Finance Quiz answers

A mid-sized firm plans to issue 10 million shares during an IPO. The underwriter plans to sell shares at $18.60; however, many investors believe the company should be valued at $27.50 per share. If the underwriter charges a $1.7 million fee to undertake the IPO, how much will the firm raise in the IPO?

$184300000.

Aman is attending school and had a financial emergency. He contacted his school's financial aid office and asked about a subsidized student loan. Aman's school facilitates these loans and determined that Aman qualifies for a $800 loan. Aman is able to repay the loan over the next 12 months while he is still in school. How much interest will Aman pay on this loan?

$0 because interest on subsidized loans does not accrue until Aman stops attending school.

Charles has a health insurance policy with the following provisions: $500 deductible, $40 copay, and 80/20 coinsurance provision. If Charles has an accident that costs $2865 in medical expenses, how much will he have to pay out of pocket?

$1005.

Michael applied for a long-term disability policy with a highly rated insurance company. His application was approved for $37800 in annual benefits. What is the maximum amount he should expect to pay in annual premiums if he is healthy and working in a hazardous industry?

$1134.

Maria, age 50, is self-employed and has never made a lot of money. But, she has consistently saved $3672 per year into a traditional IRA. Over the years, she has taken full advantage of the tax law and deducted each year's contribution from her tax return. If Maria started saving at age 26 and has earned an average annual return of 5%, how much is the account worth today?

$163411.

Ann is thinking about paying points to a lender to obtain a lower interest rate on her mortgage. The loan is in the amount of $320000. If she pays 2 points, she can reduce the interest rate from 5.25% to 4.55%. How much in loan points must Ann pay to get this deal?

6400

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.

Longevity risk is the risk that you will:

outlive your savings.

With an installment loan, the borrower:

receives the full amount of money upfront and then makes regular payments to repay the loan and interest.

Which of the following should Taylor have to invest at Level 3 of her investment pyramid? Short- to intermediate-term time horizon. Limited emergency fund savings. A strong preference for government-insured products. High risk tolerance.

High risk tolerance

A market index is an unmanaged grouping of stocks that has been identified as representative of some aspect of the stock market. What is true of the Dow Jones Industrial Average?

It consists of a small number of stocks of the largest US companies from a variety of sectors of the economy.

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.

You should start to calculate your retirement need when:

It's always important, regardless of age

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

credit freeze; new accounts.

A trust that is funded at your death is called a:

testamentary trust.

If you invest $1900 in a new bond issue and earn a coupon rate of 6% per year, how much will you receive when the bond matures?

$1900.

Wildhorse Co. has a current stock price of $31.88. The company paid $1.10 in dividends this year and dividends are expected to grow at 6% per year. If you have a required return of 11%, what is Wildhorse Co. worth to you?

$23.32.

At her death, Sandra, who is single, has the following assets: ● $33000 car. ● $13000 in collectible coins. ● $84500 403(b) retirement plan with a named beneficiary. ● $54000 term-life insurance policy with a named beneficiary. Based on this information, how much will pass under Sandra's will to her beneficiaries?

$46000.

Your next-door neighbor thinks that she has discovered the next food craze: a blend of Chinese and Mexican cuisine she is calling Crane. She already has one location that is busy all day. She currently has gross sales of $14.15 million. Her expenses, which include ingredients, rent, and personnel, run $9.00 million. What is her net profit or loss?

$5.15 million profit.

Emily owns a house with a fair market value of $184000. When she purchased the home she paid $213000, but that was several years ago. She currently owes $197000. How much equity has Emily built since she first purchased the house?

-13000

Metlock, Inc. reported a net profit of $7.25 per share and a dividend of $3.63 per share. If you buy shares of the stock at $90.75 per share, what is your dividend yield?

4.00%.

Your neighbor has monthly expenses totaling $3620. 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?

21720

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

3

With a very stable profession, if your monthly expenses totaled $3610, approximately how much should you have in an emergency fund?

10830

A short-term disability insurance policy is designed to pay benefits for a maximum of ____________ months.

12

How much can Jorge afford to spend on a monthly car payment if his excess monthly cash flow is $330, and he expects the following monthly expenses: $40 gas, $100 insurance, and $24 for maintenance and repairs?

166

Ruby and Chris were married 3 years ago. At that time, they both wrote wills leaving their assets to the other person. Since that time, they have adopted two children. How can they alter their wills without rewriting the wills entirely?

Add a codicil

Which of the following statements is true about health insurance? An insurance copay is the maximum amount the insured individual is subject to pay. An insurance deductible is the amount that the insured individual must pay before the health insurance company will pay any money. A common insurance deductible is 80/20. An insurance copayment is a percentage fee an insured individual must pay to receive healthcare services.

An insurance deductible is the amount that the insured individual must pay before the health insurance company will pay any money.

Somerset, age 43, is self-employed and started saving for retirement 8 years ago using a Roth IRA. He liked the idea of someday taking distributions on a tax-free basis. Unfortunately, he has recently run into some business troubles and needs to raise cash quickly. He would like to take a distribution from his Roth IRA immediately. Which of the following statements is true for Somerset?

