Finance 101 Final Exam
Mr. and Mrs. Davenport, aged 40 and 38, respectively, have three children aged 3, 6, and 13. For 2019, they have adjusted gross income (AGI) of $65,000 and unreimbursed medical expenses of $6,750. The Davenports' claim for itemized deductions for medical expenses is:
$250
With traditional whole life policies sold by an agent, sales commissions and marketing expenses account for at least _____% of the first year's premium and at least _____% of total premiums paid over the life of the policy.
100, 20
The medicaid coinsurance payment is usually:
20%
Sarah has the following consolidated federal student loans: Loan 1 $5,000 @ 5.2% Loan 2 $15,000 @ 6.8% Calculate her weighted-average interest rate.
6% (CHECK)
Which of the following statements regarding a consumer loan is true?
A consumer loan is used to finance the purchase of very expensive items.
____ is a common provision in many term policies.
A renewable clause
Which of the following is NOT a component of the Four Square Model for car buying?
APR
Which of the following statements regarding an individual's income and expense statement is true?
An income and expense statement measures your financial performance over a period of time.
Which of the following will lead to a poor credit rating?
Applying for a long-term loan and occasionally being late with a payment
Which of the following statements regarding budgets is true?
Budgets are forward looking.
Which of the following statements regarding loan collateral is true?
Collateral is an item of value used to secure the principal portion of a loan.
Assume that the price of ABC common stock fell from in a short period of time from $105 to $84. Which of the following investors probably made the most money, if all of these transactions occurred prior to the drop in price?
Darren shorted 2000 shares of ABC using a margin loan.
Meredith wants to buy a new car, but she has two offers on the same car from Lewis Motors and Edmonds Auto. Lewis offered her a down payment of $3,250 and a monthly payment of $275 for 36 months. Edmonds offered her a down payment of $2,500 and a monthly payment of $380 for 24 months. Which is the better deal?
Edmonds Auto
A personal property floater and a personal liability umbrella policy offer similar coverage.
False
A retired couple can probably bear more risk in their portfolio than a young investor with a secure job.
False
Advances in medical technology, drug prescriptions, and treatments have substantially reduced the cost of health care in recent decades.
False
All taxpayers have an equal probability of having their tax returns audited.
False
Always paying cash helps in establishing a high level of creditworthiness.
False
Blue Cross/Blue Shield payments for health care services are made directly to the subscriber rather than the hospital or physician.
False
Bonds typically have higher long-term returns when compared to stocks.
False
Budgeting and record keeping are the same.
False
Capital gains are paid at specified times, e.g., quarterly or semiannually.
False
Cash is the only kind of liquid asset.
False
Extremely low interest rates favor investors and boost the incentive to save.
False
Floods are covered under most homeowner's insurance policies.
False
Home equity loans are similar to home equity credit lines because they are also not secured with any collateral.
False
If your debt safety ratio works out to 10%, you are relying too heavily on credit.
False
In a co-op, the buyer receives title to a unit and joint ownership of the common areas.
False
Low price/earnings ratios indicate high investor confidence.
False
MSRP stands for Manufacturer's Suggested Real Price.
False
Nondepository institutions are referred to as banks.
False
Parent loans (PLUS) are the responsibility of the parents and the rate is determined by their child's credit score.
False
Security selection to satisfy an asset allocation plan is final.
False
Tax credits are dollar-for-dollar reductions in taxable income.
False
Tax preparers must be licensed by either the state or the federal government.
False
The Federal Deposit Insurance Corporation (FDIC) covers consumer accounts at credit unions.
False
The add-on method is less expensive than the simple interest method when the stated rates of interest are identical.
False
The best way to balance your annual budget is to increase borrowing to cover shortages.
False
The cost of workers' compensation insurance is usually paid by the employees.
False
The major reason most people invest is to shelter current income from taxes.
False
The preparation of an income and expense statement is the first step in the personal financial planning process.
False
The term "investment" refers to money placed in some medium where value and level of return are totally unpredictable.
False
The trade-in value of a car given to you by the dealer is always the most fair value.
False
Two prerequisites to investing are above average risk and clear understanding of market direction.
False
Uninsured motorists protection usually provides protection to the insured's car if a hit-and-run incident occurs.
False
Funds in commercial banks are protected by the:
Federal Deposit Insurance Corporation (FDIC).
Which of the following statements regarding private health insurance plans is true?
In a traditional indemnity plan, the premium cost is low if it is a high-deductible plan.
Which of the following statements regarding insurance underwriting is true?
Insurance underwriters design rate classification schedules so that people pay premiums that reflect their chance of loss.
Which of the following statements regarding a budget is true?
