Exam
Name___________________________________
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
1)
Funds used to start a business are usually the owner’s.
1)
2)
Funds used to start a business are usually your own and borrowed financial capital.
2)
3)
As a small business owner, you are not liable for the debts of your business.
3)
4)
As your individual business assets increase, your ability to borrow funds decreases.
4)
5)
As your individual business assets increase, your ability to borrow funds increases.
5)
6)
As your individual business assets increase, the complexity of determining how to invest and
protect these assets also increases.
6)
7)
As your individual business assets increase, the complexity of determining how to invest and
protect these assets normally decreases.
7)
8)
Risk is a term based on the uncertainty of future outcomes.
8)
9)
Risk is a term based on the certainty of future outcomes.
9)
10)
A holder of a U.S. Government bond has a greater uncertainty of getting back principal and interest
than the holder of a corporate bond.
10)
11)
A holder of a U.S. Government bond has a greater certainty of getting back principal and interest
than the holder of a corporate bond.
11)
12)
Speculative risk is uninsurable.
12)
13)
In a variable life insurance policy, all investment risk is shared by both the company and the
policyholder.
13)
14)
Long–term care insurance is only needed by the senior citizen population.
14)
15)
Pure risk involves only a chance of loss.
15)
16)
Speculative risk involves only a chance of loss.
16)
17)
Speculative risk involves a chance of both gain or loss.
17)
18)
To have an insurable loss, the loss must be accidental.
18)
19)
To have an insurable loss, the loss should be under the insured’s control.
19)
20)
The interruption of a business’s activities other than fire or theft is insurable.
20)
21)
A company that requires only cash in dealing with customers is following risk reduction.
21)
22)
A company that requires only cash in dealing with customers is following risk avoidance.
22)
23)
Insurance policies are examples of risk reduction.
23)
24)
Insurance policies are examples of risk transfer.
24)
25)
Risk assumption occurs when you believe the cost of the loss you might incur is less than the cost of
risk avoidance or risk transfer.
25)
26)
A term life insurance policy has cash surrender value.
26)
27)
A whole life insurance policy has cash surrender value.
27)
28)
The first step in the financial planning process is to establish goals that are realistic and attainable.
28)
29)
Capital accumulated over one’s life is distributed through retirement income only.
29)
30)
Tolerance for risk normally increases with age.
30)
31)
Tolerance for risk normally decreases with age.
31)
32)
Banks only pay compound interest.
32)
33)
T–bills are bonds that mature in ten years or less.
33)
34)
Municipal bonds are issued by government agencies other than the Federal government.
34)
35)
General obligation bonds use the income from a project to pay the bondholder.
35)
36)
A bond backed by secured debt is a debenture.
36)
37)
The par value of the bond is the face value of the bond.
37)
38)
The coupon rate of the bond is the effective rate.
38)
39)
A junk bond has a rating of B or less.
39)
40)
The par value and the market value of a stock are the same.
40)
41)
Preferred stock may be convertible.
41)
42)
Income funds are attractive to people who are retired.
42)
43)
Balanced funds invest in solid growth stocks only.
43)
44)
No load funds do charge commission on the amount invested.
44)
45)
All real estate investments are treated the same for tax purposes.
45)
46)
Precious metals decrease in value with an increase in inflation.
46)
47)
Paintings are collectibles.
47)
48)
As a rule, short–term investment strategies are more speculative than long–term investment
strategies.
48)
49)
Retirement plans may be contribution oriented, benefit oriented, or combined plans.
49)
50)
IRA contributions may be deductible or nondeductible.
50)
51)
Employers who have more than 100 employees may establish SIMPLE IRA plans after 1996.
51)
52)
401k plans are retirement plans established to accept employee contributions.
52)
53)
Wills are written documents that provide instruction to others as to how you want your wishes
carried out after death.
53)
54)
Trusts are legal arrangements that actually divide legal and beneficial interests between two or
more people.
54)
55)
All trusts are revocable.
55)
56)
Disability insurance is purchased to replace lost income.
56)
57)
All long–term care policies return premium paid if one does not file a claim with the insurance
company.
57)
58)
The Roth IRA cannot be established if you contribute to an employer–sponsored retirement plan.
58)
59)
SEP plans are IRAs funded by employers.
59)
60)
The income from a Coverdell Education Savings Account is tax free if used before the child turns
age 30.
60)
61)
Section 529 Plans include prepaid tuition and savings plans; only savings plans grow tax free.
61)
62)
TSAs and 403b plans target employees of not–for–profit organizations.
62)
63)
Profit sharing plans are never included in other types of pension plans.
63)
64)
The IRS states that 401k plans cannot favor highly compensated employees over lower paid
workers.
64)
65)
Money purchase plans are Defined Benefit Plans.
