Personal & Family Finance Exam 3
How much interest will you receive every six months if you own a corporate bond with an 8.5 percent coupon and a face value of $1000?
$42.50 coupon payment = coupon rate x face value 8.5% x $1000 = $85 per year 85/2= $42.5 every six months
Ethan Johnson is injured in a boating accident and incurs a $1,000 medical bill. If his plan has a $250 deductible and a 70/30-coinsurance provision, how much of the bill will be his responsibility?
$475
Assuming that your will gives all your wealth to your children, your adjusted gross estate can be _________ in 2015 without being subject to federal estate tax.
$5.43 million
If a company has 5 million shares of common stock worth $10 each and 2,000 bonds outstanding with $1,000 face value each, the market cap for the firm is ________
$50 million market capitalization = # shares x price per share 5 million x $10 = $50 million
You want to have $1,000 accumulated in 3 years and you already have $250 in a savings account earning 6 percent. If you don't contribute any additional funds, how much will you be short in three years? (TIME VALUE OF MONEY PROBLEM)
$702 *come back and work this out*
Which of the following personal financial plan components should be completed before you begin an investing plan?
-identify and prioritize financial goals -develop a budget -have adequate funds in a liquid emergency fund -have adequate insurance coverage AKA all of the above
If you withdraw money from a tax-qualified plan before age 59½, you will have to pay
-state income tax on the amount withdrawn. - federal income tax on the amount withdrawn. - a 10 percent penalty on the amount withdrawn.
What is the value of a share of a preferred stock if the dividend rate is 8%, the par value is $100, and the required rate of return on comparable-risk securities is 9%?
.08(100)/.09= $89
Which of the following strategies for setting aside money to apply to your financial goals would be helpful, even if you are living paycheck to paycheck?
1. cut down on some small expenses, such as coffee, and apply the savings to achieving your financial goals 2. plan to save a portion of your next annual raise 3. take a second job 4. maximize your employer 401(k) match SPEND LESS MAKE MORE
Assume a company had earnings per share of $5, pays dividends of $1 per share, and its price is $50. What is the P/E for the company?
10 P/E = price/ earnings per share $50/$5 = 10
Fees paid by mutual fund shareholders include all the following EXCEPT
10% fee on excess returns
If Andre purchased a work of art for $500 in 2005 and solid it for $1500 in 2015, what is his annualized return on the investment?
11.6% annualized return on investment = (current price/purchase price )^(1/n) -1 (1500/500)^1/10=1.11 1.11-1=11.6%
Carla and Ben have been married for 50 years. During that time, Carla stayed home raising their children and maintaining their household while Ben worked for an engineering firm. When they reach retirement age, together Ben and Carla are eligible to receive
150% of Ben's SS benefits
Under COBRA, if you lose or quit your job, you can purchase insurance coverage through your previous employer for up to:
18 months.
If a stock is trading at $50 and has a quarterly dividend of $.55, the dividend yield on the stock is
4.4% dividend yield= annual dividend/beginning stock price $.55 x 4 = 2.2 (annual dividend) 2.2/50= .044 --> 4.4%
The most common defined-contribution plan for businesses is the
401(k).
According to the American Health Care Association, the best time to buy long-term care insurance is between the ages of
50 and 55.
For a 50-year old investor who is willing to take a moderate risk, which of the following investment allocations would be the most appropriate?
60% stocks; 40% bonds stocks should be 110 minus age
Delaying social security benefits is a good strategy for maximizing retirement income. By choosing not to begin receiving benefits at the normal retirement age of 67, a participant's benefits will increase by ____ percent for each year of delay up to age 70.
8%
Which of the following would NOT be eligible for survivor benefits under Social Security?
A 59-year old employed wife with no children under age 18
Which of the following portfolios is the most diversified?
Christina's portfolio is invested 50% in a stock in a mutual fund and 50% in a bond mutual fund
Which of the three government college savings programs disburses unused funds when the beneficiary reaches the age of 30?