As long as he only takes out his contributions—not the account earnings—the distribution will be tax- and penalty-free.

Unlike renters, homeowners are required to pay for what common expenses?

Painting every few years. Replacing appliances. Fixing broken windows.

Which of the following lenders will likely provide the lowest interest rate to qualified borrowers?

Banks and credit unions.

Which of the following types of federal student loans accrues interest (i.e., adds the interest to the loan balance) or allows the student to pay the interest while still in school?

Both direct unsubsidized and PLUS loans.

What is the difference between defined benefit plans and defined contribution plans?

Defined benefit plans guarantee payments to retirees, whereas defined contribution plans make contributions to retiree accounts without making guarantees.

Which of the following forms of federal financial aid must be repaid once the student is no longer attending school?

Direct subsidized loans

Which of the following is/are reasons why investors might choose to invest in mutual funds? Diversification. To pool capital with other investors. Diversification, professional management, and to pool capital with other investors. Professional management.

Diversification, professional management, and to pool capital with other investors.

Which of the following statements best describes the concept of tax-deferred growth? Earnings do not accumulate in the account until after taxes have been paid. Earnings within an account are not taxed as income until the earnings are withdrawn from the account, which could be many years after the earnings were first credited to the account. Earnings are never taxed. Taxpayers can take deductions for the taxes that they pay on the earnings in the account.

Earnings within an account are not taxed as income until the earnings are withdrawn from the account, which could be many years after the earnings were first credited to the account.

All of the following firms are "do-it-yourself" online brokerage firms, except: E*-Trade. Fidelity. Edward Jones. TD-Ameritrade.

Edward Jones.

How can Armand increase his human capital?

Go back to college or engage in healthy beh

Roger is currently age 68. He is creating a retirement income plan. As such, he needs to estimate his future required distributions from his retirement plans. Help Roger by telling him when he must begin taking distributions from his Roth IRA.

He never needs to take a distribution.

The primary way investors in stock make money is through: I.Capital Gains. II.Dividends. III.Interest.

I and II only.

Mutual funds can be broadly classified into two categories: I. Passive management. II. Strategic management. III. Active management. IV. Tactical management.

I and III only

Federal student loans offer which of the following advantages? I.No credit check.II.Lower interest rate.III.Flexible loan repayment.

I, II, and III.

Three major stock exchanges in the United States are: I. S&P 500 II. NASDAQ. III. NYSE. IV. OTC

I, II, and III.

Which of the following is true regarding 401(k) plans? I. 401(k) plans are primarily funded by employees. II. 401(k) plans are primarily funded by employers. III. Investments grow tax-deferred in 401(k) plans. IV. Employers may provide matching contributions to 401(k) plans.

I, III, and IV only.

John and Emily are married and have two children, ages 5 and 7. If they purchase a new car, what titling alternative(s) are available to them as a married couple (assuming their state recognizes all available titling options)? I. Tenancy in common. II. Joint tenants with the right of survivor-ship. III. Tenancy by the entirety.

II and III only.

To have equity in a company means that: I. You have lent money to the firm. II. You receive dividends when distributed by the firm. III. You have an ownership interest in the firm.

II and III only.

Duke and Delores own rental real estate together. They are not married but have been business partners for nearly 20 years. Delores is very worried about her private affairs becoming public if she were to die unexpectedly. Duke told her that they should retitle their business holdings in a way that avoids probate. Which of the following forms of title can they use to meet this objective? I. Tenancy in common. II. JTWROS III. Tenancy by the entirety.

II only.

The largest ETFs are:

Index-based ETFs

Which of the following is not a qualified medical expense within a flexible spending account? Health insurance deductibles. Prescription drugs. Dental expenses. Long-term care premiums.

Long-term care premiums.

An advantage of investing internationally is:

Low correlation between U.S. stocks and international stock which reduces investment risk.

A government-supported health insurance program that is designed to provide coverage to those currently living in poverty is called:

Medicaid.

Michelle and Jerry are each planning to apply for disability insurance coverage from a private insurance firm. Although Michelle and Jerry are the same age and have the same health profile, Michelle's premium is lower. What explains this phenomenon?

Men are more likely to become disabled.

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

Never use credit cards online since nearly all identity theft occurs online.

Fan just received a $45,000 check in the mail from her great uncle. A note with the check said that Fan was to use the money for the down payment on a new house. Is this gift taxable to Fan?

No, the gift is not taxable to Fan, but because it exceeds the annual gift tax exclusion amount, it may be taxable to Fan's great uncle.

Which of the following investment features is more common among mutual funds and less common among ETFs?

Professional active management.

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

Qualified Tuition Plan

Xavier recently graduated from college with a degree in mechanical engineering. He currently makes $87,000 per year. He has aspirations to move up with his firm and eventually earn much more. If his plan works out, he will be paying more taxes sometime in the future. Which of the following retirement plan options should Xavier choose today?

