42) An investor plans to retire at age 62 with total savings of $1,000,000. If she is currently 37
years old, has no savings, and expects to earn 9% per year on her investments, how much money
must she set aside every year?
A) $15,546
B) $11,806
C) $12,892
D) $10,324
43) An insurance company plans to sell annuities to investors. Based on actuarial calculations, an
investor has a 15-year life span, and he wants a $30,000-per-year annuity, payable at the end of
each year. If the insurance company uses a 4% assumed investment rate, how much should the
annuity cost?
A) $296,928
B) $312,236
C) $333,552
D) $353.982
44) A safe driver who drives faster as a result of purchasing collision car insurance would be an
example of the ________ problem.
A) moral hazard
B) adverse selection
C) Texas hedge
D) actuarial error
45) A worker plans to retire in 22 years. He needs $27,000 per year in retirement income in
today’s dollars. If inflation is forecast at 3.1% per year, what annual income should he plan to
receive in the first year of retirement in order to maintain the purchasing power on $27,000?
A) $30,353
B) $54,159
C) $37,398
D) $52,851
46) An insurance company plans to sell annuities to investors. Based on actuarial calculations, an
investor has a 30-year life span, and she wants a $70,000-per-year annuity, payable at the end of
each year. If the insurance company uses a 3.3% assumed investment rate, how much should the
annuity cost?
A) $696,928
B) $743,874
C) $833,552
D) $1,320,319
47) A worker plans to retire in 32 years. He hopes to receive $68,000 per year in retirement
income. If inflation is forecast at 3.1% per year, what annual income should he plan to receive in
the first year of retirement in order to maintain the purchasing power on $68,000?
A) $68,000
B) $76,159
C) $98,398
D) $180,628
48) An investor must decide between putting a one-time contribution of $2000 into a regular
retirement plan or putting $1,440 into a Roth retirement plan. If the investor’s tax rate is 28%
now and in retirement, and she expects to earn 12% per year over the next 20 years, which will
produce more cash in the end?
A) the investment in the regular retirement plan
B) the investment in the Roth retirement plan
C) both investments will have the same future value after-taxes
D) the answer cannot be determined from the information given
49) A regular retirement plan requires that taxes be paid at the time the money is removed from
the plan. What is the after-tax value of a $6000 deposit into a retirement plan today that
generates an 7% return for 20 years if the investor is taxed at the 24% level?
A) $17,646
B) $20,135
C) $21,685
D) $23,305
50) What is the value of a $3,500 deposit into a retirement plan if the investment earns 10.5% per
year for 20 years?
A) $12,174
B) $25,782
C) $14,652
D) $15,523
51) The employees of a firm complain that they cannot afford to contribute $9,000 per year to a
401k because of the loss of $9,000 of take-home pay. In fact, how much will the take-home pay
be reduced if all taxes combined total 33%?
A) $6,030
B) $6,340
C) $7,637
D) $8,000
52) An employee uses her firm’s 401k plan. If she decides to contribute $ $12,000 per year and
pays an effective tax rate for all items of 24%, how much will she actually take home after the
reduction?
A) $3,080
B) $4,210
C) $9,120
D) $11,000
53) An investor has an effective tax rate on all items of 33%, and he decides to put $9,000 into a
401k. The future value of the investment that results from the deferral of taxes over 30 years at
an 8% return equals ________.
A) $2,400
B) $8,000
C) $10,400
D) $29,886
54) Withdrawals after retirement from a traditional retirement plan are ________, and
withdrawals after retirement from a Roth retirement plan are ________.
A) taxable; not taxable
B) not taxable; taxable
C) tax deductible; not tax deductible
D) not tax deductible; tax deductible
55) If you start saving for retirement only in your later years and your income growth from that
point is rapid, then ________.
A) a traditional retirement plan is probably a better choice than a Roth retirement plan
B) a Roth retirement plan is probably a better choice than a traditional retirement plan
C) a SEP is probably a better choice than Medicare
D) a 401k is probably a better choice than a 403b
56) Which one of the following statements about 401k plans is not correct?
A) The employer will typically match some portion of an employee’s contributions to a 401k.
B) A 401k plan is a defined contribution plan.
C) Allowable contributions to 401k plans are limited.
D) Withdrawals from 401k plans are not taxed upon retirement.
57) Suppose you have maxed out your allowable contributions to your tax-sheltered retirement
plans and you still want to shelter income. The best choice of investment for you to minimize the
tax bill is to invest in ________.
A) a bond portfolio
B) stocks with high dividend yields
C) a blended stock and bond portfolio containing zero-coupon bonds
D) stocks with low or zero dividend yields
58) A bond portfolio and a stock portfolio both provided an unrealized pretax return of 8% to a
taxable investor. If the stocks paid no dividends, we know that the ________.
