Personal Financial Planning Exam 1

Social security goes based on

40 quarters or 10 years

IPA

Bottom up

____ tends to increase and then decrease over the life cycle.

Debt Income Emergency funds

SKYY is what type of fund

ETF

A budget is a detailed statement of what income and expenses occurred over a past period

False

Index funds are actively managed.

False

There is no limit to the amount of social security tax withheld annually

False

To be eligible for social security retirement benefits, 30 quarters of covered employment are generally needed.

False

To save premium costs, one should decrease her deductible and liability coverage on a homeowners' policy

False

Using credit is the ideal way to provide for financial emergencies

False

Using credit is the ideal way to provide for financial emergencies.

False

When comparing two installment loans with the same principal and APR, the loan with the shorter maturity will have the lower monthly payment and the lower total costs.

False

When you are hospitalized for surgical care, surgical expense coverage will pay the hospital bill.

False

When you stop making premium payments on a whole life policy, the policy's cash value is forfeited.

False

While ETFs offer many of the benefits of mutual funds, they have the tax-timing disadvantages not present with otherwise comparable mutual funds.

False

Whole life policies typically provide a high investment rate of return.

False

The investment that provides the highest income of the class presented funds:

MYD (Blackrock)

HMO

Top down

Mutual funds are examples of financial assets

True

Rebate credit cards work best for those who use the rebates, charge a lot, and do not carry high monthly balances.

True

Saving is the preferred way to provide for financial emergencies.

True

Secured credit cards require that the cardholder put up collateral in order to get the card.

True

Utility refers to the amount of satisfaction a person gets from buying certain items

True

Variable-rate loans are desirable if interest rates are expected to fall in the future.

True

Wealth can be defined as the total value of all the things you own.

True

When an income and expense statement indicates a cash surplus, this may be used to increase net worth by increasing assets or decreasing liabilities

True

When loaning money to a friend or family member, it is advisable to lend only the amount that you can afford to give away.

True

When you take out a loan against the cash value of your life insurance policy, you're really borrowing from yourself.

True

With a managed care plan, an insurance company may not be involved.

True

Indemnity

You cannot make a profit from insurance

a budget is

a financial forecast

the four stages of an economic cycle are

expansion, recession, depression , recovery

Vesting

on 401k if they are 5 year vested then you only get 20% of your companies money each year until you hit the 5 years

the last step in financial planning is to

redefine goal, revise plans as circumstances occur

a capital gain is the result of

selling an asset more than its original cost

Event risk occurs when something substantial happens to a company that has an immediate impact on its financial condition.

true

SPIC does not protect against

your investment going down....only against the firm you use going out of business

The income and expense statement looks forward in time, while a budget is backward looking

False

The income and expense statement looks forward in time, while a budget is backward looking.

False

The insurance company will provide defense for a covered person against both civil and criminal charges involving her motor vehicle.

False

The key to creditworthiness is to keep your debt safety ratio as high as possible.

False

The largest single investment you will undertake in your lifetime will probably be the purchase of an automobile.

False

The minimum denomination for a treasury bills is mow 1000

False

The rate of return on liquid assets is relatively high compared to other types of investments

False

The returns on term life insurance policies receive favorable tax treatment.

False

The size of a mutual fund's management fee is related to the fund's performance.

False

The two main areas of estate planning are asset planning and probate planning.

False

The waiver-of-premium benefit excuses premium payment while the insured is experiencing short-term illness.

False

The yields on municipal bonds are usually higher than the returns available from fully taxable issues.

False

There is a penalty for early withdrawl of funds from CD's purchased from brokerage firms

False

There is no limit on the amount of social security taxes withheld annually

False

Three types of bonds

Federal, Municipal, and Corporate

The four stages of an economic cycle

Trough Expansion contraction peak

A $100,000/$300,000 bodily injury liability automobile policy could pay up to $100,000 to one person or up to $300,000 to several people seeking damages.

True

A balance sheet is like a photograph of your financial condition while an income and expense statement is like a motion picture

True

A budget is an orderly estimate of income and expenditures.

