Financial Planning 401- Unit 1

Which of the following is a strength of a traditional annuity? a) They can significantly reduce longevity risk. Incorrect Response b) Annuities can allow you to receive a fixed sum of money each year. c) Lack of liquidity once you annuitize. Correct Answer d) Both a and b.

) Both a and b.

Which of the following issues can be categorized as a consumption and savings issue?

None of the above.

The life value of being seen as successful and receiving acknowledgement for achievement is:

Recognition.

An implication of the life cycle theory is that: Correct Answer a) Households are planners whose actions extend beyond their current resources and pleasurable activities today to future needs and assets to meet them. b) Utility can be measured by only emotional assessment methods. c) Household spending decisions are based on the amount of income they earn currently. Incorrect Response d) All of the above.

a) Households are planners whose actions extend beyond their current resources and pleasurable activities today to future needs and assets to meet them.

When losses are material and there is a strong likelihood that they will occur:

a) Insurance may not be the appropriate choice.

The ability to turn an asset into cash quickly at a reasonable transaction cost and without loss of principal is:

a) Liquidity.

The actions of stockholder-owned insurance companies: Correct Answer a) May conflict with the interests of policyholders. b) Never conflict with the interests of policyholders. c) Always conflict with the interests of stockholders. Incorrect Response d) Both a and c. e) None of the above.

a) May conflict with the interests of policyholders.

Which of the following statements is accurate? Correct Answer a) Payments as reimbursement for property losses are not taxable. b) Payments as reimbursement for property losses are not tax deductible. c) Property losses are not tax deductible. Incorrect Response d) All of the above.

a) Payments as reimbursement for property losses are not taxable.

How does standard deviation differ from semi-variance? Correct Answer a) Standard deviation includes fluctuations that result in both gains and losses while semi-variance only measures fluctuations resulting in losses. b) Standard deviation includes fluctuations that result in both gains and losses while semi-variance only measures fluctuations resulting in gains. Incorrect Response c) Semi-variance includes fluctuations that result in both gains and losses while standard deviation only measures fluctuations resulting in losses. d) None of the above.

a) Standard deviation includes fluctuations that result in both gains and losses while semi-variance only measures fluctuations resulting in losses.

Under the Consolidated Omnibus Budget Reconciliator Act of 1986, the federal government requires: Correct Answer a) That people who leave positions be allowed to maintain their medical coverage for a maximum of 18 months regardless of their medical condition at the time. b) That people who leave positions be allowed to maintain their medical coverage for a maximum of 12 months regardless of their medical condition at the time. c) That people who leave positions be allowed to maintain their medical coverage for a maximum of 12 if they were in good health when leaving. Incorrect Response d) That people who leave positions be allowed to maintain their medical coverage for a maximum of 18 months if they were in good health when leaving. e) None of the above.

a) That people who leave positions be allowed to maintain their medical coverage for a maximum of 18 months regardless of their medical condition at the time.

Which of the following is not a reason why bonds are considered safer than most other types of securities? Correct Answer a) The annual income received is flexible. b) The contracted-for loan principal is likely to be repaid in full at the stated date. c) Should bankruptcy occur, bondholders have priority in receiving the proceeds from liquidation of business assets. Incorrect Response d) All of the above are reasons why bonds are considered safer. e) None of the above is a reason why bonds are considered safer.

a) The annual income received is flexible.

What is the major difference between pre- and post-retirement planning? Correct Answer a) The opportunity to enhance cash inflows is limited or nonexistent post-retirement. b) Individuals tend to have more cash available than expected post-retirement. c) Post-retirement planning is primarily focused are largely focused on revenues. Incorrect Response d) All of the above are major differences. e) None of the above is a major difference.

a) The opportunity to enhance cash inflows is limited or nonexistent post-retirement.

The net effect of government supported organizations such as Fannie Mae, Ginnie Mae, and Freddie Mac is to: Correct Answer a) To broaden credit and offer it at a cheaper rate than might otherwise prevail. b) To narrow credit but offer it at a cheaper rate than might otherwise prevail. Incorrect Response c) To broaden credit but offer it at a more expensive rate than might otherwise prevail. d) To narrow credit and offer it at a more expensive rate than might otherwise prevail. e) None of the above.

a) To broaden credit and offer it at a cheaper rate than might otherwise prevail.

Depreciation is not deducted:

a) When assets are valued for loss purposes on a replacement-cost basis.

Which of the following best describes self-insurance? Correct Answer a) Actively setting aside money to fund any actual losses in the event it happens. b) Using precautionary savings to purchase insurance. c) Diversifying activities to minimize risk. Incorrect Response d) All of the above are descriptions of self-insurance.

a) Actively setting aside money to fund any actual losses in the event it happens.