65)
66)
A Roth 401k is funded with before–tax dollars.
66)
67)
A Roth 401k allows your assets to be passed on to your heirs tax free.
67)
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
68)
Risk is a term indicating all of the following EXCEPT
68)
the probability that an expected outcome will occur.
the uncertainty of future outcomes.
the variability of the expected outcome.
the certainty of future outcomes.
69)
Which of the following would involve speculative risk?
69)
purchasing a lottery ticket
purchasing an extended warranty on your television set
purchasing a burglar alarm system for your home
purchasing a life insurance policy
70)
Which of the following would involve speculative risk?
70)
installing a camera to survey the parking lot
installing a sprinkler system
installing a merchandise display case
installing a burglar alarm system
71)
To have an insurable loss, all of the following criteria apply EXCEPT
71)
the potential loss must be reasonably predictable.
the loss should be beyond the control of the insured.
the loss should be catastrophic for the insurance company.
the loss must be accidental.
72)
To have an insurable loss, all of the following criteria apply EXCEPT
72)
the potential loss cannot be reasonably predictable.
the loss must be accidental.
the loss should not be catastrophic for the insurance company.
the loss should be beyond the control of the insured.
73)
To have an insurable loss, all of the following criteria apply EXCEPT
73)
the potential loss must be reasonably predictable.
the loss should be within the control of the insured.
the loss should not be catastrophic for the insurance company.
the loss must be accidental.
74)
When a business practices risk management, the purchase of an insurance policy is risk
74)
transfer.
reduction.
avoidance.
assumption.
75)
When a business practices risk management, the installation of a sprinkler system is risk
75)
reduction.
assumption.
avoidance.
transfer.
76)
When a business practices risk management, the decision NOT to issue credit and deal only in
cash–only sales is risk
76)
assumption.
transfer.
reduction.
avoidance.
77)
John owns a small department store that issues its own credit cards. He has been considering
phasing out his own credit card and accepting Visa® or MasterCard®. If John chooses to do this he
will be going from a position of risk ________ to one of risk ________.
77)
assumption; transfer
reduction; transfer
assumption; avoidance
avoidance; reduction
78)
John owns a small department store that issues its own credit cards. He has been considering
phasing out his own credit card and accepting only cash. If John chooses to do this he will be going
from a position of risk ________ to one of risk ________.
78)
reduction; transfer
avoidance; reduction
assumption; avoidance
assumption; transfer
79)
Which of the following is NOT involved in the function of life insurance?
79)
creation of an estate
maintenance of an estate
distribution of an estate
all of the above
80)
Which of the following holds true for term insurance?
80)
Premiums increase with age.
Premiums are paid for insurance and savings.
Term policies are renewed at a lower rate.
Premiums decrease with age.
81)
Which of the following holds true for whole life insurance?
81)
Policies can be used as collateral.
Premiums are paid for insurance only.
All cash value is returned upon death.
Premiums paid have no cash value.
82)
Which of the following holds true for whole life insurance?
82)
Policies cannot be used as collateral.
Premiums are paid for insurance only.
All cash value is returned upon death.
Premiums paid have cash value.
83)
Which part of Medicare includes a prescription drug plan?
83)
Medicare part A
Medicare part B
Medicare part C
Medicare part D
84)
Which of the following holds true for Medicare?
I. Medicare covers all expenses if medically necessary.
II. Medicare part B helps cover doctor services, outpatient care, and other items that part A does
not cover.
III. Medicare supplemental insurance plans fill in the gaps that the original Part A and Part B do
not cover.
IV. Medicare is paid to people under 65 if they have a disability for at least 24 months.
84)
II, III & IV
I, II, & III
I, III, & IV
I & IV
85)
All of the following would require liability insurance EXCEPT
85)
a certified public accountant.
a plumber installing a water heater.
a physician.
all of the above.
86)
Joe Cool installs air conditioners. He is a private contractor and usually works five days a week for
approximately 48 weeks. Joe is 50 years old and occasionally his back gets dislocated. What types of
insurance policies that manage risk would you recommend to Joe?
86)
health, errors and omissions, life
health, fire, theft, life
health, liability, life, disability
health, liability, life, accident
87)
Which of the following is true for universal life insurance policies?
87)
Premiums are set higher than whole life policies.
Premiums never need to be increased to maintain the policy in force.
Premiums are set lower than whole life policies.
None of the above.
88)
Which of the following is the MOST liquid of all investments?
88)
certificates of deposit
bonds
real estate
cash
89)
Which of the following is the LEAST liquid of all investments?
89)
bonds
cash
certificates of deposit
real estate
90)
According to Moody’s Corporate Bond Ratings, bonds that are rated ________ are judged to have
speculative elements.
90)
A
Aa
Baa
Ba
91)
According to Moody’s Corporate Bond Ratings, bonds that are rated ________ are judged to be of
the BEST quality?