Coverdell Education Savings Account
A five percent coupon bond has greater interest rate risk than a zero-coupon bond, all else being equal
FALSE
A small technology stock that has just recently had its IPO is most likely traded on the NYSE
FALSE
An investment in corporate bonds make you a part-owner of a business
FALSE
As a characteristic of preferred stock, annual cash flows are more similar to common stock than to bonds
FALSE
Investing in stock is riskier than investing in an option contract
FALSE
Naming a beneficiary for your retirement account will complicate the distribution of your assets
FALSE
Treasury bonds are issued by state governments and municipalities
FALSE
Growth stocks distribute most of their profits to investors in the form of dividends
FALSE compensates investors primarily through increases in the value of the shares over time
Capital gains are taxed at normal tax rates, whereas dividends are taxed at the lower current income tax rate.
FALSE *I think it is the opposite. come back*
Day trading is an exampled of passive investing
FALSE, it's active investing
For a 35-year-old single parent, durable power of attorney is a more important component of an estate plan than a will
False
The best place to keep your estate planning documents is in a bank safe deposit box
False
A term life insurance policy that the insured person can extend for another term without taking a medical exam has _________________.
Guaranteed renewability.
Why is it considered preferable to buy disability insurance on an after-tax basis?
If you purchase disability insurance on an after tax basis and later are disabled, the income benefit you receive while disabled will be tax-free.
A comparison of two portfolios shows the following: Portfolio A is invested as follows-stocks: 70%; bonds: 20%; and cash: 10%. Portfolio B is invested as follows-stocks: 30%; bonds: 40%; cash: 30% What can be concluded about the investors to whom these portfolios belong?
Portfolio A represents a younger person, probably in their forties
Which of the following is a reason that a company might choose to issue preferred stock instead of common stock or bonds?
Selling common stock would increase the number of shares and reduce the percentage ownership of the existing stockholders
Which of the following is the best strategy for building sufficient wealth for retirement?
Start saving early and take advantage of compound interest
A limit order is more likely to have a rapid execution than a market order
TRUE
Buying mutual funds through a "financial supermarket" offers the advantage of being able to purchase funds from different fund families
TRUE
Dividends represent current income for shareholders; interest represents income for bondholders
TRUE
The coupon rate is the fixed interest rate on the bond and is quoted as a percentage of par (face) value
TRUE
Both options and futures are considered speculative investments
TRUTH
Buying mutual funds through your retirement plan is an example of passive investing
TRue
Which of the following is a tax incentive offered by the federal government to make it easier for families to pay for higher education costs? Select all that apply.
Tax credit for education expenses Tax deduction for student loan interest Tax-free earnings on Section 529 savings plans
Which of the following statements regarding bonds and changes in required return is true?
The longer the time to maturity, the greater the percentage change in bond value for a given change in the required return
Which of the following statements concerning risk tolerance is true?
There is some evidence that women are less inclined to take risk than men
If all other factors are equal, how will your life insurance needs change if your youngest child graduates from college and gets a well-paying job?
They will decrease.
A Medical expenses that exceed 10% of your adjusted gross income are deductible on your federal tax return. T or F
True
A preferred provider organization is less restrictive on its members than a health maintenance organization. T or F
True
Adelaide has purchased a new life insurance policy. Her agent has sent her a sheet that contains the following information: face amount of the policy, policy issue date, key features of the policy, the insurer's promise to pay, among others. This is an example of a policy declarations page. T or F
True
All other things equal a smoker will pay higher premiums for life insurance than a non-smoker. T or F
True
Consumers considering the purchase of life insurance should research the financial strength rating for the insurance company they plan to buy from. T or F
True
HMOs provide relatively comprehensive services, encourage preventive medicine, and give health-care providers financial incentives to control costs. T or F
True
In order to compare fringe benefits of different jobs, you should only consider those benefits that are valuable to you. T or F
True
The likelihood of an individual dying in the next year is called mortality risk. T or F
True
The working environment on the job is an example of an intangible benefit. T or F
True
There are more open-end funds than there are closed-end funds
True
Vision insurance is considered expensive for the benefit received. T or F
True
Since mutual funds are investment companies, Federal regulations require less disclosure and reporting than is required of regular companies
WRONGO
Which of the following goals for retirement spending will require the largest amount of accumulated wealth at retirement?
You plan to only spend the interest earned on your assets without depleting the principal.
A major difference between a flexible spending account (FSA) and a health savings account (HSA) is that:
a HSA can earn interest on amounts in the account; a FSA does not.
If you get to select which benefits you want from a variety of benefits offered in the employer plan, this is:
a cafeteria plan.
