CSR 103 Chapter 7 Questions

Tula, age 33, is thinking about investing for retirement. She plans to retire when she turns age 62. She will need $1.2 million in today's dollars in assets. If Tula has $300,000 currently saved and can earn an annual average real rate of return of 4%, will she meet her retirement goal?T

No, because her money will double every 18 years, leaving her short of her goal.

Bart has been a successful financial advisor for more than 10 years. During that time, he has generated returns that have never been less than 5% annually. He does not advertise but that has not stopped investors from opening new accounts with his firm. It turns out that Bart has been taking the deposits of new investors, keeping a portion for himself, and sending the rest to earlier investors. Bart is running a(n):

Ponzi scheme.

Which of the following sources of emergency funds will have the least negative impact on your lifetime financial situation if the source is used to meet emergency expenses?

Taking money from your savings account

Generally speaking, you should build the base of your investment pyramid using low-risk assets. Which of the following assets would be most appropriate for building Level 1 of an investment pyramid?

U.S. savings bonds, certificates of deposit, and treasury bills.

Ji-Yung is 14 years old and a young entrepreneur. She is interested in investing some of her savings in real estate. She recently found a small house that she can rent out to college students. Her dad has agreed to the idea. Ji-Yung and her dad learned that the property will need to be held in a custodial account until Ji-Yung turns 21. Which custodial account can be used in this situation?

UTMA

An account that pays greater than savings account interest but limits the number of withdrawals per month is known as a:

dedicated savings account

Lucy and Doug are engaged and hoping to get married in a few months. Lucy has been developing a budget. She knows that their combined income will be about $80,000 per year. After paying taxes and other employer withholdings, she thinks they will have take-home pay of approximately $55,000. Lucy is an aggressive saver. She thinks that she and Doug can save at least $500 per month in an emergency fund. Currently, they have about $5,000 of savings in a savings account. What type of account do you recommend to Lucy and Doug for their current and new savings to earn the highest interest rate?

dedicated savings account

Which of the following should Taylor have to invest at Level 3 of her investment pyramid?

high risk tolerance

Which of the following assets would be an appropriate choice for Evan, who is building a portfolio at Level 2 of his investment pyramid?

mutual fund

One strategy to avoid prize scams from telemarketers is to:

never pay anything to receive a free prize and never give your credit card number out over the phone unless you initiated the phone call.

A fraud that entails recruiting new members to sell products or services and to also recruit additional new members is called a(n):

pyramid scheme

Which of the following has the highest level of liquidity?

savings account

Tony has $3,000 saved in a money market account. He just received a birthday gift and is deciding what to do with the money. He has narrowed down his options to either increasing his savings or purchasing a subscription to an online video streaming service. If he chooses the video streaming service, the savings alternative is:

the opportunity cost

The tax benefits of custodial accounts mean that:

the tax rate on the investment earnings could be as low as 0%.

An effective way to motivate yourself to save involves:

visualizing where you want to be in the future.

The variability of returns associated with investing is called

volatility

Borrowing money in the event of job loss is a bad idea because:

you may not have access to credit or other means to repay the debt, and it may lead to bigger problems.

If Haley can obtain a 2.5% annual yield on a single $500 EE bond, how much will the bond be worth after 30 years (round your answer)?

$1,049

With a very stable profession, if your monthly expenses totaled $3,300, approximately how much should you have in an emergency fund?

$10,000

Your neighbor has monthly expenses totaling $3,725. His employer has indicated that the firm is expecting to announce layoffs soon. How much should your neighbor have in an emergency fund if he wants to cover 6 months of living expenses?

$11,175

Leonard and Louise have been married for 14 years. They have combined annual incomes of $87,000. After taxes and other payroll deductions, they bring home $56,555 annually. If they save 10% of their take-home pay and use the rest for household living expenses, how much should they have in an emergency fund to meet the 3-month emergency fund requirement (round your answer)?

$16,900

Mike pays taxes at the 12% federal income tax bracket level. His state also has a 6% tax on investment income, including interest earned. If Mike were to cash in a U.S. savings bond for $300, which he originally purchased for $100, how much will he pay in federal and state taxes?

$24

How long will it take for Sancho to double his investment if he purchases a U.S. savings bond that yields 3.30% annually (round your answer to the nearest year)?

22 years

Joe has cash in a savings account totaling $7,500, and his monthly expenses are $2,500. What is his emergency fund ratio?

3

Tula, age 33, is thinking about investing for retirement. She plans to retire when she turns age 62. She will need $1.2 million today's dollars in assets. If she can earn an average annual 7.75% rate of return, what will be her real rate of return?

4.50%

Which of the following is an appropriate investment vehicle or source from which to draw emergency funds?

A savings account held at the local bank or an online checking account.

All of the following are true of custodial accounts, except: a. custodial accounts represent a way parents can indefinitely control money they give to children. b. minors can set up custodial accounts with a parent. c. minors can set up custodial accounts with an older relative or friend. d. custodians can withdraw money from a custodial account for the benefit of the minor.

A.

Tony struggles to save money. He knows it is important, but his immediate needs and wants make it difficult for him not to spend the money he has set aside. Which of the following options would be most effective for him to start building savings?

Automatically having money deposited into a restricted account each month.

As a general rule, how much money should be kept in an emergency fund?