A) after-tax return of the stock portfolio was higher than the after-tax return of the bond portfolio
B) after-tax return of the bond portfolio was higher than the after-tax return of the stock portfolio
C) after-tax income of the stock portfolio was equal to the after-tax income of the bond portfolio
D) after-tax income of the stock portfolio could have been higher or lower than the after-tax
income of the bond portfolio, depending on the marginal tax rate of the investor
59) In planning for retirement, an investor decides she will save $3,000 every year for 25 years.
At a 5.7% return on her investment, how much money will she have at the end of 25 years?
A) $119,015
B) $125,316
C) $157,805
D) $128,420
60) An insurance company plans to sell annuities to investors. Based on actuarial calculations, an
investor has a 18-year life span, and he wants a $40,000-per-year annuity, payable at the end of
each year. If the insurance company uses a 3.78% assumed investment rate, how much should
the annuity cost?
A) $496,928
B) $512,236
C) $515,548
D) $553.982
61) An investor can earn a 6.7% nominal rate of return, but inflation is expected to be 3%. If the
individual invests $3,000 per year for 25 years, the real future value of this investment is
________. (All investments occur at year-end).
A) $73,571
B) $66,334
C) $118,293
D) $48,732
62) An individual wants to have $57,000 per year to live on when she retires in 27 years. The
individual is planning on living for 23 years after retirement. If the investor can earn 6.2% during
her retirement years and 9.10% during her working years, how much should she be saving
during her working life? (Hint: Treat all calculations as annuities.)
A) $29,872
B) $28,234
C) $17,908
D) $26,317
63) If you plan for a bequest for your children, your grandchildren, their children, and so on,
your planning horizon becomes ________.
A) equal to the life span of your children
B) 100 years, or your lifetime, whichever ends first
C) infinite
D) double what it would have been without the bequest
64) You want to minimize your current tax bill by maximizing your contributions to your
________.
A) taxable bond portfolio
B) Roth retirement plan
C) 401k or 403b plan
D) taxable savings account
65) Sharon decides to put $6,500 into her retirement plan at the age of 26. She will continue to
invest the same amount for a total of 6 years and then stop contributing. Assume 10.8% annual
return.
How much money will Sharon have in her retirement plan after 6 years?
A) $30,000
B) $35,575
C) $38,175
D) $61,451
66) Sharon decides to put $6,500 into her retirement plan at the age of 26. She will continue to
invest the same amount for a total of 6 years and then stop contributing. Assume 10.8% annual
return.
How much money will Sharon have in her retirement plan when she is ready to retire at age 63?
A) $554,856
B) $623,245
C) $1,229,675
D) $1,311,805
67) A nonprofit organization offers a 5.5% salary contribution to John’s 403b plan regardless of
his own contributions, plus a matching 5.5% when John contributes 5.5% of his salary. John
makes $.66,000 a year.
What is the amount of the total contribution to his 403b if John contributes 5.5% of his own
money?
A) $7,260
B) $10,890
C) $11,200
D) $12,500
68) A nonprofit organization offers a 5.5% salary contribution to John’s 403b plan regardless of
his own contributions, plus a matching 5.5% when John contributes 5.5% of his salary. John
makes $66,000 a year.
What is John’s effective salary reduction if he is in the 24% tax bracket?
A) $2,758
B) $2,800
C) $3,600
D) $5,400
69) A nonprofit organization offers a 5% salary contribution to John’s 403b plan regardless of his
own contributions, plus a matching 5% when John contributes 5% of his salary. John makes
$56,000 a year. He is in the 24% tax bracket.
What is John’s total cost of his 5% contribution net of taxes?
A) $2,128
B) $2,800
C) $784
D) $3,500
70) The fact that the U.S. government provides deposit insurance to banks creates a form of
________, which is at least partially offset by requiring banks to hold more capital if they are
riskier.
A) moral hazard
B) adverse selection
C) risk aversion
D) interest rate risk
71) An investor in a 34% tax bracket would be indifferent between a corporate bond with a
before-tax yield of 8% and a municipal bond with a yield of ________.
A) 3.91%
B) 6.15%
C) 5.28%
D) 10.72%
72) An investor who is in a 35% federal tax bracket and a 5% state bracket buys a 6.5% yield
corporate bond. What is his after-tax yield? (Assume that federal taxes are not deductible against
state taxes and vice versa).
A) 3.9%
B) 4.75%
C) 6.5%
D) 9.9%
73) Shawn decides to put $5,000 into his retirement plan at the age of 22. He will continue to
invest the same amount for a total of 16 years and then stop contributing. Assume 10% annual
return.
How much money will Shawn who will be 38 years old at that point, have in his retirement plan
when he is ready to retire at age 62? Assume the same 10% annual return.
A) $554,856
B) $623,245
C) $1,770,476
D) $1,311,805
74) In planning for retirement, an investor decides she will save $4,000 every year for 35 years.
At a 6.8% return on her investment, how much money will she have at the end of 35 years?
A) $519,015
B) $525,316
C) $529,403
D) $628,420