalties are 10% of the taxable portion of the distribution. To calculate the amount of penalty, Sophie must multiply the interest earnings of $400 by the penalty rate of 10%. The formula is as follows: Taxable portion of distribution × 10% = $400 × 10% = $40
CONCEPT
Roth IRAs
Sana12 signs a lease to rent a small house. Which of the following will be true for Sana? She will not have to pay a security deposit on the house.
CONCEPT
She will have to buy homeowner's insurance for the duration of the lease.
She will have to pay city and state taxes on the house.
She will pay a fixed monthly cost to rent the house.
RATIONALE
Renting a property usually involves a fixed monthly payment. Utilities may or may not be included in the rent.
CONCEPT
Renting a Home
Max13
opts to lease a car instead of buying one.
Which of the following is true about Max's situation?
Max owns the car during the lease period.
Max will have to pay the dealer the actual price of the car, of which the dealer will return 10% at the end of the lease period.
Max has to pay a fixed price to the dealer, which is much lower than the price of the car, to be able to use the car during the lease period.
Max can sell the car at the end of the lease period.
RATIONALE
A lease is a financial agreement between a person and the dealership in which the person agrees to pay a certain price for the right to drive the car for a set period. The price paid toward leasing the car is much lower than the actual price of the car. During this time, the person rents the car and does not have ownership of the car and will not be able to sell the car.
CONCEPT
Auto Loans
The14
Singhs must sell their house in a short sale and the bank has agreed to forgive the remaining amount owed.
Which of the following is true in this scenario?
The Singhs must sell their house for at least as much as the mortgage amount.
The amount forgiven for the Singhs is considered as taxable income.
The lender or the bank is foreclosing on the Singhs' house.
The short sale does not affect the Singhs' credit scores.
RATIONALE
A short sale involves selling the house for less than the mortgage value. During a short sale, the lender takes back the home and forgives any amount owed. The amount forgiven is usually considered taxable income.
CONCEPT
Real Estate
15
Karen needs to borrow $2,500 for the repair of the oven in her bakery. She uses her problem-solving skills and finds a lender through an online lending platform who agrees to loan her the money she requires.
Which type of loan is Karen opting for in the given scenario?
Pawn shop loan
Title loans
Peer-to-peer lending
Payday loan
RATIONALE
Peer-to-peer (P2P) lending allows a borrower and a lender to come together via the Internet. Popular P2P lending platforms include LendingClub, Peerform, and Prosper. Other alternative loans like title loans, payday loans, and pawn shop loans require collateral and charge high interest rates from borrowers.
CONCEPT
Personal Loans
is a middle-aged professor who wants to retire early and start his own coaching classes. He decides to invest his savings and use the returns to fund his business venture.
Which piece of investment advice would you give Jose?
He should invest all his savings in a single type of investment such as mutual funds to prevent the total loss of his savings.
Jose16
He should have a variety of investments, such as savings accounts, stocks, bonds, and mutual funds.
He should use the money to purchase an asset such as a luxury vehicle that can be sold at a later date for a higher value.
He should deposit the money in a savings account that ensures a guaranteed minimal rate of return rather than investing it.
RATIONALE
Since Jose is investing all his savings to earn extra money to pay for his business venture, he needs to ensure that the investment yields profitable returns. Therefore, Jose should diversify his investments. He should invest different percentages of his savings in different types of investments. This ensures that even if one type of investment fails, the others can make up for the loss incurred.
CONCEPT
Investment Portfolios
Stella17
buys stock in a pharmaceutical company.
Which of the following is true in this case?
Stella is entitled to a proportional amount of the profits of the company.
Stella receives the interest on her investment in the company in a series of predefined payments.
Stella and other shareholders are responsible for paying for any losses the firm may generate.
Stella will receive guaranteed income in the form of dividends.
RATIONALE
Owners are entitled by law to share in the profits of the firm. However, they are not responsible for paying for any losses a firm may generate.
CONCEPT
Introduction to Stocks
