FIN 250- Chapter 7

Bart has been a successful financial advisor for more than 10 years. During that time, he has generated returns that have never been less than 5% annually. He does not advertise but that has not stopped investors from opening new accounts with his firm. It turns out that Bart has been taking the deposits of new investors, keeping a portion for himself, and sending the rest to earlier investors. Bart is running a(n):

Ponzi Scheme

If a parent's intent is to save for their child's education, which savings product is best? - Qualified Tuition Plan. - UTMA - Savings account. - UGMA

Qualified Tuition Plan

Which of the following sources of emergency funds will have the least negative impact on your lifetime financial situation if the source is used to meet emergency expenses? - Selling investment assets. - Taking money from your savings account. - Borrowing money using a credit card. - Being unprepared for major car repairs, major medical expenses, and major home repairs.

Taking money from your savings account.

Which of the following is a benefit of holding money in a CD for an emergency fund? - There are no benefits to holding money in a CD for an emergency. - The money is earning a higher rate of return than a savings account. - The money cannot be withdrawn without a penalty prior to maturity. - The money could be earning a higher rate of return if it were invested more aggressively.

The money is earning a higher rate of return than a savings account.

When interest rates increase, which of the following outcomes is most likely? - The value of investments will increase. - The rate of return on a bank or credit union savings account will increase. - Holding cash in an emergency fund is more attractive. - The rate of return on a bank or credit union savings account will increase, and holding cash in an emergency fund is more attractive.

The rate of return on a bank or credit union savings account will increase, and holding cash in an emergency fund is more attractive.

Lannie funded her Roth IRA yesterday. Unfortunately, today she had an unexpected financial emergency. What is the earliest she can take out her contribution to the Roth IRA without a penalty?

Today

All of the following bank products allow a depositor to make additional contributions to the account, except a: - certificate of deposit - dedicated savings account - savings account - money market savings account.

certificate of deposit

All of the following are true of custodial accounts, except: - minors can set up custodial accounts with an older relative or friend. - custodians can withdraw money from a custodial account for the benefit of the minor. - custodial accounts represent a way parents can indefinitely control the money they give to children. - minors can set up custodial accounts with a parent.

custodial accounts represent a way parents can indefinitely control the money they give to children.

Roth IRA accounts are unique because:

investment earnings receive unique tax treatment.

All of the following charge a depositor an early withdrawal fee, except a: - certificate of deposit. - money market savings account. - dedicated savings account. - All accounts charge an early withdrawal fee.

money market savings account.

One strategy to avoid prize scams from telemarketers is to:

never pay anything to receive a free prize and never give your credit card number out over the phone unless you initiated the phone call.

A fraud that entails recruiting new members to sell products or services and to also recruit additional new members is called a(n):

pyramid scheme

Which of the following has the highest level of liquidity? Stocks. Commodities. Certificates of deposit. Savings accounts.

savings accounts

The tax benefits of custodial accounts mean that:

the tax rate on the investment earnings could be as low as 0%.

All of the following are true of traditional IRAs, except: - withdrawals before the account holder reaches age 59½ years old are taxable and may be subject to a penalty. - contributions are made with pretax dollars. - contributions are deductions for AGI. - they are appropriate accounts to hold emergency funds.

they are appropriate accounts to hold emergency funds.

Borrowing money in the event of job loss is a bad idea because:

you may not have access to credit or other means to repay the debt, and it may lead to bigger problems.

If Kimberly can obtain a 4.5% yield on a single $600 EE bond, how much will the bond be worth after 15 years (round your answer)?

$1,161

Your neighbor has monthly expenses totaling $3780. His employer has indicated that the firm is expecting to announce layoffs soon. How much should your neighbor have in an emergency fund if he wants to cover 6 months of living expenses?

$22,690

Assume Margaret has owned an EE bond for 4 years. The fixed rate of interest is 8% and the current value of the bond is $1500. If Margaret were to cash in the bond tomorrow, how much interest will she lose (approximately) as a penalty?

$30

With a very stable profession, if your monthly expenses totaled $3170, approximately how much should you have in an emergency fund?

