Financial Planing

A family is solvent if it can meet its short run debt payments.

False

A retractibility provision allows the bondholder the option of extending the maturity of the bond.

False

A significant period of disability is less probable than death at any age, but most disabilities exceed one year in duration.

False

If interest income is accrued but not yet received, it can be deferred until the next calendar year.

False

Cash is the only eligible investment that you can contribute to an RRSP.

False (can contribute other investments as well)

Which of the following is not a Government Pension plan?

Registered pension plan

If the rate of interest, (the discount rate), increases, which of the following statements is false?

The present value of an annuity will increase.

In a second mortgage, the equity of redemption of the first mortgage is used as collateral.

True

Special forms are required in order to claim tax deductions for child care and moving expenses

True

The taxation system in Canada is based on a system of self-assessment.

True

Self-insurance is

a decision not to finance a risk

The kind of policy in which the investment portion can be used to pay the minimum premium required to maintain the insurance portion of the contract is most accurately called:

a universal life policy

Taxable income can be reduced by: 1) deducting expenses used to earn income. 2) deducting contributions to registered pension plans and registered retirement savings plans. 3) deducting non-refundable tax credits. 4) a, b and c

a, b and c

If the RESP beneficiary does not go on to post-secondary education the funds may be: given to an alternative beneficiary withdrawn (minus grants and tax) transferred to an RRSP

all of the above

. In order to reduce probate costs, you can

make your spouse your RRSP/RRIP beneficiary

The individual who makes a will is called a:

testator

Human capital is:

the principal component of your future earnings

The most important factor that affects your future borrowing is:

your credit report

If an investment is too risky, which of the following actions would be appropriate? 1) Change the investment horizon. 2) Change the amount of the initial investment. 3) Choose a different investment that has less risk. 4) All of the Above.

All of the Above.

Which of the following cannot be used as a discount rate? 1) The nominal rate of interest. 2) The real rate of interest. 3) The after-tax nominal rate of interest. 4) The after-tax real rate of interest.

All of the above can be used as the discount rate, depending on the situation.

The provision which allows the holder of a term policy to convert it to a whole life policy is called:

Convertibility

. If a borrower owns assets and is willing to use them to secure a loan, this will increase the lender's risk and the lender will charge at a higher interest rate

False

A policy that has lapsed can be reinstated even if there is no reinstatement time limit provision if the individual became unemployed?

False

A registered pension plan cannot be amended to allow for higher contributions for past service but it may allow employees to join who were not previously in it.

False

A will is a legal document, signed in accordance with specific rules, that is not always essential in ensuring your wishes are carried out, after your death, with minimal expense and delay

False

Life insurance cannot be viewed as an insurance policy that is protection against the loss of an insured's human capital because human capital cannot be traded in the market like other assets.

False

No-load funds are mutual funds that charge a front-end fee but do not charge back-end and annual fees.

False

Tenant's or renter's insurance covers the home structure, including all the contents in the home.

False

The replacement value of a home for insurance purposes is its current market value since it includes the value of the land and foundation.

False

t is clear that you should pay cash to acquire investments and use debt for consumption.

False

To calculate the after-tax rate of return on a house investment, one must deduct the total expected capital gain from the total imputed rental gain.

False (add capital and rental)

The term of a given mortgage is three years with a fixed interest rate of 7.5%. At the end of the second year the market interest rate increases to 8%. The amount of the monthly mortgage payments will be increased for year three.

False (at the end of second year still suffices for yr 3)

Canadian financial institutions are usually willing to lend more than 75% of the appraised value of the house without insurance, thus the minimum down payment can have less than 25% of the appraised value of the house.

False (has to equal 25%, and needs insurance)

The higher the value of beta, the less sensitive the stock is to the market volatility.

False (high beta=high risk/volatility)

The lower the coupon of a bond, the higher the reinvestment risk

False (low coupon=low risk)

The lower the total value of the assets that become part of the estate, the higher the probate costs are likely to be.

False (lower value of total assets =lower probate costs)

A Guaranteed Income Supplement (GIS) is an income-tested monthly pension supplement for OAS pensioners who have little other income. GIS is included in taxable income.

