Personal Finance Ch3

Bill is evaluating different cash management accounts for his escrow account. Which of the following is the least important factor to consider? A The interest rate earned on the account B How easy it is to withdraw money from the account C The risk of losing the original investment D Any fees that are charged on the account

C The risk of losing the original investment

If you make credit card purchases and do not pay your credit card bill in full each month, you are more likely to be A running a budget surplus. B revising your budget. C running a budget deficit. D on budget.

C running a budget deficit.

If a family forecasts that they will have negative net cash flow for each of the next six months, they must be A planning to file for personal bankruptcy. B spending less than their after-tax income. C using credit to finance the budget shortfall. D planning to have a positive cash flow in the following six months.

C using credit to finance the budget shortfall.

Annual percentage yield (APY) will A be less than the stated nominal interest rate. B always equal the rate of inflation. C usually be greater than the stated nominal rate. D be equal to the stated nominal interest rate.

C usually be greater than the stated nominal rate.

Janet and Daniel are a married couple with no children, who are in their mid-30s. The proportion of their budget spent on health-care expenses when they are in their 60s and older will likely A be greater than it is now. B be about the same over their entire lifetime. C decrease with inflation. D be less than it is now.

A be greater than it is now.

Checking accounts at commercial banks can differ on all of the following factors except A minimum balance requirements. B amount of FDIC insurance. C overdraft fees. D interest paid on balances.

B amount of FDIC insurance.

Deborah's bank just covered two of her checks that cleared today through her overdraft protection. Her bank typically charges $25 for insufficient funds transactions and 18 percent APR on credit advances. What will be her charge for the overdraft protection? A Overdraft fee of $50 and 18 percent APR on the daily balance of the overdraft B Overdraft fee of $25 C Interest charge of 18 percent APR on the daily balance of the overdraft D Overdraft fee of $50

C Interest charge of 18 percent APR on the daily balance of the overdraft

Caroline is comparing her actual expenses for the past several months with her budgeted amounts for each category of spending. Which step of the budgeting process is this activity a part of? A Forecasting B Implementing C Monitoring D Reevaluating

C Monitoring

Recently, many financial institutions, such as Bank America, that had previously fit into the commercial bank category have been trying to redefine themselves as a multiservice financial institution in an attempt to provide A "one-stop shopping" for their customers. B "core values" to their shareholders. C "differentiation" to the public. D "boutique" experience for their customers.

A "one-stop shopping" for their customers.

Approximately, how can you calculate how long will it take to double your money if you can earn 12% per year? A 72/12% B 12%/72 C 72/0.12% D 0.12%/72

A 72/12%

Tony and Tina want to have liquid assets of at least 5 times their monthly expenses as an emergency fund. They currently have $3,500 saved. Their total annual expenses equal $66,000. How do they calculate how much more do they need to save? A $66,000 less $3,500 B $66,000 multiplied by 5/12 of a year, then less $3,500 C $66,000 less the product of $3,500 divided by 5 D $66,000 multiplied by 5/12 of a year

B $66,000 multiplied by 5/12 of a year, then less $3,500

John would like to have $8,000 in his emergency fund. He is able to save $500 every month. At the end of last month, he had a balance of $1,500. How can he calculate how many more months he needs to save to achieve his goal? A $8,000 divided by $500 B $8,000 less $1,500, then divided by $500 C $8,000 less $500, then divided by $1.500 D $8,000 divided by $1,500

B $8,000 less $1,500, then divided by $500

Sophie is backpacking throughout Europe this summer and has unfortunately been arrested for participating in a rally that got out of hand. How can her parents electronically send money to the authorities as soon as possible to pay the steep fine so that she can be released from jail? A Venmo B MoneyGram C Square D Wire transfer

B MoneyGram

Hanna owns a rental apartment unit. Her college student tenants do not always pay their rent on time and Hanna ends up having a cash management problem when her mortgage auto-payment hits. Which of the following cash management solutions would be most appropriate for Hanna's situation? A Stop payment order B Overdraft protection C Wire transfer D Prenuptial agreement

B Overdraft protection

Of the following, which is not one of the main reasons for tracking budget variances? A Ensuring that large, irregular cash expenses do not cause financial hardship B All of the choices are correct. C Determining which expense accounts are the highest percent of the budget D Identifying small cash leakages before a major shortfall

C Determining which expense accounts are the highest percent of the budget

Which of the following financial institutions is likely to have portfolios of loans with some of the longest maturities? Why? A Credit unions. They lend the largest proportion of their money for mortgages among all financial institutions and also seek out the riskiest borrowers for greatest return. B Savings and loan institutions. They are required to lend a majority of their deposits for home mortgages. C Money market funds. They invest in long-term foreign corporate bonds and long-term mortgages. D Commercial banks. They only lend money for home mortgages that have long maturities.