91)
A
Aaa
Baa
Ba
92)
Which of the following are NOT synonyms for the value of a bond?
92)
coupon
par
principal
face
93)
Bonds sold at a value above par are sold at a ________, and bonds sold at a value below par are
sold at a ________.
93)
discount; premium
premium; discount
markup; discount
discount; markup
94)
Bonds sold at a value below par are sold at a ________, and bonds sold at a value above par are
sold at a ________.
94)
discount; premium
markup; discount
discount; markup
premium; discount
95)
The coupon rate on a bond is the
95)
rate of interest the issuer agrees to pay to the lender on an annual basis.
rate of interest the issuer agrees to pay the lender on a semiannual basis.
rate of interest the lender agrees to pay the issuer on an annual basis.
rate of interest everyone else receives on bonds of a similar nature.
96)
The current market interest rate on a bond is the
96)
rate of interest the lender agrees to pay the issuer on an annual basis.
rate of interest the issuer agrees to pay the lender on a semiannual basis.
rate of interest the issuer agrees to pay to the lender on an annual basis.
rate of interest everyone else receives on bonds of a similar nature.
97)
The book value per share of common stock is computed as follows:
97)
value of the company’s assets/price of the book it‘s listed in.
total common stockholders’ equity/number of shares outstanding.
assets/number of shares outstanding.
liabilities/number of shares outstanding.
98)
Which of the following factors are subject to change due to company sales?
98)
additional paid in capital
retained earnings
stock at par
number of shares of common stock authorized
99)
All of the following are factors that affect the market value of a share of common stock EXCEPT
99)
authorized, but not issued, shares.
excess demand for shares.
product liability suit.
anticipated company earnings.
100)
As the number of shares of common stock increases, the book value of each share will ________ if
equity does not change.
100)
increase
remain the same
decrease
none of the above
101)
Preferred stockholders
101)
have a residual claim on assets.
have voting rights.
must receive a dividend.
have original selling prices and par value the same.
102)
ABC corporation declares a $2 million dividend. It had issued 1 million shares of common stock
and 500 thousand shares of preferred stock. If preferred shares have a par value of $50 and a
preferred dividend of 4 percent, what is the preferred dividend?
102)
$1,250,000
$2,000,000
$1,000,000
$200,000
103)
Which of the following is a feature of cumulative preferred stock?
103)
Dividends accumulate and must be paid each year.
Dividends in arrears are paid to both preferred and common stockholders.
Dividends in arrears are paid to preferred stockholders whenever a dividend is declared by
the corporation.
Dividends in arrears are paid to common stockholders.
104)
Convertible preferred stock
104)
is subordinate to common stock.
has a maximum time frame for the holder to exercise the option.
may be exchanged for bonds.
has a minimal time frame for the holder to exercise the option.
105)
Companies normally call back preferred stock when
105)
the prime rate increases.
common stock prices are low.
market interest rates are high.
market interest rates are low.
106)
Mutual funds
106)
generally charge an up–front load fee.
collect funds of investors and use these funds to purchase large blocks of stocks, bonds, or
investment vehicles.
have one investment objective.
are coexisting funds in a bank savings account.
107)
Balanced mutual funds
107)
invest only in stocks.
appeal to the investor who has a moderate tolerance for risk.
invest only in bonds.
provide capital growth through bond coupon payments.
108)
Money market funds do NOT invest in
108)
certificates of deposit.
short–term futures.
repurchase agreements.
commercial paper.
109)
No load mutual funds
109)
are preferred by investors who do their own research.
charge a commission on the initial investment.
are not part of a mutual fund family.
are preferred by most brokers.
110)
A primary residence and one additional vacation home qualify as
110)
nonowner occupied residential real estate for the vacation home and owner occupied
residential real estate for the primary residence.
commercial real estate for the vacation home and owner occupied residential real estate for
the primary residence.
owner occupied residential real estate.
none of the above.
111)
Precious metals
111)
are a hedge against deflation.
fall into the area of commodity trading.
can be purchased via mutual funds dealing in bullion.
are as good an investment as stocks and bonds over time.
112)
Which of the following is an example of a collectible?
112)
an old share of McDonald’s stock
a Mickey Mantle rookie baseball card
a photograph of Uncle Joe
all of the above
113)
Which of the following is true for dollar cost averaging?
113)
It allows us to purchase an equal dollar amount of a different stock at equal time intervals.
It allows us to purchase an unequal dollar amount of the same stock at equal time intervals.
It allows us to purchase an equal dollar amount of the same stock at equal time intervals.
It allows us to purchase an unequal dollar amount of a different stock at equal time intervals.
