Personal Finance Exam 3
The Anderson Balanced mutual fund charges a sales load of 4.85%. If you invest $15,000, how much of your investment will actually be used to purchase shares in the fund?
$14,272.50 (Load charge = Dollar amount of investment x Load percentage) (Amount available for investment = Investment amount - Load charge)
Stephanie is the wage earner in a "typical family" with $40,000 gross annual income. Use the easy method to determine how much insurance she should carry.
$196,000
Tim and Tammy are updating their financial plan and are concerned that they might not have enough life insurance coverage for their family, which includes two children, ages 4 and 10. They have determined that their annual income is $70,000, and their net worth is now $150,000. What is the amount of life insurance they should carry using the easy method.
$343,000
If you monthly expenses total $2,000, you should save at least how much in an emergency fund before focusing on your investment program.
$6,000
Nicholas purchased 150 shares of ABC Mutual Fund at $10.50 and sold them one year later at a price of $14.50. His total capital gain was
$600 (Capital gain or profit = number of shares x (sell price - purchase price))
The net asset value is calculated as:
(Current market value of portfolio - Liabilities)/Number of shares outstanding
An employer may choose to match the contribution made by employees in a:
401(k) plan or salary-reduction plan
In which type of fund are the prices determined by factors of supply and demand like the prices of a stock?
A close-ended fund
Which of the following investors would mostly prefer speculative investments with higher risks over conservative investments with less risk?
A dual=career couple (with no children) in their 30s whose combined income is $95,000
If your primary investment objective is to receive investment income, which of the following would not be an appropriate investment for you?
Aggressive growth funds
If you start a new job and are offered the opportunity to participate in the company's 401(k) or 403(b) retirement plan, which of the following decisions can affect your financial future?
All of these decisions can affect your financial future
Which of the following investors would mostly prefer conservative investments with less risk to speculative investments with higher risks?
An unemployed single parent who just received a $300,000 divorce settlement
If you have fully funded your 401(k) and profit-sharing plans up to the allowable limits, then you may want to put away more money for retirement in an
Annuity
The process of spreading your assets among several different types of investments to lessen risk is called:
Asset Allocation
Thomas wants to invest in a fund that invests in stocks, bonds, and money market instruments. Which of the following will meet his needs?
Asset allocation funds
Val wants to invest in a fund whose primary objective is to conserve principal, provide income, and provide long-term growth. Which of the following will best meet her needs?
Balanced funds
A person who is named to receive the proceeds from a life insurance policy is a:
Beneficiary
Which of the following risks deals with the possibility that bad management, unsuccessful products, or other factors will cause the business to be less profitable than originally anticipated?
Business failure risk
Payments to a fund's shareholders that result from the sale of securities in the fund's portfolio are:
Capital gain distributions
Equity financing is money received from the sale of:
Common stock
A young employee is buying individual life insurance and is worried about the impact inflation will have on his life insurance coverage. Which of the following riders should he consider?
Cost-of-living protection
When monitoring the value of your stock investments, it is important to:
Determine their values using the price quotations reported on the internet and in newspapers
A distribution of money, stock, or other property that is paid to the stockholders of a company is called a:
Dividend
All of the following statements are correct except:
Dividend payments must be approved by the stockholders
Rebecca owns stock that pays a dividend. She does not want the cash now; instead, she would prefer to have more shares of stock. She should use a:
Dividend reinvestment plan
This calculation uses the current price per share and the annual amount of money paid to investors from the company
Dividend yield
Donald and Charlene are married and do not have any children. They plan to ensure that the other will not be unduly burdened by debts in case one of them dies. Each plans to continue work after the other one dies. Which method are they using to determine their life insurance needs?
Dual income, no kids method
Judy and James have a 4-year-old child. They plan to purchase life insurance using this formula: Current income x 7 x 70%. Which method are they using to determine their life insurance needs?
Easy method
If you hold mutual fund shares in your Roth IRA, the taxes on reinvested income will be:
Eliminated
Vesting is the right to receive
Employer's contributions to a pension plan even if the employee leaves the company before retiring.
When you die, this tax will be based on the fair market of your investments, property, and bank accounts, less an exemption (of $11.58 million in 2020).
Estate tax
Candice is updating her estate planning and wants to write a legal document that will allow all of her assets to go to her spouse except for a certain amount that will be set up in a trust. The trust (plus interest) can provide her spouse lifelong income that will not be taxes. She is writing an:
Exemption trust will
As of 2020, an individual can give away up to $15,000 per year before paying an inheritance tax to the IRS.
False
If you are married, all of your assets will automatically pass to your spouse.
False
Younger investors tend to invest more growth-oriented investments, because they do not have time to recover if their investments take a nosedive.
False
Francisco and Maria have three children and want to complete a detailed worksheet to determine the amount of life insurance they need to purchase. They will consider factors such as Social Security and liquid assets. Which method are they using to determine their life insurance needs?