B Savings and loan institutions. They are required to lend a majority of their deposits for home mortgages.

Which category of expenses typically makes up the largest category of a household budget? A Education B Housing C Food D Clothing

B: Housing

Marci started the month with a balance of $1,000 in her checking account. During the month, she withdrew $250 from the ATM, wrote $800 in checks, and had a payroll deposit of $2,500. Which equation will show her ending balance? A $250 + $800 − $2,500 + $1,000 B $250 + $800 − $2,500 C $1,000 − $250 − $800 + $2,500 D $1,000 + $250 + $800 − $2,500

C $1,000 − $250 − $800 + $2,500

Cindy's checking account provider charges a fee of $30 if her account balance falls below $500 in a given month. How can she calculate what percent a year one monthly charge on an average balance of $1,000 would be? A $30 divided by $500, divided by 12 B $30 divided by $1,000, divided by 12 C $30 divided by $1,000 D $30 divided by $500

C $30 divided by $1,000

A 5-year bank CD pays a 2.25% APY. If the depositor pays state plus federal income taxes at the rate of 28%, what is the equation to calculate her after-tax annual return? A 1 − 0.28 B 2.25% − 1.28% C 2.25% × (1 − 0.28) D 2.25% + 0.28%

C 2.25% × (1 − 0.28)

With increasing use of the web for online purchases, what antifraud precaution should you take before giving your credit card number? A Make sure the website offers a money-back guarantee. B Call your close friends to find out if they have heard anything negative about the Internet business. C Check with your local better business bureau. D Make sure the website is trusted and is electronically secure.

D Make sure the website is trusted and is electronically secure.

What is the advantage of investing $20,000 in a Series I U.S. savings bond? A Series I bonds earn the highest amount of interest allowed by law. B Series I bonds reach maturity much faster the other types of investments. C Series I bonds are guaranteed to increase in value over time. D Series I bonds are protected from inflation and are tax exempt.

D Series I bonds are protected from inflation and are tax exempt.

Deirdre spent almost $1,000 last year on bank charges for overdrafts and extra interest and penalties on overdue payments. This year she is steadfast in her cash management and laid out some strategies. Which of the following would not help in her efforts? A Keeping careful track of cash flow by reconciling the check register with online balance B Consolidating accounts at Big City Federal Savings to free checking and better rates C Setting bills on auto-pay through electronic payments from checking D Sticking to her financial plan by paying herself last

D Sticking to her financial plan by paying herself last

Rocky is a new graduate and just got a job in the suburb of Big City. He is looking to purchase a new car. He wants to finance the purchase with a 60-month loan that he can auto-pay directly from a checking account. He figures that he can get a good deal doing this all at the same financial institution. He is most likely to find his financial needs being satisfied at A the company offering his auto insurance. B a payday loan company. C a mutual fund. D a local credit union.

D a local credit union.

If you plan on holding about $10,000 in a cash reserve account and do not know when you will need the money, the least suitable type of account to use is a(n) A regular savings account. B interest-earning checking account. C money market deposit account. D certificate of deposit.

D certificate of deposit.

Gary carries an average balance of $1,000 in his checking account. The bank pays 0.75% annual interest on the average balance, compounded monthly, and charges a monthly fee of $5. After adjusting for the monthly fee, the APY on this account will be A greater than 0.75%. B indeterminate. C equal to 0.75%. D less than 0.75%.

D less than 0.75%.

Charlene's checkbook, which was reconciled recently with her bank account statement, showed a balance of $365.24. She wrote four checks for $124.55, $96.34, $85.09, and $53.12, respectively, during the week, which were presented in that order and cleared by her bank. If Charlene has forgotten to record an ATM withdrawal of $40 earlier in the week, A if any of her checks result in an overdraft, the bank will refund the overdraft fee if she explains the error. B her bank will not charge an overdraft fee because it was a simple customer error due to an ATM transaction. C her bank will hold the check until Charlene's account receives an adequate deposit to cover it. D it is possible that some of her checks will result in an overdraft and she may be assessed an overdraft fee.

D it is possible that some of her checks will result in an overdraft and she may be assessed an overdraft fee.

