Chapter 1: Personal Financial Planning in Action

Who is most likely to benefit by inflation? A. Retired people B. Lenders C. Borrowers D. Low-income consumers E. Government

C. Borrowers

An advantage of personal financial planning is: A. The use of low-interest savings B. Increased impulse spending C. Increased control of financial affairs D. More credit card debt E. Less monitoring of investments

C. Increased control of financial affairs

The stages that an individual goes through based on stages in the family and financial needs is called the A. Financial planning process B. Budgeting procedure C. Personal economic cycle D. Adult life cycle E. Tax planning process

D. Adult life cycle

The problem of bankruptcy is associated with poor decisions in the ______________ component of financial planning. A. Sharing B. Savings C. Obtaining D. Borrowing E. Protecting

D. Borrowing

A question associated with the saving component of financial planning is: A. Do you have an adequate emergency fund? B. Is your will current? C. Is your investment program appropriate to your income and tax situation? D. Do you have a realistic budget for your current financial situation? E. Are your transportation expenses minimized through careful planning?

A. Do you have an adequate emergency fund?

Attempts to increase income are part of the _____________ component of financial planning. A. Obtaining B. Planning C. Saving D. Borrowing E. Spending

A. Obtaining

Which of the following would increase the interest rate for a loan? A. Poor credit rating B. Higher down payment C. Constant interest rates D. Lower consumer prices E. Short time to maturity

A. Poor credit rating

The 'borrowing' activity in a financial plan relates to A. Acquiring adequate insurance coverage B. Investing for long-term growth C. Setting up a budget D. Obtaining financial resources from employment, investments or ownership E. Maintaining control of credit-buying habits

E. Maintaining control of credit-buying habits

A financial plan is another name for a budget. True of False?

False

Financial Plans are only created by financial planners. True of False?

False

Higher inflation usually results in lower interest rates. True or False?

False

Risks associated with most financial decisions are easy to measure. True or False?

False

Opportunity costs refer to money already spent. True or False?

False An opportunity cost is the time, money, or resource given up when a decision is made.

Inflation reduces the buying power of money. True or False?

True

Opportunity costs refer to time, money, and other resources that are given up when a decision is made. True or False?

True

Higher consumer prices are likely to be accompanied by A. Lower union wages B. Lower interest rates C. Lower production costs D. Higher interest rates E. Higher exports

D. Higher interest rates

Which of the following short-term goals is stated most clearly? A. Buy a car for less than $17,000 within 6 months B. Retire at age 65 with $2,000,000 in my 401(k) account C. Purchase a house with a mortgage no greater than $150,000 within 5 years D. Set up an emergency fund E. Invest $50 per month for the next 18 years for my nephew's college fund

A. Buy a car for less than $17,000 within 6 months The only complete short-term goal listed is A. B and E are long-term goals. C is an intermediate goal. D is a short-term goal; however, it is not measurable and does not have a time limit.

John Jones was laid off of his job two months ago. He just received an offer for a position that pays 2/3 the salary of his old job. Why should he set up a financial plan? A. To increase the effectiveness of obtaining, using, and protecting his financial resources. B. To decrease control of his financial affairs regarding debt. C. To accept the loss of freedom from financial worries due to his new position. D. To learn how to manage with less savings. E. To find out why he was laid off.

A. To increase the effectiveness of obtaining, using, and protecting his financial resources.

A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends a direction for your financial activities is a(n) A. Insurance prospectus. B. Financial plan. C. Budget. D. Investment forecast. E. Statement.

B. Financial plan.

Patrick Guitman recently graduated from college with $20,000 in student loans and $5,000 in credit card debt. He usually makes minimum payments on his debt and he has been late with three payments in the last year. He wants to buy a new car but was told that his interest rate on a loan would be very high. What is the most likely reason this might be so? A. General interest rates are very low B. His credit rating is poor because of his late payments C. He already has a student loan outstanding D. Recent graduates are not allowed to have more than $25,000 in debt outstanding E. Interest rates must be tied to the CPI

B. His credit rating is poor because of his late payments

The Rule of 72 is: A. A tool to determine the number of years until retirement for an employee B. Used to estimate how long it takes for prices to double using a given annual inflation rate C. The legal code for requiring companies to provide a match on retirement savings D. Used to calculate interest rates for savings E. The number of steps required to complete a financial plan

B. Used to estimate how long it takes for prices to double using a given annual inflation rate

The major function of a financial plan is to A. Reduce taxes. B. Increase savings. C. Achieve financial goals. D. Improve your credit rating. E. Obtain adequate insurance protection.

C. Achieve financial goals.

An investor should expect to receive a risk premium for A. Expanded exports B. Lower consumer prices C. Higher potential earnings due to uncertainty D. Reduced availability of investments E. Expected lower inflation

C. Higher potential earnings due to uncertainty

The consumer price index reflects: A. The prices of products and services in the United States B. The prices of products and services around the world C. The change in prices of products and services of urban consumers D. The change in prices of products and services around the world E. None of the above

C. The change in prices of products and services of urban consumers

The inflation rate for a household will be: A. Greater than the inflation rate as reported by the CPI since the index excludes the product or service with the highest inflation rate for the past 12 months B. Lower than the inflation rate as reported by the CPI since the index excludes the product or service with the lowest inflation rate for the past 12 months C. Equal to the inflation rate as reported by the CPI since it includes all products and services whether or not the prices have changed in the past 12 months D. Either greater than or less than the inflation rate as reported by the CPI depending on the household's "basket" of goods and services purchased E. Zero since the CPI does not measure consumer price changes

D. Either greater than or less than the inflation rate as reported by the CPI depending on the household's "basket" of goods and services purchased

Sally Smith's friends have told her that they think she should consider a visit to a personal financial planner. Why do you think her friends made the suggestion? A. Sally usually saves 10 percent of her paycheck for long-term goals. B. Sally has no credit card debt. C. Sally tracks her investments and makes changes to her allocations once per year. D. Sally plans to quit her job and volunteer for local organizations. E. Sally has used a budget for years.

D. Sally plans to quit her job and volunteer for local organizations. Sally's job loss will affect her financial situation. Her income, expenses, insurance coverage, and investing may all be affected.

The life situation of a household has little influence on personal financial planning decisions. True of False?

False

The long-term goals for a young single will probably be the same as those for an older couple with no dependent children at home. True of False?

False

A financial plan is an informal report that analyzes past financial decisions. True or False?

False Financial plan is a formal report that summarizes present conditions, analyzes financial needs, and recommends future financial activities.

Inflation is most harmful to people with incomes expected to increase. True or False?

False Inflation is most harmful to people living on fixed incomes.

Interest earned is calculated by multiplying the principle times the opportunity cost. True or False?

False Interest earned equals principal × rate × time.

Intermediate goals are usually achieved within the next year or so. True or False?

False Intermediate goals are to be met in 2 to 5 years.

Developing a budget is part of the "spending" component of financial planning. True or False?

False It is part of the "planning" activity.

Purchasing a car is an example of a consumable-product goal. True or False?

False Purchasing a car is a durable-product goal.

Purchasing a car is an example of a durable-product goal. True or False?

True

Retirement planning includes thinking about your housing situation, recreational activities, and possible volunteer or part-time work. True or False?

True

Short-term goals are usually achieved within the next year or so. True or False?

True

Personal financial planning is the process of managing your money to achieve personal economic satisfaction. True or False?

True Definition

When prices are increasing at a rate of 6 percent, the cost of products would double in about 12 years. True or False?

True Use rule of 72