True

A callable bond may be retired by the issuer prior to maturity.

True

A cash deficit decreases net worth.

True

A codicil is a simple and convenient legal means of modifying a will.

True

A diversified portfolio is less risky than putting your money into a single security.

True

A good rule to remember when considering the use of credit is that the product purchased on credit should outlive the amount of time it takes to pay it off.

True

A house and land are examples of real property

True

A lender will generally require private mortgage insurance (PMI) if the down payment is less than 20 percent.

True

A life insurance policy's cash value may be collected by terminating the policy.

True

A mutual fund's price per share will increase if its underlying holdings increase in value.

True

A peril is a cause of loss

True

A person with a significant amount of investment income would have a high probability of needing to make estimated tax payments

True

A potential estate planning problem is improper distribution of assets.

True

A preferred provider organization has characteristics of both an IPA and an indemnity plan.

True

A rental car could be a covered auto under your personal auto policy collision section.

True

A round lot consists of multiples of 100 shares of stock.

True

A short sale transaction will be profitable when prices are falling.

True

A short-term capital gain would be taxed at the same rate as your salary

True

A stock's beta is an indication of how responsive the stock is to changes in the overall stock market.

True

A systematic investment routine involves investing similar sums in regular intervals.

True

A trampoline in your back yard is an example of a hazard.

True

A will is revoked if a second legitimate will is created.

True

A will may be invalid if the testator was under undue influence of another person.

True

ATM transactions require the use of a PIN

True

Actual cash value is defined as replacement cost minus depreciation.

True

Aggressive growth funds typically buy stocks with high price/earnings ratios and stocks with volatile price fluctuations.

True

Alimony received is included in gross income for the receiver and deducted from gross income for the payer

True

All contributions to Roth 401(k) plans are made in after-tax dollars.

True

All mutual funds have management fees.

True

All securities involve risk of some kind.

True

An elimination period is the number of days that must pass before disability policies pay proceeds.

True

An inflation hedge is an asset that increases in value at a rate equal to or greater than the rate of inflation

True

An investment is acceptable if the expected rate of return is greater than the desired rate of return.

True

An investment must be owned over one year in order to qualify for long-term capital gain treatment

True

An open-end investment company is commonly known as a mutual fund.

True

Annual term insurance premiums increase as you get older while whole life insurance premiums remain constant.

True

As a homeowner, the federal government may allow you to deduct interest expenses and taxes paid on the property.

True

Being late on credit payments only 2-3 times per year may label you a "late payer" in your credit file.

True

Bonds can be used conservatively by investors seeking current income and aggressively by investors seeking capital gains.

True

Borrowing to pay for a college education is a legitimate use of credit.

True

Changes in the value of securities due to social, political, or economic factors are referred to as market risk.

True

Collateral is an item of value used to secure the principal portion of a loan.

True

College costs have been escalating faster than the overall rate of inflation.

True

Commercial banks are generally more selective in granting loans than finance companies.

True

Common stock generally allows the stockholder an equal vote in electing the management of the corporation.

True

Compound interest is a very important concept when evaluating the return on an investment you plan to hold for a long time.

True

Condominiums are generally less costly than single-family, detached homes.

True

Covered liability perils do not include claims for libel, slander, or character defamation.

True

Credit card users can often avoid finance charges entirely by paying their total balances by the stated due date.

True

Credit union typically pay higher rates of return on savings and loans association

True

Current consumption affects future consumption

True

Debit and ATM card transactions are linked to your checking account

True

Earnings on 529 college savings plans can be tax free when used for qualifying college education expenses.

True

Even if you do have money, you may still be better off using an installment loan for a big-ticket purchase.

True

Even the best retirement plan needs to be reviewed every few years.

True

Event risk occurs when something substantial happens to a company that has an immediate impact on its financial condition.

True

Financial planning is a dynamic process.

True

For most workers, participation in the social security system is mandatory.

True

Gasoline is a variable cost of automobile ownership.