What is the bucket approach? Incorrect Response a) A strategy whereby savings take place one fixed calendar date every several months. The large amount placed into savings at this time is the "bucket." Correct Answer b) A strategy where separate savings accounts are created for each need. Each account is a separate "bucket." c) The mistake some people make whereby they only save when large cash flows are received, similar to dipping a bucket into a river. d) Both a and b above. e) None of the above.

b) A strategy where separate savings accounts are created for each need. Each account is a separate "bucket."

Which of the following is not part of the investment policy associated with a short-term horizon? a) Short-term bond funds. Correct Answer b) Individual stocks. Incorrect Response c) U.S. government bonds. d) Certificates of deposit. e) All of the above are part of the investment policy associated with a short-term horizon.

b) Individual stocks.

Is leasing presented as a liability on the household's balance sheet? a) Yes. Correct Answer b) No. Incorrect Response c) No, unless the household is attempting to qualify for a new loan. d) Yes, unless the household is attempting to qualify for a new loan. e) None of the above.

b) No.

Project A has NPV of $45 million while project B has NPV of $54.5 million. If the cost of project A is $33 million and the cost of project B is $22 million, which project should be chosen if only one can be chosen? Incorrect Response a) Project A. Correct Answer b) Project B. c) Neither. d) Both. e) Answer varies, depending on inflation.

b) Project B.

Which of the following is not a goal of the Social Security system? a) To provide retirement payments to individuals based on their contributions. Correct Answer b) To minimize the riskiness of pension investments. c) To redistribute income so that all workers may retire at a minimum standard of living. Incorrect Response d) All of the above are goals. e) None of the above are goals.

b) To minimize the riskiness of pension investments.

If the risk free rate is 5% and the risk premium is 4%, what is the expected rate of return?

c) 9%

Which of the following may be a reason why household savings in the U.S. have declined in recent years? a) Below average growth of the single-adult-household category (including households with children). b) Above average growth of the single-adult-household category (excluding households with children). Correct Answer c) Above average growth of the single-adult-household category (including households with children). Incorrect Response d) Below average growth of the single-adult-household category (including households with children). e) None of the above.

c) Above average growth of the single-adult-household category (including households with children).

Which of the following is not true according to the life cycle theory? a) Borrowing generally takes place early in the household's life, when income is low. Incorrect Response b) The goal is to "die broke." Correct Answer c) As income rises, people increase their debt rather than save for retirement. d) Upon retirement savings are liquidated steadily to maintain their cost of living.

c) As income rises, people increase their debt rather than save for retirement.

A household's sharing of fixed costs for shelter and other goods is an example of:

c) Economies of scale.

Which of the following is not an advantage of a fixed annuity versus a taxable bond? a) Tax deferral. b) Lack of fluctuation in principal. Correct Answer c) Higher pretax return. Incorrect Response d) All of the above are advantages of a fixed annuity versus a taxable bond. e) None of the above is an advantage of a fixed annuity versus a taxable bond.

c) Higher pretax return.

Which of the following types of credit is not closed end?

c) Insurance Loan.

The capacity to find a seller or buyer of an asset at its current value is:

c) Marketability.

Which of the following is not a key principle of Modern Portfolio Theory? a) Investments should be viewed as part of a portfolio. b) Look at both risk and return when making investment decisions. Correct Answer c) Overall risk is not influenced by the degree of diversification among assets in the portfolio. d) The more dissimilar assets are the lower the risk for the portfolio. Incorrect Response e) All of the above are key principles of Modern Portfolio Theory.

c) Overall risk is not influenced by the degree of diversification among assets in the portfolio.

Typically the most attractive place to save for retirement is a qualified pension, with one exception. What is that exception? Incorrect Response a) The purchase of a charitable annuity. b) Social Security. Correct Answer c) The purchase of a home. d) Private investment in mutual funds. e) None of the above.

c) The purchase of a home.

Which of the following is an advantage of home ownership? a) Its lack of short-term liquidity should immediate sale become necessary. b) The responsibility for maintaining the home and grounds; and Correct Answer c) The significant growth potential of home prices over longer periods of time. Incorrect Response d) All of the above are disadvantages of home ownership. e) None of the above is a disadvantage of home ownership.

c) The significant growth potential of home prices over longer periods of time.

Which of the following statements is inaccurate? a) The maintenance and leisure approach is more consistent with pure financial planning theory. Incorrect Response b) The maintenance and leisure approach is a more straightforward, logical approach to household finance. c) The nondiscretionary and discretionary approach is more practical. Correct Answer d) All of the above statements are accurate.

d)

The retirement age for full Social Security benefits for those born in 1984 is: a) 55. b) 62. Incorrect Response c) 65. Correct Answer d) 67. e) 72.

d) 67.