False (not included in taxable income)

The criteria used by private lenders to qualify potential borrowers are usually more stringent than that used by the banks.

False (private lenders do not use stringent criteria)

A capital loss can be carried back three years or carried forward forever for use in reducing taxable capital gains in other years.

True

A vendor-take-back (VTB) mortgage enables the buyer to acquire a more expensive house than that which a bank would normally allow.

True

An allowable capital loss can be carried back and used to calculate a refund to the taxpayer in respect of an earlier year.

True

An employer pension plan defers income tax until it is paid out in retirement.

True

Annuities, Registered Retirement Income Funds, Locked-in Pension Funds, and reverse mortgages are all special retirement instruments.

True

As a property owner, the most important risk you face is damage or destruction.

True

Borrowing money to invest is a very useful strategy for high-income earners in setting up their own tax shelters.

True

During an unpaid absence from work, it is possible to withdraw money from an RRSP?

True

Estate planning is a process which ensures your assets are distributed in accordance with your wishes for the maximum benefit of your heirs.

True

Financing a risk means finding someone to share it with, through insurance.

True

Government tax credits are a form of tax relief given for investments in certain sectors like labour-sponsored venture capital corporations.

True

Specialized tax shelters are high risk and generally should be avoided even if they have a CCRA registration number.

True

The analysis of the "buy" versus "rent" decision consists of comparing the cash-flow value of each alternative.

True

The required insurance premium depends on both the statistical probability of the loss and the expected amount of the loss.

True

The safest mutual fund diversification strategy is to hold some index funds and some actively managed mutual funds.

True

The top tax rate is applied to the dividend and business income of minor children from family businesses in order to stop this kind of income splitting. It is called the "kiddie tax."

True

There are two ways that an investment can earn a return for you: an income return and a capital gain return.

True

Three problem areas stand out in the retirement planning model: discount rates, life expectancy and pension plans.

True

The direct market comparison (DMC) approach is limited in the sense that there must be available data pertaining to the sale of comparable homes in the recent past.

True (comparing prices with similar sold)

A couple earns a combined household gross income of $120,000. Property taxes amount of $250/month. The current mortgage rate is 9.25%. The amortization period will be 30 years. Based on a GDS ratio of 30%.

the maximum amount of mortgage they can afford is $340,000

If the rate of interest (the discount rate) increases, which of the following statements is false? the future value of the investment will increase the present value of an annuity will decrease the present value of an annuity will increase the present value of an uneven stream of cash-flow will decrease

the present value of an annuity will increase

If a stock has a beta of 0.5, it implies that:

the stocks return movies in the same directions as the stock markets return the risk is only one half that of the TSE 300

Which of the following statements is NOT true of family finance?

there are generally accepted accounting principles for personal financial statements

Mr. & Mrs.D an annual gross income of $90,000. Their mortgage payment is $1900. Last year they paid $2600 in property taxes. Their other debt obligations are $240/month loan repayment and a credit card payment of $210/month.

total debt service ratio is 34.2% (1900x12+2600+240x12+210x12)/90000

If another company takes over and pays cash for your shares, you may have no choice but to sell them and then the capital gains will be realized.

true

Defined benefit plans are more risky to employers since they bear the investment risk of funds invested in the plan.

employers

A will typed and signed in the presence of at least two witnesses is called a:

formal will

Which of the following statements best describes government securities?

government securities are considered to have virtually no default risk

Financial planning is generally done:

in family units

What prevents us from comparing dollar amounts in future years with dollar amounts in current years?

inflation

The requirements that may have to be met in order to purchase insurance determine:

insurability

Which of the following is not an example of consumer credit financing? (loans)

investing in a stock mutual fund

There are three characteristics of a family's assets and cash flow that affect the borrower's capacity:

liquidity, solvency and risk

Provincial tax rates in 2005 were: 1) lowest in Alberta and highest in Newfoundland. 2) lowest in Alberta and highest in Ontario. 3) lowest in Ontario and highest in Newfoundland. 4)lowest in British Columbia and highest in New Brunswick.

lowest in Alberta and highest in Newfoundland.