114)
Joe Dough buys $300 worth of ABC mutual fund every month. In June Joe pays $30 per share, in
July he pays $25 per share and in August he pays $50 per share. How many shares of ABC mutual
fund will Joe have at the end of August?
114)
10
18
28
22
115)
Joe Dough buys $300 worth of ABC mutual fund every month. In June Joe pays $30 per share, in
July he pays $25 per share and in August he pays $50 per share. What is Joe’s average price per
share?
115)
$27.50
$35.00
$37.50
$32.14
116)
If your adjusted gross income is $30,000 and you contribute $3,000 to a retirement plan in pretax
dollars, then you will pay income tax on a recomputed adjusted gross income of
116)
$33,000.
$30,000.
$27,000.
none of the above.
117)
Nondeductible IRAs
117)
allow you to contribute different amounts than deductible IRAs.
allow you to begin taking distributions at age 59 1/2.
have returns that are taxed each year.
allow you to contribute before–tax dollars.
118)
Which of the following is true about a Roth IRA?
118)
The amount invested is taxed and the gain is not taxed.
The amount invested and the gain are both taxed.
Neither the investment nor the gain are taxed.
The amount invested is not taxed and the gain is taxed.
119)
The maximum annual contribution to an Educational IRA is
119)
$500.
$2,000.
$1,000.
unlimited, as long as the parents establish the IRA.
120)
Which of the following is NOT true for SIMPLE IRA plans?
120)
Company matches dollar–for–dollar up to three percent of the employee’s salary.
Employee contribution limit is $10,000.
Participants are vested immediately.
Each employee should have received at least $16,000 in employee compensation for each of
the past two years.
121)
Who can participate in a tax sheltered annuity?
121)
a college professor who is employed by a for–profit university
a public school teacher
an employee of a public corporation
a self–employed plumber
122)
401k plans
122)
are separate from profit sharing plans.
allow contributions of up to 25 percent of salary by the employer.
are based on salary reduction.
are employer contribution plans only.
123)
Wills
123)
are not vital for single business owners.
are written documents that provide direction to others as to how you want your wishes
carried out after death.
require the court to appoint an administrator.
describe the disposition of business assets.
124)
Probate costs
124)
are a set fee.
are a percent of the net estate.
are a percent of yearly retirement income.
are a percent of the gross estate.
125)
Trusts
125)
can be established at death.
can have the trustor and grantor as one.
are legal arrangements.
All of the above.
126)
Which of the following holds true for disability insurance plans?
126)
They are purchased to replace lost income.
Benefits are employer focused.
Disability is expected to last for at least two years.
They are purchased in order to supplement income.
127)
Long–term care insurance plans
127)
do provide coverage in a nursing home and for home care.
do not increase premiums with respect to risk.
do require that you be above a certain age in order to sign up.
do not provide coverage for people with chronic illnesses.
128)
The Roth Ira
128)
allows for a maximum contribution amount if you are age 50 and above.
is tax free to one’s heirs.
allows one to contribute while he or she is retired.
all of the above.
129)
Coverdell Education Savings Accounts
129)
allow for deductible contributions.
have no penalties for premature withdrawal of funds.
pay for all education costs.
can be transferred between family members.
130)
Section 529 plans
130)
include prepaid tuition plans only.
have tax free withdrawals if the money is used for qualified expenses.
have withdrawals that are taxed.
have tax free withdrawals if the money is used to buy a first home.
131)
In a SEP (Simplified Employee Pension) plan,
131)
contributions cannot exceed the lesser of 40,000 or 25% in 2005.
contributions can be made after the plan year and up to the tax filing date.
only the employer can open up the plan.
contributions are not deductible to the employer.
132)
In the SIMPLE (Savings Incentive Match Plan for Employees) plan,
132)
it is easy to set up and maintain for employees who received 10,000 in compensation for the
preceding year.
the plan is available for fewer than 50 employees.
there are 3 types of simple plans
employers must contribute a match for all eligible employees.
133)
TSAs and 403b plans
133)
make contributions on a before–tax basis.
make contributions on an after–tax basis.
target employees of for–profit organizations.
None of the above.
134)
Keogh plans
134)
usually are combinations of profit sharing and 401k plans.
usually have additional costs due to payroll taxes that have to be factored in.
are for the self–employed.
All of the above.
135)
Money purchase plans
135)
mandate that the employer contribute each year even if the company made no money.
are defined benefit plans.
allow for employee contributions.
None of the above.
136)
Roth 401k plans
136)
force you to take a minimum distribution at age 70 1/2
tax your contributions and your earnings.
are an after–tax elective contribution to a 401k plan.
have contributions that are deductible.
137)
An irrevocable grantor trust that is established by the employer for key employees is
137)
not considered income for the employee.
a trust which can be change at any time during the life of the trust.
also known as a Rabbi trust.
A and B above.
A and C above.