1) Simple interest is the interest computed on principal only, without adding the interest
to the principal to determine future interest.
2) Ultraconservative investors should invest in instruments such as insured certificates
of deposits and Series EE savings bonds.
3) The balance sheet serves as an assessment of assets and liabilities at fair market
value as of a specified date.
4) All types of open-ended credit accounts allow multiple uses without reapplication,
but some require that the entire balance be repaid each month.
5) Socially responsible funds usually invest in firms with good records pertaining to the
environment, human rights, and public safety.
6) Your auto liability coverage will usually protect you when you drive a rental car.
7) When shopping for insurance, your goal should be to “buy” what you need and not
be ‘sold” more or less coverage.
8) The major purpose of budgeting is to reach your financial goals.
9) The asset allocation strategy is a form of diversification.
10) Commercial properties are generally more risky investments than residential
properties.
11) A(n) ____ buys and holds an unmanaged fixed portfolio of fixed-maturity
securities.
a. exchange-traded fund
b. real estate investment trust
c. unit investment trust
d. sector fund
12) Figure 4-1
Tony and Liz Montey both work for XYZ Corporation where Tony earns $32,000 and
Liz earns $31,000. However, XYZ Corporation does not have a retirement plan for their
employees. Tony and Liz have three-year old twin daughters named Trisha and Tasha.
The following is information related to their taxes for the current tax year:
Refer to Figure 4-1. What is Tony and Liz’s adjusted gross income?
a. $43,800
b. $55,400
c. $60,000
d. $6,100
13) People who start saving and investing for retirement during their twenties should
aim to reserve ____ percent of their pretax income every year.
a. 9 to 11
b. 12 to 15
c. 16 to 18
d. 19 to 22
14) What statement is not accurate regarding participation in an FSA?
a. Funds in a dependent care FSA account may be used to pay only for the care of a
dependent younger than age 21
b. Unused amounts are forfeited and are not returned to the employee
c. The maximum annual contribution is $5,000 for a dependent-care FSA
d. The maximum annual contribution limits are usually $2,000 to $3,000 for a
medical-care FSA
15) A successful financial plan includes
a. specified values that underlie the plan
b. explicitly stated financial goals
c. logical and consistent financial strategies
d. all of these
16) The transaction cost of purchasing a stock over the counter typically includes
a. the spread
b. a sales commission
c. a member fee
d. both the spread and a sales commission
17) When securities are kept in their street name, they are registered in the name of the
a. issuing corporation
b. individual investor
c. brokerage firm
d. Security Investors Protection Corporation
18) While away at college, expensive items such as jewelry or computers may be
subject to specific limits in the homeowner’s insurance policy; ____ can be purchased
for these items.
a. additional auto coverage
b. floater protection
c. comprehensive personal liability insurance
d. physical loss insurance
19) Which of these is a reason many don’t save?
a. Their belief that spending is better when inflation is low
b. Not having a credit card precludes them from purchasing essentials
c. The high annual percentage yields (APYs) for savings accounts
d. Their belief that they have no money left over at the end of the month
20) With a home-equity line of credit the collateral is
a. the principal of the first mortgage on the home
b. the down payment from the first mortgage
c. the difference between what the home is worth and the balance owed on the first
mortgage
d. the total value of the home
21) Rank the following bonds in terms of general safety with the safest listed first.
a. U.S. Treasury, corporate, and municipal
b. Corporate, U.S. Treasury, and municipal
c. Municipal, U.S. Treasury, and corporate
d. U.S. Treasury, municipal, and corporate
22) ____ life policies are designed especially for those whose life insurance needs are
high but who cannot immediately afford the required premiums.
a. Whole
b. Modified
c. Limited-pay
d. Endowment
23) Which of the following persons is (are) practicing tax avoidance?
a. Bartender who does not report all his tips
b. Plumber who does not report a barter transaction
c. Employee who deducts qualifying job-related expenses
d. All of these
24) A stock brokerage firm is a licensed financial institution that
a. buys and sells stocks and bonds
b. provides investment alternatives
c. offers money market mutual fund accounts
d. all of these
25) ____ typically pay the highest rates of interest on savings.
a. Commercial banks
b. Credit unions
c. Savings banks
d. Mutual savings banks
26) The basis for financial planning is (are)
a. a budget
b. personal values
c. a balance sheet
d. goals
27) Figure 12-1
Antonio and Trina Tyson are a young couple with two small children, Jason (age four)
and Amy (age two). Trina is an account executive for a brokerage firm while Antonio
has taken a couple years off from his profession as a civil engineer to work on an MBA
degree. Right now Antonio and Trina’s budget is very tight, as they are accustomed to
living on two incomes, but Trina’s employer has just circulated employer benefit
information, so Antonio and Trina believe this is a good time to evaluate their life
insurance needs. They have listed the financial information they believe is relevant.