Between 3-6 months of living expenses

Which of the following is not a wise use of emergency fund money?

Buying gifts

What occurs when you are deceived into believing that you will receive something that does not actually exist?

Fraud

Which of the following is an indication of a fraud?

Hearing an investment advisor claim that he has consistently earned 15% annually for his clients over the last 10 years.

Linda likes the idea of using a portion of her federal income tax refund to purchase a U.S. savings bond. Which of the following statements is true regarding this investment possibility? I. The minimum investment for an EE bond is $50 using her tax return. II. The minimum investment for an EE bond is $25 using her tax return. III. The minimum investment for an I bond is $50 using her tax return.

I and III only.

In which of the following can UTMA accounts invest? I. Real estate. II. Mutual funds. III. Bonds.

I only

How might someone gain information about you to commit identity theft? I. Going through your garbage looking for personal information. II. Sending a phishing e-mail to obtain personal information. III. Stealing your wallet or purse.

I, II, and III.

In which of the following can UGMA accounts invest? I. Real estate. II. Mutual funds. III. Bonds.

II and III only

Which of the following statements indicates a possible fraud? I. Fill out this e-mail survey to receive a free gift. II. Be one of the first 30 callers to receive three days and two nights at a famous Las Vegas hotel. III. Your wealthy uncle recently died; send $250 to obtain details about your inheritance.

III

Luigi has saved $4,500 in an online savings account. Does he meet the basic emergency fund ratio guideline if his monthly living expenses are $1,800?

No, because he has only enough in the account to cover 2.5 months of expenses.

Assume Jasmine has owned an EE bond for 3 years. The fixed rate of interest is 2% and the current value of the bond is $2,000. If Jasmine were to cash in the bond tomorrow, how much interest will she lose (approximately) as a penalty?

$20

All of the following charge a depositor an early withdrawal fee, except a: a. certificate of deposit. b. money market savings account. c. dedicated savings account. d. All accounts charge an early withdrawal fee.

B

Which of the following statements regarding the taxation of U.S. savings bonds is correct? a. Interest on I bonds is not taxable but interest on EE bonds is taxable. b. Interest on I bonds and EE bonds is taxed by the federal government when the bonds are redeemed. c. If savings bonds' proceeds are used to pay for qualifying higher education expenses, such as college tuition and fees, the interest is only taxed by the state government and not the federal government. d. Interest on I bonds and EE bonds is not taxed by the federal government.

B

Tyler is 18 years old. He has $3,000 worth of EE bonds in his name. He received the bonds as gifts over the years. He is hoping to cash in the bonds and use the proceeds for college. Which of the following statements is true in relation to his goal?

Because he received the bonds as a gift, he must pay taxes on the full amount of the redemption.

Custodial IRAs, whether Roth IRAs or traditional IRAs, allow minors to:

begin saving for retirement prior to reaching age 16.

With savings of $4,300 and monthly expenses of $9,600, what is your emergency fund ratio?

0.4479

Which one of the following statements regarding identity theft is incorrect? a. Identify theft results in losses of more than $13 billion per year. b. The occurrence of identity theft has decreased dramatically since it was designated as a federal crime. c. Little can be done by individuals to stop identify theft from occurring. d. More than one-third of households have experienced some form of identity theft.

B.

Which of the following is false in relation to U.S. savings bonds? a. Interest earned is received on a tax-free basis at the federal level. b. U.S. savings bonds should not be used to hold the majority of a person's emergency fund assets. c. Interest earned is received on a tax-free basis at the state level. d. Interest earned is received on a tax-free basis at both the federal and state levels.

D.

Which of the following is not a strategy to protect against identity theft? a. Never respond to unsolicited e-mails asking for credit cards, passwords, or other financial or security information. b. Always shred financial statements and receipts that show account-related information. c. Reconcile your monthly account information to make sure there are not any unauthorized transactions. d. Never use credit cards online since nearly all identity theft occurs online.

D.

Which of the following statements is true when you invest in a federally insured bank account?

Even though there is federal insurance in place, you still face inflation risk.

What are benefits of a custodial IRA?

It offers tax-deferred growth on investment earnings, allows minors to build long-term savings, and gives minors control of assets in the IRA once they reach the age of majority.

Which of the following is a threat associated with keeping cash at home?

Loss of interest, theft, and no protection against impulse purchases.

Why are investment companies and banks reluctant to open accounts for minors?

Minors cannot legally contract.

If a parent's intent is to save for their child's education, which savings product is best?

Qualified Tuition Program.

Which of the following is a benefit of holding money in a CD for an emergency fund?

The money is earning a higher rate of return than a savings account.

When interest rates increase, which of the following outcomes is most likely?

The rate of return on a bank or credit union savings account will increase, and holding cash in an emergency fund is more attractive.

How can Karina redeem a U.S. savings bond?

With an employer who offers U.S. savings bonds as an employee benefit.

All of the following bank products allow a depositor to make additional contributions to the account, except a:

certificate of deposit.

One way to become more motivated to save for emergencies is to:

consider how the people you love would be affected if you could not pay for an emergency

A(n) _________ seals your credit reports so that _________ cannot be opened.

credit freeze; new accounts

If parents are concerned their child may use money set aside for her or his college education unwisely, they could:

establish a custodial IRA to prevent premature withdrawals.