Which one of the following types of metal funds continuously sells its own shares or units to the public with the right of redemption?

open-end fund

Term insurance is advantageous for: 1) persons who want lower life insurance premiums. 2) persons who need life insurance in the later years of life when premiums become very high. 3) people who want very long life insurance coverage. 4) people who use life insurance as a form of forced savings.

persons who want lower life insurance premiums.

Capital gains are subject to a lifetime exemption of $500,000 when:

qualified farm property is sold qualified small business is sold

The risk of not knowing the interest rate that will be earned on future interest earnings on bonds is called:

reinvestment risk

Indexation of taxation involved the adjustment of:

tax credits, tax deductions and tax brackets according to inflation

If the nominal rate of interest is positive, theoretical which of the following cannot be negative?

the after-tax nominal rate of interest

A key estate planning objective is to reduce or defer tax that would otherwise be payable at death. Which of the following are considered to be tax saving strategies: Spousal rollover of poverty spousal rollover of RSSP/RRIF Spousal trust

all of the above

A stated annual interest rate of 9.25% (with semi-annual compounding) is equivalent to a monthly compounding rate of:

0.756% 1+m^12=(1+9.25%/2)^2

Governments try to achieve several things with taxation laws including: 1) raising revenue and promoting social equity. 2) encouraging or discouraging particular financial actions. 3) managing economic trends. 4) all of the above

all of the above

The taxable portion of capital gains that are not tax free is:

1/2 of the total gain

Personal risk management is a:

5 stage process: identify, evaluate, control, finance and monitor

Disability insurance should cover:

60-80% of income.

Mr.Moneybags wants to invest $1000 for one year. Which of the following bank accounts will offer the best deal?

7% interest with annual compounding

A will is important because:

: it ensures that your property is distributed according to your wishes

The right hand side of the retirement planning equation is known as:

: the consumption during retirement

is the continuation of an RRSP and its mirror image.

A Registered Retirement Income Fund

If an investment is too risky, which of the following actions would be appropriate? change the investment horizon change the amount of the initial investment choose a different investment that has less risk

all of the above

Of the following 5 financial planning goal characteristics, which is the LEAST IMPORTANT?

Goals must be shirt-term vs long-term

Mr. Saval earned $35000 in wages and $2000 in overtime in 2005. He earned $200 in interest on his Canada Savings Bonds and received $3000 in UIC while unemployed. He also received a $500 training allowance during this period. He paid uni dues of $400.

His earned income in 2005 was $36600 (35000+2000-400, earned income=wages+overtime-union)

Which of the following reasons support(s) the idea of using cash to buy consumption goods and borrowing money to invest?

Interest expenses on consumer loans are not tax deductible whereas interest expenses in investment loans are tax deductible

Spendthrift owes her friend some money. She is given the following alternatives for payment. If the current rate of interest, 6% used as the discount rate, which of the following alternatives of payments is best for her?

Pay $2000 per year for 5 years, each payable at the end of the year

Which of the following cannot be used as a discount rate? nominal rate of interest real rate of interest after-tax nominal rate of interest after-tax real rate of interest

all of the following can be used as the discount, depending on the situation

If the nominal rate of interest is positive, theoretically which of the following cannot be negative? 1) The before-tax real rate of interest. 2) The after-tax real rate of interest. 3) The rate of return on a stock. 4) The after-tax nominal rate of interest. 5) All of the above can theoretically be negative.

The after-tax nominal rate of interest.

The person who received the death benefit is the:

beneficiary

A progressive system of income tax is:

a system in which higher levels of taxable income are taxed at higher rates

The most useful tool for assessing debt capacity is:

debt service ratios such the GDS and TDS ratios

Taxable income can be reduced by

deducting expenses used to earn income deducting contributions to registered pension plans and registered retirement savings plans deducting non-refundable tax credits

The beneficiary may terminate an RRSP voluntarily by: withdrawing the funds and paying tax immediately Buying an annuity, either life or term certain, using all the money in the RRSP. The annuity payments are taxed when received. Transferring the money to a RRIF from which taxable payments will be received until the beneficiary dies or all the money runs out

all of the above