True

Group life insurance is often provided as a fringe benefit by employers.

True

Group life insurance is usually term life insurance.

True

Guaranteed renewable term insurance allows you to renew the policy for another term without qualifying medically.

True

Having an accurate current income and expenditures statement would be very useful when calculating retirement needs.

True

Housing prices vary widely from on part of the country to another.

True

If a gift is so large that taxes are due, the money used to pay the taxes is removed from the estate.

True

If your bank states that it compounds monthly, the effective interest rate (APY) will be greater than the nominal interest rate.

True

If your insurance company makes a payment to you, subrogation is the right of the company to collect from the person causing the accident or from his/her insurance company.

True

In insurance terminology, "participation" and "co-insurance" mean the same thing.

True

In most investments, there is a risk-return tradeoff.

True

Installment loans are typically repaid in monthly payments.

True

Interest on corporate bonds is paid semiannually.

True

Intestacy results from dying without a valid will.

True

Investing and speculating are two entirely different activities.

True

Jewelry, furniture, and computers are examples of personal property

True

Jewelry, furniture, and computers are examples of personal property.

True

John and Mary Smith own 500 shares of ABE stock. After the company pays a 6 percent stock dividend, John and Mary will own 530 shares of ABE stock.

True

Less rapid depreciation is one advantage of buying a used car rather than a new car

True

Less rapid depreciation is one advantage of buying a used car rather than a new car.

True

Liability claims may result from alleged negligent acts.

True

Life insurance needs change dramatically over one's lifetime

True

Life insurance needs change dramatically over one's lifetime.

True

Liquidity is important in an estate to pay for death costs and possible taxes.

True

Living a healthy lifestyle is an example of loss prevention and control.

True

Loans against a life insurance policy do not have to be paid back

True

Long-term care insurance can cover both nursing home and home health care.

True

Losing your job triggers a "qualifying life event" that allows you to obtain new insurance outside the normal enrollment window.

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

More damage is done to estates by doing nothing than by doing the wrong thing.

True

Most surgical expense plans fully reimburse the cost of second opinions.

True

Mutual funds may be classified by the types of securities they purchase.

True

Mutual funds provide professional management and diversification that individual investors - especially those with limited resources - can rarely obtain on their own.

True

Nearly all life insurance policies have a two-year suicide clause.

True

One can expect to earn a higher rate of interest on a COD than a checking account

True

One should typically name both primary and contingent beneficiaries for life insurance policies.

True

Open account credit is a form of credit extended to a consumer in advance of any transaction.

True

Personal financial planning involves translating financial goals into action plans

True

Personal financial statements help you identify potential financial problems.

True

Profit-sharing plans allow flexible employer contributions to the plan.

True

Protection for personal property both at home and away from home is a provision of the homeowners' policy.

True

Social Security represents about 38% of total retiree income.

True

Social security benefits are often available resources to the family after the death of a family member

True

Social security benefits are often available resources to the family after the death of a family member.

True

Spreading risk among a large number of people is a major principle of insurance.

True

Standard of living is defined as the necessities, comforts, and luxuries desired by an individual family

True

Stocks with betas of less than 1.0 will have relatively stable prices.

True

Supplementary medical insurance (SMI) is a voluntary participatory program, commonly known as Medicare Part B.

True

Tax credits are dollar-for-dollar reductions in taxes due

True

Te heart of sound financial planning is improved standard of living.

True

Term insurance is generally the most economical form of life insurance for young families.

True

Terms of payment and terms of coverage are two sets of provisions that should be carefully scrutinized when evaluating an insurance program.

True

The "other-insurance clause" helps prevent the violation of the principle of indemnity.

True

The Medicare portion of FICA tax is paid on 100% of earnings

True

The SEP is designed for self-employed individuals.

True

The basic purpose of insurance is to protect you from the financial consequences of losing assets or income due to accident, illness, or death.

True

The cash value of a life insurance policy can be used as a source of loan collateral.

True

The current trend in retirement plans is toward contributory plans.

True

The difference between the market value of your home and the balance of the mortgage is your equity in the property.