According to which of the following is technical analysis a waste of time? Incorrect Response a) Super weak form efficient market hypothesis. b) Semi-strong form efficient market hypothesis. c) Strong form efficient market hypothesis. Correct Answer d) All of the above.

d) All of the above

Which of the following is not a risk associated with human-related assets? Incorrect Response a) Disability. b) Integrity of pension assets. c) Anticipated gifts. Correct Answer d) All of the above are risks associated with human-related assets.

d) All of the above are risks associated with human-related assets.

Which of the following statements is not accurate? a) Household results are provided on a cash flow statement while business results are provided on an income statement. b) Business accounting under GAAP attempts to report income and expenses, whether or not in cash, for a fair presentation. Incorrect Response c) For household reporting of results, only cash matters. Correct Answer d) All of the above statements are accurate.

d) All of the above statements are accurate.

Which of the following statements is not accurate? a) Loan applicants are placed into two risk classes with one rejected and the other accepted. Incorrect Response b) Lender may be basing the interest rate on the average quality of the loans. c) Even thought lenders should present an array of interest rates with the rates offered appropriate to the risks of non-payment that the individual household represents, they often only present one rate. Correct Answer d) All of the above statements are accurate.

d) All of the above statements are accurate.

Borrowing helps by providing funds that allow one to: Incorrect Response a) Raise one's standard of living today. b) Make investments such as those for the house and its possessions. c) Finance a business. Correct Answer d) All of the above. e) Both a and b.

d) All of the above.

What is the objective of the household budget? Incorrect Response a) To assure that the household generates enough cash to meet household operating needs. b) To provide resources for emergency funds if current assets are insufficient. c) To keep track of growth in efficient spending. Correct Answer d) Both a and b above. e) None of the above.

d) Both a and b above.

What distinguishes a house from most durable goods? a) It has no unique physical characteristics. b) It does not last long. Incorrect Response c) It has no tax benefits. Correct Answer d) It has appreciation potential. e) None of the above.

d) It has appreciation potential.

Which of the following statements regarding ETFs is false? a) Usually traded at close to market value of its underlying holdings Incorrect Response b) Traded intraday and minute-to-minute like stocks c) Typically lower cost structure than mutual funds Correct Answer d) They are traditionally actively managed e) Pool together investors' monies for joint management

d) They are traditionally actively managed

What is longevity risk? Incorrect Response a) The possibility of living beyond normal expectations. b) The possibility of dying prematurely. c) The risk of outliving one's insurance policy. Correct Answer d) Both a and b. e) Both a and c.

d) Both a and b.

Which of the following is not a reason to communicate? a) To express your opinion or feelings about a matter. b) To convey specific facts. c) To develop a relationship with another person. Incorrect Response d) To persuade someone to follow your advice. Correct Answer e) All of the above are reasons to communicate.

e) All of the above are reasons to communicate.

Which of the following is not a shortcoming of the life cycle theory? a) It doesn't provide for money to be left for non-household members. b) It assumes that expenditures can remain level throughout a person's life. Incorrect Response c) It doesn't account for uncertainty in projecting future incomes and expenses. d) It doesn't account for the desire by some to have a standard of living that varies by age. Correct Answer e) All of the above are shortcomings of the life cycle theory.

e) All of the above are shortcomings of the life cycle theory.

Which of the following statements does not characterize the efficient market hypothesis? a) The best valuation for an individual security is its current market price. b) The price reflects all information known about the security. Incorrect Response c) The price is the fair price for the asset. d) When new information is issued, it is quickly incorporated in the price of the shares. Correct Answer e) All of the above characterize the efficient market hypothesis.

e) All of the above characterize the efficient market hypothesis.

Which of the following statements regarding the relation between finance and economics is inaccurate? Incorrect Response a) Finance places more stress on practicality in its analysis. b) Finance describes most processes in tangible money terms. c) Finance is able to look at how assets interact so as to provide an integrated solution to a problem. d) Finance more often incorporates risk in decision making and can offer outcomes in combined risk-return terms. Correct Answer e) All of the above statements are accurate.

e) All of the above statements are accurate.

The treating of repayment of debt as an expense in the cash flow statement is an example of: a) The blurring or elimination of the distinctions between assets and liabilities, income and expenses, and cash inflows and outflows. b) The underestimation of expenses. Incorrect Response c) The overestimation of expenses. d) None of the above. Correct Answer e) Both a and b above.

e) Both a and b above.

Which of the following factors makes auto leasing less attractive than ownership? a) Selling an automobile is time-costly. b) Inspection standards. c) Mileage charges. Incorrect Response d) Both a and b. Correct Answer e) Both b and c.

e) Both b and c.

What are savings? Incorrect Response a) Additions or subtractions from debt. b) Outlays on household related matters that provide benefit beyond the current year. c) The day-to-day financial functions of the household. d) Cash flows that come from changes in debt spent on luxury items. Correct Answer e) None of the above.

e) None of the above.

What is a nondiscretionary cost?

A fixed cost.

The actual substance part of the client interview typically begins with:

A simple question.