Family need method
Pam just started working at XYZ Widget Company and finally wants to get insurance coverage through her employer. She does not want to take a medical exam to get coverage, because she has some underlying health conditions and is concerned that she might not qualify for a policy. Which of the following life insurance policies should she apply for?
Group life
Which of the following risks reduces your purchasing power?
Inflation risk
When choosing an investment, you should consider risk. The four primary risk components are:
Inflation, interest rate, business failure, and market
This tax is only imposed by state governments
Inheritance tax
This allows the trustor to receive benefits during his or her lifetime.
Inter vivos trust
Which of the following risks associated with preferred stocks or government or corporate bonds is a result of changes in rates in the economy?
Interest rate risk
When considering why to buy annuities, which of the following statements is correct?
It is better to fully fund your IRA, Keogh, or 401(k) before buying an annuity
If your main focus is to be able to buy and sell an investment quickly without substantially affecting the investment's value, you are most concerned with:
Liquidity
Which of the following risks deals with fluctuations in the economy from a period of rapid expansion followed by a period of recession?
Market risk
Patrick graduated from college five years ago. He has set up an emergency fund and has been paying off his student loans. In addition, he participates in the retirement plan offered by his employer. He wants to invest $75 per month in very small companies (capitalization between $50 and $300 million or less). He should purchase what kind of stocks?
Micro-cap
Wendy has had a life insurance policy for five years with her spouse listed as the person who receives the benefit if she dies. She has recently divorced. Which of the following provisions should she take action on?
Naming a beneficiary
Jeff and Erica have two children. They plan to purchase life insurance using this formula: (18 - youngest child's age) x $20,000. Which method are they using to determine their life insurance needs?
Nonworking spouse method
You want to purchase a life insurance policy that pays a policy dividend. What kind of policy would you want to purchase?
Participating policy
Which of the following describes a growth company?
Profits are reinvested in the company for future growth
Jill is 45 years old and thinks that her future tax rate will be lower than what she currently pays, so she wants to defer her taxes on her contributions of up to $6,000 in 2020. Which plan would allow her to meet her goals?
Regular IRA
Megan decided to start investing in stocks. Which of the following should she do first?
Research the corporations she is interested in as well as their industries
Julian's annual contributions to his retirement are not tax-deductible, but his earnings accumulate tax-free. He is investing in a
Roth IRA
Lawrence is self-employed and wants to establish the simplest type of retirement plan. He should set up a
SEP plan
Which of the following investments typically has the largest potential growth?
Stocks
Sean's estate planning should:
Take the needs of his wife and children into account.
Another name for temporary life insurance is:
Term life insurance
When analyzing a price-earnings ratio:
The higher the price-earnings ratio, the more investors are paying for earnings
Which of the following is correct?
The price/earnings ratio is the price of a share of stock divided by the corporation's earnings per share of stock
Which of the following is not correct regarding preferred stocks?
The yield on preferred stocks is often lower than the yield on corporate bonds
An example of a defined-contribution plan is a stock bonus plan
True
An interest-adjusted index is a method of evaluating the cost of life insurance by taking into account the time value of money.
True
Eight years ago, Thomas began investing in his Roth IRA. He is now purchasing his first home. He may withdraw some money from his Roth IRA tax-free and penalty-free for this purchase.
True
For almost 100 years, stocks have earned an average annual return of almost 10 percent.
True
Premium payments are fixed with a variable life policy
True
The "family need" method of estimating life insurance includes factors such as Social Security and liquid assets.
True
The lower the interest-adjusted index, the lower the cost of a life insurance policy.
True
The purpose of diversification or asset allocation is to spread your assets among several different types of investments to decrease risk.
True
To investors, liquidity is the ability to buy or sell an investment quickly without substantially affecting the investment's value.
True
When Paul leaves his job at Acme Bending Company, he may choose to move his 401(k) balance to a plan called a rollover IRA
True
A legal arrangement that helps manage the assets of your estate for your benefit or that of your beneficiaries is called a:
Trust
Megan wants to purchase a type of whole life insurance policy that will allow part of her premium to be invested in stock, bonds, or money market funds. Which of the following policies should she buy?
Variable life
Another name for permanent life insurance is:
Whole life
Melinda wants to withdraw some money from her mutual fund. She has a minimum required asset value of $10,000. Which of the following is not an option available for her to systematically withdraw some money?
Withdraw all principal and leave interest dividends and capital gain distributions in the account
If you have children and are writing your will, you need to do all of the following except:
Write the will with the help of an attorney
If you have a renewable term policy, then:
Your premium may increase if you continue it for another term because you will be older.
When an employer promises to set aside a certain amount of money for each employee each year, it has set up a:
money-purchase plan
An employer's contribution will vary according to the company's profits in a :
profit-sharing plan
Interest paid to corporate bond owners is:
tax-deductible for the corporations
A U.S. government security issued in minimum units of $100 with a 30-year maturities is called a
treasury bond