The most important component of an estate plan fr a college student who has no assets or dependents will be having
a durable power of attorney
The estate planning document in which you tell your survivors how you would like to be buried is known as
a letter of last instruction
A life-cycle fund purchases assets designed to meet the needs of individuals in
a particular stage of life
The ______________ method of estimating retirement expenses takes more time but will result in a more accurate forecast.
adjusted expense
The adjusted expense method is used to estimate
after-tax retirement income needs in current dollars by adjusting current expenses for changes expected in retirement.
Which of the following types of bonds has the lowest liquidity risk?
all have equal liquidity risk (municipal bonds, treasury bonds, corporate bonds)
Living benefits are options that _____________________.
allow some terminally ill people to collect part of their policy proceeds before death.
Which of the following is the riskiest investment type?
an option contract
A fee charged to compensate sales professionals for the marketing and advertising of fund shares is known as a
annual 12b-1 distribution fee
Both traditional and Roth IRAs have the same
annual contribution limit
Unlike employer-sponsored disability benefits, Social Security disability benefits stipulate that you must be unable to work
any job.
You decide that you want to buy shares of a particular stock. The price you will pay will be the ______ price at the time you place your order
ask
Which of the following types of companies would be expected to have the largest stock price decline in a recession?
auto manufacturer
A focus on a mixed portfolio of both stocks and bonds would match which of the following fund classifications?
balanced fund
Hank Johnson named his three kids and nephew as people to whom his life insurance should be paid out upon his death. This is an example of designating _____________
beneficiaries
You can establish a ____________ to donate the annual income from your investment portfolio to a charity while you are living, but passing the property to your heirs upon your death.
charitable income trust
An investment in _______ makes you a part-owner of a business
common stock
A defined-___________ employer retirement plan puts the most risk on employees.
contribution
The amount of interest paid per year on a bond is called the _______
coupon
Gold values tend to ________ during times of economic growth and stability and _________ during times of economic and political uncertainty
decrease; increase
Total state revenue from inheritance and estate taxes over the last decade has ________
decreased
Your employer sponsors a retirement plan in which it promises to match your contributions to the plan up to 3 percent of your salary for each pay period. The plan is most likely a
defined-contribution plan
A ______ broker will charge less for simple transactions
discount
A no-load fund is a mutual fund that
does not charge a front-end or back-end load
Carrie has been diagnosed with a terminal illness. She decided to draft a ________ to appoint someone to make specific medical decisions for her when she is incapacitated
durable power of attorney
A person can invest by being
either an owner or a lender
The first step in the estate planning process is to
evaluate your financial situation
A weakness of the income-multiple method used to determine life insurance needs is its assumption that ______________________________.
everyone has the same life insurance needs.
Bonds are a riskier type of investment than stocks
false
Both traditional and Roth IRAs allow tax deductible contributions.
false
Cyclical stocks have less risk of ups and downs in price than defensive stocks
false
If your adjusted gross estate value is $15 million and your will leaves everything to your husband, the federal taxes that will be payable at your death will be of the applicable estate tax rate times $15 million.
false
In community property states, any property owned by one spouse is assumed to be owned by both spouses, regardless of who acquired it or when it was acquired
false
Income in retirement from traditional and Roth IRAs is not subject to income tax.
false
It's important to begin planning for your children's education when they are very young because your funding goal will be smaller at that time
false
Social Security provides higher retirement benefits to low-income people than to higher-income people.
false
The best place to keep wills and powers of attorney is in a safe-deposit box
false
The majority of states in the US impose estate or inheritance taxes
false
There is no reason to establish a trust if your wealth is lower than the federal estate and gift tax exemption limit
false
The __________method analyzes your life insurance needs by estimating how much money your dependents will need after your death, while taking into account existing household resources.
financial needs
A pre-retiree says, "I'm in good shape for retirement because I have enough to provide a decent income for 20 years." This person is exhibiting the behavioral bias called
focusing on averages
Which of the following categories of household expenses is least likely to change substantially in retirement as compared with preretirement expenses?
food expenses
A(n) ______ contract is a contract in which you promise to buy or sell the underlying asset at a point in the future for a price determined today
futures
An example of a debt investment is
government bonds
If all else is equal, a 20 year bond has _________ interest rate risk than a 5-year bond
greater
In 2006 Monster Beverage Corporation (MNST) stock traded for $11 per share. BY 2016 the share price was $150. During that time span the company stock split twice. The company has never paid its common shareholders a dividend. Monster Beverage Corporation can be classified as a(n) _______ stock.