Don is preparing for a trip to Vietnam and Laos. He will spend some time in the big cities with full access to banking services, but he will spend more than half of his time in smaller towns and villages that do not have ready access to banking services, so he will need to carry some local currency. What can Don do to be most prepared for his four-week trip? A In case of theft or loss of his credit and debit cards, Don would need to inform his bank(s) immediately to prevent their misuse. He should notify the banks that he is travelling internationally. B Don should only carry cash and traveler's checks and leave all of his credit and debit cards at home. C Don should only carry a minimal number of necessary credit cards and/or debit cards with sufficient available balances to meet his needs, along with transactional cash in his wallet. D Don should carry a large number of credit cards and debit cards in case he runs out of money and also write his bank log-in information on a piece of paper and put it in his wallet in case he needs to transfer money online when the Internet is available.

C Don should only carry a minimal number of necessary credit cards and/or debit cards with sufficient available balances to meet his needs, along with transactional cash in his wallet.

Which of the following is not a recommended strategy for reducing the risk of identity theft? A Shred bank and credit statements before throwing them away. B Check your credit card statements each month to be sure that all the charges are legitimate. C Never give out your credit card number over the phone or on the Internet. D Don't print your Social Security number on your checks.

C Never give out your credit card number over the phone or on the Internet.

Which of the following is not a common budgeting mistake people make? A Not being insured well enough B Being too generous C Saving too much into the work retirement account D Using credit cards too much

C Saving too much into the work retirement account

Ambrosia has just retired and received a lump sum of $400,000 from her employer. To be sure that her money is protected against the risk of bank failure while she decides how to invest it, what should she do? A She should put all of her funds in an account at an FDIC-insured financial institution. B She should invest the entire amount in a money market fund at her bank. C She should split the funds between accounts at least two different banks with no more than $250,000 in each. D She should split the funds into multiple accounts at the same bank with no more than $250,000 in each.

C She should split the funds between accounts at least two different banks with no more than $250,000 in each.

Brandy is comparing two banks in order to get a better deal on her checking account. Her current bank charges her $25 for each time her balance falls below the $500 minimum. The other bank has a $1,000 minimum balance but only charges $2 for each deficit. If she usually has a balance of $1,100 in her checkbook, in which bank should Brandy set up an account and why? A She should select the second bank because her usual monthly checkbook balance is never in any danger of falling below the minimum. B She should split her funds between the two banks in order to make sure she does not need to pay any charges. C She should use the second bank because, even though the minimum is higher, the penalty for below minimum balance is much lower, and she usually has a balance above the minimum balance. D She should select the first bank because her monthly balance is likely to fall under the threshold.

C She should use the second bank because, even though the minimum is higher, the penalty for below minimum balance is much lower, and she usually has a balance above the minimum balance.

Why are banks, credit unions, and nondepository types of institutions starting to converge in terms of products and services? A They are increasing access to branch-based services over online resources. B They are all trying to avoid paying new mandatory taxes. C They are competing for the same types of customers. D They are looking to form one large financial conglomerate.

C They are competing for the same types of customers.

One way to forecast variable expenses is to A keep them constant. B assign probabilities to different outcomes. C increase them by the expected inflation rate. D use a wide range of random estimates.

C increase them by the expected inflation rate.

Someone who is looking for a very safe investment that is fully insured, does not need to access the money for the next few years, and is interested in a slightly higher interest rate could consider A investing in a money market mutual fund. B Investing in a market deposit account. C purchasing a certificate of deposit. D keeping the money in a checking account.

C purchasing a certificate of deposit.

Beth is getting ready for a trip to West Africa. She will be traveling to small towns and often will need cash in the local currency. In larger towns, she can use her credit cards and debit cards, but in smaller towns, she will have little or no access to banking services. Which of the following statements best describes her proper financial preparedness for the trip? A Beth should only carry the necessary minimal number of credit cards and/or debit cards with sufficient available balances to meet her needs, along with transactional cash in her wallet. B Beth should only carry cash and leave all her credit and debit cards at home. C In case of theft or loss of her credit and debit cards, Beth would need to inform her bank(s) immediately to prevent their misuse. She should make copies of the front and back of her cards and put the copies in her luggage or purse so they will be handy on the trip. D Beth should carry a large number of credit cards/debit cards in case she runs out of money and also write her bank log-in information on a piece of paper and put it in her purse in case she needs to transfer money online.

A Beth should only carry the necessary minimal number of credit cards and/or debit cards with sufficient available balances to meet her needs, along with transactional cash in her wallet.

Students right out of college are often a bad credit risk and are, therefore, not a prime audience for large banks. What would a bank want to focus on for this demographic, considering they are not a source of significant deposits and future business loans? A The bank is anticipating that these customers will be a larger source of deposits and loans in the future. B The bank is trying to keep government auditors from snooping around for any unauthorized or illegal activity. C The bank is trying to maximize profits. D The bank is looking to reduce its tax burden by marketing to a demographic that is paying very little in taxes.