Roth IRA.

When searching for a vehicle to purchase, which of the following variables is an important factor in the purchase decision-making process?

Safety. Reliability. Cost efficiency.

Which of the following has the highest level of liquidity? Commodities. Stocks. Savings accounts. Certificates of deposit.

Savings accounts

Which of the following statements is true? The best investment strategies and the best investments are made with intuition. The best investment strategies and the best investments are made based on luck. Sometimes the best investment strategies and the best investments are made by combining basic analysis with intuition. The only way to identify a potentially profitable stock is through basic stock analysis.

Sometimes the best investment strategies and the best investments are made by combining basic analysis with intuition.

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. Borrowing money using a credit card. Being unprepared for major car repairs, major medical expenses, and major home repairs. Selling investment assets.

Taking money from your savings account

Scotty and Kirk own a speedboat together. They are not related but have been friends since childhood. They own equal shares of the boat. When thinking about the future, Kirk would like to pass his share of ownership to his son, Leonard. How must Scotty and Kirk title the boat?

Tenancy in common.

Which of the following is a benefit of holding money in a CD for an emergency fund? There are no benefits to holding money in a CD for an emergency. The money is earning a higher rate of return than a savings account. The money could be earning a higher rate of return if it were invested more aggressively.

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

In what ways are 401(k) plans, 403(b) plans, and 457 plans similar?

They each provide employees tax-advantaged opportunities to save for retirement.

Which of the following are forms of cash-value life insurance?

Universal, variable, and variable universal

Willis, age 50, was a single man who died intestate. In addition to household and personal items, he had a savings account valued at $30,000. Assume Willis engaged in proactive financial planning prior to death. How did Willis ensure that his savings account assets would go to a specific person?

Used a transfer on death title on the bank account.

Which of the following insurance products allows for investments in mutual funds and the possibility to skip future premium payments?

Variable universal life insurance.

Mark, age 56, is a single man and died intestate. In addition to household and personal items, he had $450,000 in 401(k) retirement assets. Who will receive the 401(k) plan?

Whomever Mark listed as the account beneficiary.

Under which of the following circumstances may life insurance be unnecessary? You will have a large tax liability (very wealthy) when you die. You and your fiancée are getting married in 1 year and both of you work full-time. You have a spouse or children. You want to leave a legacy or inheritance to someone else.

You and your fiancée are getting married in 1 year and both of you work full-time.

The Social Security Administration's definition of disability is most closely linked with the ____________________ disability definition.

any occupation

Aside from not taking out student loans, the best way to minimize the amount of interest paid on student loans is to:

both repay them as quickly as possible and limit borrowing to direct subsidized loans.

The number-one determinant of someone's health is _____________________, followed by _____________.

health behavior; genetic disposition

A(n) ____________ in the loan interest rate and a(n) _____________ in the loan duration will increase the monthly auto loan payment.

increase; decrease

When making an automobile purchase decision, you should always attempt to find the vehicle that provides the __________ price and the _____________ quality.

lowest; highest

The 50 in a 50/100/25 split limit policy refers to the maximum amount the policy will pay in:

medical coverage for one person in the other car.

Insurance that protects the lender in the event that the borrower does not repay the mortgage is called:

mortgage insurance.

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.

All of the following statements regarding federal student loans are true, except: federal student loans have loan forgiveness programs for those working in public service jobs, and those who have made on-time payments for 10 years. federal student loans offer more flexible repayment options compared to private student loans. there is no credit report/score check when applying for federal student loans. private student loans generally have lower interest rates compared to federal student loans.

private student loans generally have lower interest rates compared to federal student loans.

Collateral is:

property that can be taken by the lender if a loan is unpaid.

Peer-to-peer lending options:

provide competitive loan terms to borrowers that do not have access to conventional loans. facilitate loans between groups of individual investors and individual borrowers. are accessed through the Internet and require a borrower to have a credit report.

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

A problem with living an unhealthy lifestyle is that the:

severity and frequency of future risks increases over time.

Deciding how to invest retirement savings can be a time-consuming task. However, there are investments that simplify this task. These investments are called:

target date funds.

All of the following statements are true, except: a personal bank loan requires that an application be completed. reliance on credit reports and credit scores often differentiates mainstream and alternative financial service providers. individuals without credit reports should always first apply to mainstream lenders. there is a relatively small difference in the total finance charge between mainstream and alternative financial service providers.

there is a relatively small difference in the total finance charge between mainstream and alternative financial service providers.

If Nicole buys health insurance, she is effectively:

transferring the risk of high health-related expenses to an insurance company.

For young adults, average health expenses are minimal but they may include:

visiting a doctor or emergency room because of an injury or accident or getting a prescription for medicine.

An effective way to motivate yourself to save involves

visualizing where you want to be in the future.

Insurance policy owners can list contingent beneficiaries. Contingent beneficiaries:

will receive the death benefit if the primary beneficiary dies before the policy owner.