growth
The appointment of a(n) _______ identifies who will take care of a person's children upon death
guardian
For a given dividend rate and par value, the price of cumulative preferred stock will be ______ than preferred stock that does not have cumulative dividends.
higher
Riskier companies tend to pay _________ dividends than less risky companies
higher
The higher the expected rate of college cost inflation, the ______________ the monthly savings contribution you will need to make, if all other factors are the same.
higher
A person's estate is
his or her net worth at death
A pre-retiree says, "I have enough saved to cover my expected needs of $50,000 per year." This person is exhibiting the behavioral bias called
ignoring inflation
The most important type of risk to consider for federally insured bank deposit account is __________ risk
inflation
Which of the following statements concerning federal and municipal debt is true?
interest on municipal debt is tax exempt from federal income taxes and state income taxes if the investor is a resident of the state that issued the bond. Federal debt is exempt from state and local income taxes
Which of the following portfolio strategies is the most risky?
investing 100% in small-cap technology company
Which of the following portfolio strategies is likely to be the least risky?
investing equally in 20 stocks that are all in different industries
Bonds that are rated BBB or better by Standard & Poor's are referred to as
investment-grade bonds
It's advisable to start planning for your children's education when they are young so that your ___________ have many years to earn interest.
investments
The biggest problem with timing strategies is
it is difficult to correctly predict highs and lows in the market
How does a trust minimize estate taxes owed?
it removes property from the taxable estate
A _________ annuity payout from a defined-benefit plan is designed to protect spouses who do not have their own retirement account or IRA.
joint and survivor
As an investment, government bonds are _____ than corporate bonds
less risky
When compared to married couple retirement households, single retirees have ________ the household income.
less than half
Financing the purchase of investment real estate with a mortgage when borrowing at low rates of interest and investing in assets that earn more than they cost puts you ahead of the game due to the concept of
leverage
Social security is _______ to be around when you retire
likely
An investor interested in a short-term horizon will avoid purchasing real estate, art, and collectibles due to _______ risk
liquidity!
Large cap stocks have a ________ average expected return than small cap stocks
lower
Treasury bonds have _________ rates of return than corporate bonds with the same maturity.
lower
For actively-traded stock issued by a technology company, the most important type of risk to consider is _________ risk
market
The _________ is the number of years before the bond issuer must repay the principal on a bond.
maturity
As with other types of financial planning, the last step in retirement and education planning is to
monitor your progress and revise your plan as needed
A pre-retiree says, "I had planned to increase my retirement plan contributions this year, but I needed the money for our trip to Disney World." This person is exhibiting the behavioral bias called
myopia
The term used by economists to describe the tendency of people to overemphasize short-term goals and outcomes is called
myopia
Which of the following is the most appropriate investment for emergency funds?
near-term safer securities with a predominance of money market funds
A living trust takes effect
now
The three-legged stool of retirement is a metaphor for retirees suggesting that retirement be funded by three sources: employee-sponsored retirement plans, social security, and
personal savings
Dell is an American computer company. The founder, Michael Dell, and global technology investment firm, Silver Lake Partners, own all of the shares of Dell. It is not possible to buy shares of Dell stock on the secondary market because Dell is a
private corporation
Joint ownership of household checking and savings accounts allows these assets to avoid
probate
The legal process of settling an estate is known as
probate
In health insurance plans, coinsurance is a(n)
proportional sharing of medical costs by the insurer and the insured.
If you wanted to know more about a new stock issue, you would ask the company for a(n)
prospectus
Beneficiaries are those persons or entities who
recieve a distribution under the terms of a will
Naming a beneficiary for your retirement account will ________ taxes owed on your estate
reduce
Portfolio diversification in the real world can be employed to
reduce risk of a portfolio up to a point
High-frequency trading is done in the _______ market
secondary
Based on historical performance of various investments, which of the following is considered the riskiest on the list and therefore will have the highest expected rate of return over the long-term?
small U.S. company stocksTher
The primary source of income for today's retirees is
social security
Who can inherit an unlimited estate without being subject to federal estate tax?
spouse
If you are worried about a stock market decline, you can place a ________ to limit your losses
stop loss order
The major advantage of term life insurance over whole life insurance is that
term life tends to have lower premiums than whole life for the same face value.