$9,510

Joe has cash in a savings account totaling $7,500, and his monthly expenses are $2,500. What is his emergency fund ratio?

3

Sharon, age 34, is thinking about investing for retirement. She plans to retire when she turns age 65. At that time, she will need $2.60 million in assets. She has calculated that inflation will average 2.55% over her lifetime. If she can earn an average annual 7.35% rate of return, what will be her real rate of return?

4.68%

Tony struggles to save money. He knows it is important, but his immediate needs and wants make it difficult for him not to spend the money he has set aside. Which of the following options would be most effective for him to start building savings? - Accepting that he probably will not be able to save money. - Gives $20 to his friend Maria each week and asks her to save the money for him. - "Hiding" cash in his apartment. - Automatically having money deposited into a restricted account each month.

Automatically having money deposited into a restricted account each month.

Tyler is 18 years old. He has $3,000 worth of EE bonds in his name. He received the bonds as gifts over the years. He is hoping to cash in the bonds and use the proceeds for college. Which of the following statements is true in relation to his goal? - Because he is younger than age 24 and single, he will not owe taxes when the bonds are redeemed. - Because he received the bonds as a gift, he must pay taxes on the full amount of the redemption. - Because he is using the bonds for college, he will not owe taxes when the bonds are redeemed. - Because he is younger than age 24, he will need to pay taxes on the interest earned when the bonds are redeemed.

Because he is younger than age 24, he will need to pay taxes on the interest earned when the bonds are redeemed.

Which of the following statements best describes the concept of tax-deferred growth? - Taxpayers can take deductions for the taxes that they pay on the earnings in the account. - Earnings within an account are not taxed as income until the earnings are withdrawn from the account, which could be many years after the earnings were first credited to the account. - Earnings are never taxed. - Earnings do not accumulate in the account until after taxes have been paid.

Earnings within an account are not taxed as income until the earnings are withdrawn from the account, which could be many years after the earnings were first credited to the account.

Which of the following statements is true when you invest in a federally insured bank account? -Although there is federal insurance, you are faced with liquidity risk. - Given the federal insurance, you are taking significant business risk. - Even though there is federal insurance in place, you still face inflation risk. - Given the federal insurance, you are taking no risk.

Even though there is federal insurance in place, you still face inflation risk.

Which of the following should Taylor have to invest at Level 3 of her investment pyramid? - A strong preference for government-insured products. - High risk tolerance. - Limited emergency fund savings. - Short- to intermediate-term time horizon.

High risk tolerance.

In which of the following can UTMA accounts invest? I.Real estate.II.Mutual funds.III.Bonds.

I, II, and III

Which of the following statements regarding the taxation of U.S. savings bonds is correct? - Interest on I bonds is not taxable but interest on EE bonds is taxable. - If savings bonds' proceeds are used to pay for qualifying higher education expenses, such as college tuition and fees, the interest is only taxed by the state government and not the federal government. - Interest on I bonds and EE bonds is not taxed by the federal government. - Interest on I bonds and EE bonds is taxed by the federal government when the bonds are redeemed.

Interest on I bonds and EE bonds is taxed by the federal government when the bonds are redeemed.

What are benefits of a custodial IRA?

It offers tax-deferred growth on investment earnings, allows minors to build long-term savings, and gives minors control of assets in the IRA once they reach the age of majority.

How can Karina redeem a U.S. savings bond?

Log into her Treasury Direct account and follow the redemption procedure.

Who of the following may establish a Roth IRA? - Shelby, who had $3,000 of interest income last year. - Mary, who is retired and is taking distributions from her traditional IRA. - Lamar, who is enrolled in college and has $9,000 in scholarships. - Nelda, who is still in college and has a part-time job as a sales clerk.

Nelda, who is still in college and has a part-time job as a sales clerk.

Which of the following is not a strategy to protect against identity theft? - Reconcile your monthly account information to make sure there are not any unauthorized transactions. - Never use credit cards online since nearly all identity theft occurs online. - Never respond to unsolicited e-mails asking for credit cards, passwords, or other financial or security information. - Always shred financial statements and receipts that show account-related information.

Never use credit cards online since nearly all identity theft occurs online.