It is a detailed financial report that looks forward.
What is the name of the speaker from our class on Wednesday, October 23rd and what was his field of study?
Kissan Joseph, Marketing
In which of the following type of investment is the most liquidity risk?
Land
Which of the following programs is a public assistance program that provides health insurance benefits only to those who are unable to pay for healthcare?
Medicaid
Damien plans to buy a share at $120 and hold it for 5 years. During this period, he would receive average annual dividends of $4 a share. He expects to receive $145 at the end of the 5-year period when he sells the share. What are the keystrokes used to calculate the rate of return on the investment?
N = 5, PV = −120, PMT = 4, FV = 145
Which of the following is an interest-bearing checking account?
Negotiable order of withdrawal (NOW) account
Which of the following describes when a 12 oz can of tuna fish is 3 times the price of a 6 oz can of tuna fish?
Quantity surcharge
The federal government regulates the disclosure of information about securities through the:
Securities and Exchange Commission
Payments under the provisions of the Federal Insurance Contributions Act (FICA) are also known as:
Social Security tax.
Which of the following statements regarding the Affordable Health Care Act (ACA) is true?
The ACA eliminates lifetime limits on total health care insurance payments by insurers.
Which of the following is the biggest fixed auto ownership cost?
The cost of installment loan payments
Which of the following statements about risk is true?
The higher the risk, the higher the expected return.
Which of the following is a characteristic of a stop-loss order?
The stop-loss order sells a stock when the market price drops below a specified price.
Which of the following statements regarding tax credits is true?
They are deductions from a taxpayer's tax liability that directly reduce the person's taxes due.
Which of the following is the correct formula for calculating the debt safety ratio?
Total Monthly Consumer Credit Payments ÷ Monthly Take-Home Pay
A chattel mortgage is an instrument that gives lenders title to movable personal property in the event of default.
True
A credit card application requests information that is routinely used to predict creditworthiness.
True
An individual is said to have a balanced budget when his or her total income for the year equals or exceeds his or her total expenditures for the year.
True
Arranging for and fully repaying a small loan helps improve creditworthiness.
True
Cash value is an important component of whole life, universal life, and variable life but is never a component of term insurance.
True
Compound interest is a very important consideration when evaluating the return on an investment you plan to hold for a long time.
True
Compound interest means that a savings account earns interest on the interest previously earned.
True
Investing and speculating are two entirely different activities.
True
Keeping valuables in a safe-deposit box may reduce your homeowner's insurance premium by eliminating the "riders" that are often needed to cover such items.
True
Knowing how to prepare and interpret personal financial statements is a cornerstone of personal financial planning.
True
Life insurance death benefits are not subject to income taxes.
True
Life insurance proceeds paid to your heirs are not usually subject to state or federal income taxes.
True
Living a healthy lifestyle is an example of loss prevention and control.
True
Lowballing is a sales technique where the salesperson quotes a low price for a car to get you to make an offer, and negotiates the price upward prior to signing the sales agreement.
True
Net profit margin is a key measure of profitability that relates the net profits of a firm to its sales.
True
Paying a loan on schedule is one way to build a good credit history.
True
Rebates are always more cost effective than the 0% annual percentage rate (APR) loans offered on automobile loans.
True
Russ and Lois were married on December 30. Even though they were single for most of the year, they can legally file as married filing jointly taxpayers in the year of the wedding.
True
Steve was told that the government would be paying interest on his Stafford loan while he was in school, which is a subsidized loan.
True
Suppose you carelessly, but unintentionally, knocked someone down a flight of stairs in your home. You would be covered by your homeowner's insurance.
True
Tax avoidance is legal, whereas tax evasion is illegal.
True
The basic purpose of insurance is to protect you from the results of accidental losses.
True
The most common method used by lenders to apply finance charges on credit cards is the average daily balance method including new purchases.
True
The need for additional life insurance can be determined by looking at the difference between available resources and family monetary needs.
True
The need for life insurance increases with children.
True
The premiums for homeowner's insurance policies are affected by the type of structure and its location.
True
The purpose of a credit investigation is to evaluate the kind of risk you pose to the lender.
True
The returns you expect from securities are income and growth.
True
The value of a stock at any time depends on its expected stream of future earnings.
True
There is generally a trade-off between earning a high current income from an investment and obtaining significant capital appreciation from it.
True
Visa and MasterCard issue debit cards linked to your checking account.
True
With traditional whole life policies sold by an agent, sales commissions and marketing expenses amount for between 20% to 25% of total premiums paid over the life of the policy.
True
Your eligibility and rate on a private loan is determined by your credit score.
True
Your need for additional life insurance can be determined by looking at the difference between your family's available financial resources after your death and your family's total economic needs.