True

The federal government regulates securities markets through the Securities and Exchange Commission.

True

The federal personal income tax is a progressive tax

True

The fees on annuities tend to be high compared to mutual funds.

True

The first step in retirement planning is to identify retirement goals

True

The higher a stock's beta, the riskier the stock.

True

The margin requirement for common stock is 50%.

True

The most common forms of open account credit are bank credit cards and retail charge cards.

True

The most effective way to achieve financial objectives is through financial planning.

True

The most important advantage of a mutual fund is pooled diversification.

True

The need for additional life insurance can be determined by looking at the difference between available resources and family monetary needs.

True

The needs analysis method is the most accurate approach to determining the proper amount of life insurance to buy.

True

The net asset value (NAV) per share is found by dividing the market value of the fund's securities less the fund's liabilities by the number of shares outstanding.

True

The primary investment objective of bond funds is income.

True

The purpose of a credit report is to evaluate the kind of risk you pose to the lender.

True

The right of subrogation allows the insurer to get reimbursed for claims paid.

True

The risk-free rate of return is often measured by the return on U.S. Treasury bills.

True

The student loans with the best loan terms are the Stafford and Perkins loans.

True

The value of any investment is a function of the return it is expected to produce relative to the amount of perceived risk involved in the investment.

True

There is an inverse relationship between bond prices and market interest rates.

True

To make a legally binding offer on a car, you must sign a sales contract that specifies the offering price and all the conditions of your offer.

True

Treasury bills are sold at a discount of their maturity value

True

Treasury notes, bills, and bonds represent loans to the federal government.

True

You can deduct mortgage interest and property taxes on your home to reduce your federal income taxes only if you itemize deductions.

True

Your auto loan payments would be listed as an expense on the income and expense statement.

True

Your goals tend to set the tone for your investment program, and they play a major role in determining how conservative or aggressive you're likely to be in making investment decisions.

True

Your health insurance has an 80% co-insurance clause. Once the deductible is satisfied, your insurance company will pay 80% of your covered losses up to the stated limits.

True

Your house is an example of a tangible asset.

True

Your personal value system will shape your attitude toward money and wealth accumulation.

True

Your ____ is an example of a liquid asset.

checking account

generally, as income rises, the average propensity to consume ...

decreases

the 3 key groups in the economic environment are

government, consumers and businesses

A strong economy leads to

higher employment

on the balance sheet a mortgage loan is recorded as the

the principal balance

You are solvent if your

total assets exceed total liabilities.

A closed-end investment company can create an unlimited number of shares.

False

A long-term capital gain is taxed at the same rate as ordinary income

False

A savings account may be a useful tool in managing everyday household transactions

False

Actual cash value provides coverage at the current market value of your property.

False

Advances in medical technology, prescriptions drugs, and treatments have substantially reduced health care costs in recent decades.

False

All disability occurs only when someone is completely incapable of doing any type of work.

False

All types of life insurance offer a cash surrender value.

False

Always paying cash is helpful in establishing a high level of creditworthiness.

False

An 80 percent co-insurance clause requires the insured to carry insurance protection equal to 80% of the original cost of the home.

False

Approximately 50 percent of Americans prepare a detailed household budget

False

Average propensity to consume refers to how much of your money you plan to save in your financial plan.

False

Condominium and single-family home owners can deduct real estate taxes and mortgage interest on their federal income taxes but co-op owners cannot take these deductions.

False

Depreciation is not an important consideration since it is not a recurring out-of-pocket cost.

False

ETFs often distribute large capital gains to their shareholders.

False

Earthquakes are covered under most homeowner's policies.

False

Estate planning usually occurs during the last ten years of a person's life.

False

Exchange-traded mutual funds are actually closed-end mutual funds.

False

FDIC covers stocks, bonds, and mutual funds purchased at banks

False

Generally speaking, the interest rates on credit cards are lower than any other form of credit.

False

Generally, the primary purpose of life insurance is to provide a tax-advantaged investment plan.