Refer to Figure 12-1. Trina enjoys managing investments and believes that she could
get a higher yield on the proceeds from Antonio’s life insurance than the insurance
company would pay. Which settlement option should be selected for Antonio’s policy in
the event of his death?
a. Interest income
b. Lump sum
c. Income for a specific period
d. Income for life
28) When preparing a budget to buy a new home, you should add an additional ____
percent to the monthly payment on the loan for such things as homeowner’s insurance,
property taxes, maintenance, and upkeep.
a. 25 to 35
b. 35 to 45
c. 45 to 55
d. 55to 60
29) What is the break even price of an option to buy 100 shares of ABC with a $26
striking price if the cost of the 100 options was $150?
a. $24.50
b. $26.00
c. $27.00
d. $27.50
30) The time period between billing dates on your credit cards is the
a. revolving period
b. transaction cycle
c. grace period
d. billing cycle
31) Pamela Arms has a health insurance plan through her employer. The health plan
states that Pamela’s annual deductible is either $250 or $500, depending on which
doctors she uses. This plan is an example of a(n)
a. Blue Cross/Blue Shield plan
b. health maintenance organization
c. preferred provider organization
d. individual practice association
32) Which of the following is an example of earned income?
a. Welfare payments
b. Interest
c. Capital gains
d. Self-employment income
33) Jim Kice was injured in a freak accident in his dorm room and had to spend several
days in the hospital. His covered medical costs totaled $8,000. How much will Jim’s
health insurance policy pay for this claim given the following policy information?
$250,000 annual policy limit
$400 deductible per year
80/20 coinsurance
$2,000 per year out-of-pocket coinsurance cap
a. $5,600
b. $6,080
c. $6,400
d. $7,600
34) The person named in a will who identifies assets, collects any money due, pays off
debts, liquidates assets, files final income tax and estate tax returns, and with the court’s
permission distributes the balance of any remaining money and property to the
beneficiaries is the
a. guardian
b. executor
c. grantor
d. probate judge
35) To collect Social Security retirement benefits based on a spouse’s earnings,
a. the marriage must have lasted at least eight years
b. neither can have remarried
c. both must be at least 62 years old
d. all of these
36) Employer-sponsored retirement plans that are approved by the IRS are said to be
a. vested
b. exempt
c. qualified
d. endowed
37) Which of the following purposes is never allowed as an early withdrawal from a
tax-sheltered retirement account?
a. purchase of a home
b. medical expenses
c. education expenses
d. purchase of a vehicle
38) “Spiders” are a type of
a. REIT
b. ETF
c. UIT
d. open-end fund
39) The best method of comparing the cost of cash-value life insurance that is expected
to be held until death is the
a. cost per $1,000 of coverage
b. interest-adjusted cost index method
c. interest-adjusted net payment index method
d. net cost method
40) Which of the following would be classified as a long-term liability?
a. Credit card debt
b. Bank card debt
c. Education loan balance
d. All of these
41) Common stockholders elect
a. the corporation’s president
b. the corporation’s board of directors
c. the top management of the corporation
d. the CEO of the company
42) If one is in the 25 percent marginal tax bracket, he or she will have an after-tax
income of ____ from an investment that pays $1,500 in taxable income.
a. $1,500
b. $1,125
c. $960
d. $420
43) A method by which one can compare cash flows across time, either as what a future
cash flow is worth today (present value) or what an investment made today will be
worth in the future (future value) is called
a. time-value of money
b. compounding
c. simple interest
d. marginal analysis
44) A positive aspect of defined-benefit plans is that
a. they are more transferable than defined-contribution plans
b. they generally permit earlier vesting than defined-contribution plans
c. the funds are out of reach of corporate creditors
d. there is more certainty about the amount of the benefit than with defined-contribution
plans
45) If you want your annuity to provide income to a survivor after you die you would
select a(n)
a. installments-certain annuity
b. fixed annuity
c. immediate annuity
d. straight annuity
46) Installment purchase agreements are loans in which the title does not pass to the
buyer until the last installment payment has been paid.
47) The major purpose of budgeting is to make sure bills get paid.
48) The default rate is a measure of the number of credit card users that pay only the
minimum each month.
49) The debt payments-to-disposable-income ratio is gross income divided by monthly
nonmortgage debt repayments.
50) Financial planning begins by acquiring a good job that provides a person with
enough extra income to manage.
51) IRA funds can be invested in only very low-risk investments.
52) If the stock owned by a mutual fund increases in value, the net asset value of the
fund will fall.
53) Long-term care insurance that will provide coverage if a lower number of activities
of daily living are unperformable will cost less.