True
Your savings will grow faster with monthly interest compounding than with quarterly interest compounding for a given nominal interest rate.
True
Which of the following statements regarding workers' compensation insurance is true?
Workers' compensation insurance compensates workers who are injured on the job or become ill through work-related causes.
The Securities Investor Protection Corporation (SIPC) provides insurance to protect the investor from:
a brokerage firm's financial failure.
An example of event risk is:
a corporate takeover.
A collection of investments is called:
a portfolio
Most people do not need protection against:
a specific dread disease.
Underwriting is best described as:
activities related to selecting acceptable risks so that general insurer objectives are met.
When the simple interest method is used to determine finance charges, the interest is calculated based on the:
actual balance of the loan.
A personal liability umbrella policy typically includes:
added liability coverage for homeowner's and automobile insurance.
An _____ provides financial and descriptive information about a firm's operations in the recent past to the internal and external interested parties.
annual stockholders' report
A market order is transacted at the:
best price when the order is entered.
The returns you would expect from your investments could be:
capital gains and current income
If life insurance is convertible, the policy can be:
changed to another type of life insurance.
Comprehensive automobile coverage refers to:
coverage for damage to an insured automobile from perils (with a few exceptions) other than collision.
A payment made using a(n) _____ is equivalent to paying by cash.
debit card
The loss in the value of an automobile that occurs over its period of ownership is called:
depreciation.
Risk and return are ________ related.
directly (CHECK)
Insurance is a tool that can lessen ______ risk.
economic
Insurance is a tool that can reduce your _____ risk.
economic
Negligence occurs when someone:
fails to act in a reasonable manner.
A balance sheet describes your:
financial position at a given point in time.
The primary purpose of life insurance is to provide:
financial security for your dependents after your death.
If the interest rate and monthly mortgage payment do not change over the life of your mortgage, you have a(n):
fixed-rate mortgage.
In a traditional indemnity (fee-for-service) plan, the:
health care provider and the insurer are separate.
If a loan has a prepayment penalty, there will be an additional cost to repay the loan early:
if the lender wants to recover part of the full interest that would have been earned.
A bull market is characterized by:
investor optimism
The settlement option chosen by the beneficiaries is:
lump sum
Variable auto ownership costs are dependent on the:
miles covered by the automobile.
A budget helps in:
monitoring and controlling spending.
The monthly interest on your adjustable-rate mortgage was $690. You paid $650 as your monthly payment on the loan leading to an increase in the principal balance. This is an example of a(n):
negative amortization.
Insurance companies make profit by:
paying out less than the sum of the premiums and the earnings on them.
Term life insurance is characterized by:
premium amounts related to age
Jane and Smith are considering the purchase of a home in downtown Minneapolis. They approached Larson's Mortgagers Inc. to arrange for the financing needed for their home. This process of arranging with a mortgage lender in advance of buying a home is called:
prequalification.
The basic purpose of insurance is to:
protect you and your family from economic losses.
The personal property floater:
provides either blanket or scheduled coverage of items that are not covered adequately in a standard homeowner's policy.
Fredrick purchased a property worth $150,000 on mortgage. He paid $30,000 as a down payment on this property. However, a recent slump in real estate prices forced Fredrick to sell the property for $115,000 only 2 months later. This sale is termed a(n):
real estate short sale.
A policy provision ensuring continued insurance coverage for the insured's lifetime as long as the premiums continue to be paid is known as:
renewability
An unmarried investor with few responsibilities should be able to accept ______ better than two people who are married with young children.
risk
When you buy 300 shares of a company, you have purchased a(n):
round lot.
A _____ would most likely have to pay estimated taxes.
self-employed plumber
When an individual gives his or her child an income-producing asset, he or she is:
shifting his or her income.
Which of the following terms best describes a day trader?
speculator
With a bank credit card, you can often avoid interest charges if:
the account balance is paid in full every month.
Long-term care is a term used to describe:
the delivery of medical and personal care to persons with chronic medical conditions who are not in a hospital.
Underwriting is:
the determination of which exposures to insure.
Underwriting refers to:
the determination of which exposures to insure.
Assume that you have taken a car on a closed-end lease for a period of 5 years. At the end of the fifth year, you would need to pay additional money only when:
the mileage limits are exceeded.
Insurance underwriting is best described as:
the process used by insurers to decide who can be insured and to determine applicable rates that will be charged for premiums.
Commercial banks are able to charge lower interest rates than other lending institutions because:
they usually take only the best credit risks.
In order to qualify for disability insurance under social security, a person must be:
unable to carry out the duties of any job.
A liability suit could result against you if:
your dog bites your neighbor.