False

Growth funds are mutual funds designed for short-term investing.

False

Health insurance policies automatically cover all family members.

False

If Lois has 2,000 in checking, 50,000 in mutual funds, and 75,000 in COD's, her accounts will be insured for 71,000 by FDIC

False

Newly issued securities are sold to the public in the secondary market.

False

One's marginal tax rate is typically lower than one's average tax rate

False

One's marginal tax rate is typically lower than one's average tax rate.

False

Open-ended mutual funds can be traded on an intraday basis.

False

Over the long run, gaining an extra two percent on an investment makes little difference in earnings generated.

False

Owning common stock represents a debt investment.

False

Preferred stocks are the common stocks of ultra blue-chip companies.

False

Prices are rising in bear markets, indicating economic optimism.

False

Probate property includes only real property.

False

Purchasing power risk is of most concern during economic recession.

False

Savings accounts are sometimes referred to as demand deposits

False

Social Security taxes are deducted from all wages and salaries earned in a year

False

Social Security taxes are deductible from all wages and salaries earned in a year

False

The Consumer Price Index (CPI) is the amount of goods and services each dollar buys at a given point in time

False

The Standard and Poor's Index is based on 30 industrial stocks.

False

The average propensity to consume refers to how much of your money you plan to save in your financial plan

False

The equity in your home is the difference between the loan balance and purchase price

False

If Wristwatch Arm Corporation (WAC) has assets of $10 million, liabilities of $5 million, and preferred stock of $1 million, its book value is $6 million.

False

If a mutual fund provides for automatic reinvestment, the reinvested dividends will not be taxed until the shares are redeemed.

False

If you are married, you can legally file a single tax return

False

If you're married, you can legally file a single tax return

False

Inflation generally has little effect on personal financial planning.

False

Interest rate risk is greater for short-term bonds than for long-term bonds.

False

Interest you earned on your savings account would be an entry on your personal balance sheet

False

Internet-only banks typically pay lower interest rates on savings than traditional banks

False

Investing is considered a short-term activity that involves the buying and selling of securities.

False

Buy on Margin

Borrowing money to buy stock, can only do 50% and causes more risk

How do you make money on investments

Capital appreciation and Dividends

It is safe, and often required, to give your Social Security number as a form of identification when using a credit card.

False

It really makes little difference whether you start retirement savings at age 25 or at age 45.

False

Loans are available from term life insurance policies.

False

Minors can handle large sums of money and property.

False

MYD is what type of Fund

Closed End Fund

Money market mutual funds are insured up to 250,000 by FDIC if purchased at an insured bank

False

In which of the following types of investment is the most liquidity risk?

Land

MEIAX is what type of fund

Loaded mutual Fund

Marginal vs. Average tax rates

Marginal is the graduated while average is the actual % of your money you end up paying

Money market vs Money Market Deposit

Money market is not insured Money Market Deposit is

PSDTX is what type of fund

No load mutual fund

Beta

Over 1 more risky than S&P 500 Less than 1 less risky than S&P 500

Which security has the lowest fee structure according to the presentations in class?

PSDTX

Balance Sheet is like a

Picture at a moment in time

what is lowballing

Purposefully giving a price lower than what you expect to pay so negotiations can slowly creep up from there

for tax purposes, head of households, refers to

a single person with a dependence

A cash budget should help you to

achieve your short-term financial goals. implement disciplined spending. Eliminate needless spending allocate funds to savings and investments

The primary function of financial statements is to provide a picture of your [actual or projected] financial position.

actual

typical adjustments to gross income on form 1040 would be.

alimony, moving expense, health insurance for self employed

a cash budget should help you to

allocate funds to savings and investments

investments are distinguished from savings on the basis of

level of risk and respected return

Using balance sheet information, what ratio indicates your ability to meet current debt payments

liquidity ratio

Income statement is like a

moving picture

over 75% of the revenue received by the federal government is from

social security and income tax

if you do not wish to itemize your deductions you can use the

standard deduction

the term most closely associated with quality of life is

standard of living