Marnie and John have a joint and survivor annuity. This means that
the annuity pays a benefit until the second spouse dies.
The law requires that the signing of a will be witnessed in order to verify
the mental capacity of the person writing the will
In a long-term care insurance policy, the amount of time that the policyholder must pay for long-term care, either from household resources or Medicare, before the insurance will cover any of the cost is called
the waiting period.
It is illegal for insiders to
trade on company information not available to the public
A Section 529 plan, which is offered by a state, can be either a prepaid tuition plan or a savings plan.
true
A disadvantage of saving for retirement in a tax-deferred account is that there are restrictions on your use of the funds prior to retirement.
true
Benjamin earns $150,000 per year and has decided to contribute money to his grandson's education. Because of his high income Benjamin cannot contribute to a Coverdell Education Savings account, but he can contribute to a section 529 savings plan.
true
By law, a REIT must have a buy-and-hold strategy and have at least 100 stockholders
true
Contributions to a traditional IRA are tax deductible and withdrawals in retirement are taxed as income. Roth IRAs differ in that a Roth IRA provides no tax break for contributions, but earnings and withdrawals are generally tax-free.
true
Investors in real estate generally expect to benefit from the combination of price appreciation and cash flow
true
Small company stocks, as an investment, are riskier than large company stocks
true
Social Security provides benefits to non-working spouses of qualified workers.
true
There is no federal estate tax due in 2016 for estates of less than $5.45 million
true
If you own 100 shares of stock currently selling at $50 per share and the company declares a 3 for 1 split, you will have 300 shares selling at approx. $16.67 after the split
true 100 x 50 = $5000 $5000/300 = $16.67
Common stockholders have the right to _______
vote for the board of directors
The most important component of an estate plan for a 70 year old grandfather who wants to pass wealth on to grandchildren will be having a
will
If you die "inestate", you have died
without a valid will
If a firm has a P/E of 12 and a current price of $48, then its EPS is:
$4.00 EPS = after-tax net income / number of shares outstanding P/E = stock price/EPS 12= 48 / x x= 4
Under current tax law, you an your spouse may give up to _____ per person to as many people as you like tax-free
$14,000
The net asset value of a mutual fund is worth $100 million, has liabilities of $5 million, and has 5 million shares is
$19 per share net asset value= (market value of assets-market value of liabilities)/ number of shares (100 million - 5 million)/ 5 million = $19 per share
Gloria has calculated that she needs $50,000 her first year of retirement to maintain her standard of living. She expects to receive $1,000 per month from her employer DB plan and $1,500 per month from Social Security. What is her annual retirement income shortfall?
$20,000 multiply each by 12 (1,000 x 12); (1500 x 12) then subtract from before tax needs income in first year of retirement
Joe's expenses are about $3,500 per month. Use the replacement ratio method to estimate his annual retirement expenses.
$29,400 - $33,600 (multiply by 70-80%)
If you were to buy a $10,000 health insurance plan for the year through your employer as a pre-tax deduction, and you are able to buy the same policy in the marketplace for the same price, how much in pre-tax savings will you acquire, assuming a 25% tax rate?
$3,333
If a company has 1.5 million shares outstanding at $25 per share, what is its market capitalization?
$37.5 million current market price x number of shares outstanding = market capitalization $25 x 1.5 million = 37.5 million
Margo, the CEO of an NYSE-traded company, gives a tip to her brother Jared that her company is about to announce very favorable news. Jared buys the stock before the announcement and then sells it when the stock price goes up, making $10,000 in trading profits. Which of the following is true about this transaction?
Jared is guilty of insider trading
If you are invested primarily in small company stocks, the most appropriate benchmark for you to assess your portfolio performance would be
NASDAQ
Janet Arbuckle has decided that she only needs $30,000 per year to live a comfortable life. In talking to her financial advisor, he forecasts 3% inflation in the long run. As Janet wants to retire 20 years from now, she has calculated her first-year retirement needs will be about $72,000 in future dollars. Is she correct? Why?
No, adjusting for inflation, $30,000 will be worth approximately $54,000 in 20 years. FV=PV x (1+i)^n FV=30,000 x (1+.03)^20