A The bank is anticipating that these customers will be a larger source of deposits and loans in the future.

Which type of expense is difficult to estimate in a budget? A Variable expenses B Fixed expenses C Essential expenses D Debt expenses

A Variable expenses

Which of the following services is normally provided for free by a bank to its depositors? A Withdrawal from the bank's ATMs B Stop payment order C Overdraft protection D Wire transfer

A Withdrawal from the bank's ATMs

Identity thieves can be successful if they lay their hands on all of the following types of personal information except A purchase receipts. B a Social Security number. C a credit card number. D a date of birth.

A purchase receipts.

The concept of paying yourself first is based on the idea that you should A set aside the money needed to achieve your personal goals before you spend it on other things. B first pay all your essential bills and then save the rest for your goals. C first pay all your bills and discretionary expenses and then save the rest for your goals. D first pay all your discretionary expenses and then save the rest for your goals.

A set aside the money needed to achieve your personal goals before you spend it on other things.

It is important to monitor your budget because A you can then go back to the original budget and revise it so that, going forward, you will be able to meet your expenses better. B your bank will be asking for your variances at the end of the month. C you do not have to go back and monitor your budget once it was developed. D to make sure you spent what is budgeted in all your categories.

A you can then go back to the original budget and revise it so that, going forward, you will be able to meet your expenses better.

Vijay has invested in a corporate bond that pays interest every six months at an annual rate of 6 percent. The annual percentage yield (APY) of this bond will A equal the rate of inflation. B be less than 6 percent. C be exactly 6 percent. D be greater than 6 percent.

D be greater than 6 percent.

Mike and Mindy are consulting with a financial planner who suggests they should hold five months' equivalent of expenses in liquid assets, which are short term in nature, for unforeseen events. If the couple spends an average of $3,550 a month and has accumulated $7,000 in their savings account, they A are over funded in their liquid asset fund. B should not save in a liquid asset fund as it earns a low return. C are properly funded in their liquid asset fund. D have a shortfall in their liquid assets fund.

D have a shortfall in their liquid assets fund.

Jane is estimating the cost of holding her emergency fund in liquid assets. Jane believes she could earn 3 percent in a long-term certificate of deposit at her local bank. Instead, her emergency fund is in a checking account earning 0.5 percent annually. The reduced interest earnings A is due to higher risk. B is due to inflation. C will cause Jane will lose money out of pocket. D is an opportunity cost to Jane.

D is an opportunity cost to Jane.

The Farradays hold $10,000 in their checking account for emergencies and earn 1% interest annually on the account. If they could earn 3% on a longer-term bank certificate of deposit (CD), what is the annual opportunity cost incurred by the couple? A 4% APY on $10,000 B 3% APY on $10,000 C 2% APY on $10,000 D 1% APY on $10,000

C 2% APY on $10,000

Which of the following is true about financial institutions' fees? A Some institutions will charge a bounced check fee between $10 and $50. B Some institutions require that you maintain a minimum balance in your checking account. C All of the choices are correct. D Some institutions will charge a service fee if a checking or savings account drops below a minimum balance, for example, $100 or $1,000.

C All of the choices are correct.

Which of these statements about credit unions is true? A Credit unions usually offer lower investment rates of return on large investments than banks do. B Competition between large banks and credit unions is often quite small because they serve different demographics of the population. C Credit unions are often able to offer higher interest rates on savings accounts than banks can. D The interest rates on home and auto loans are usually higher at a credit union.

C Credit unions are often able to offer higher interest rates on savings accounts than banks can.

When reconciling her online bank balance with her checkbook, Elizabeth found that her bank available balance was higher than the balance in her own records by $100. Which of the following is the most likely explanation? A $100 check she has written has not been deposited yet. B She forgot to post a $100 ATM cash withdrawal. C She recorded a $50 debit card purchase as a $50 deposit. D She deposited a check at the bank's drop box on Sunday.

A $100 check she has written has not been deposited yet.

An investment offers a tax-exempt return of 6%. If an individual is in the 40% tax bracket and was comparing it to a taxable investment, how do you calculate the pretax return in order to be equivalent to the tax-exempt investment? A 6% divided by 1 − 0.40 B 6% multiplied by 0.40 C 6% divided by 1 + 0.40 D 6% multiplied by -0.40

A 6% divided by 1 − 0.40

Barry is considering how much of his wealth he should have in liquid assets. Which of the following is not a reason for him to hold cash? A Preparing for closing on a new home purchase B Covering monthly transaction needs C Paying for unexpected car repairs D Making contributions to his retirement account

D Making contributions to his retirement account