Personal Finance 2
The claims of security owners in a corporation are satisfied in the following order:
bondholders, preferred stockholders, common stockholders.
Since 1927 the worst 20-year performance for stocks was a ____ of ____ percent.
gain ; 3
The mortgage suited for someone who has his or her home completely paid for but needs cash to live on is the ____ mortgage.
reverse
Selling shares of stock for more than you originally paid is called
capital gain
If a homeowner is considering insuring the home computer used in his or her home office, which of the following losses should be identified and evaluated? a. The computer itself b. Extra expenses that may arise because of its loss c. Loss of income sustained because of its loss d. All of these.
d. All of these.
What basic factor(s) affect(s) the monthly payment on a mortgage loan? a. Amount borrowed b. Interest rate charged c. Time period of the loan d. All of these
d. All of these
A bond is an interest-bearing negotiable certificate of long-term debt issued by a. corporation b. a municipality. c. the federal government.
d.Any of these.
The investment strategy where an investor buys a fixed dollar amount of stocks or mutual funds regularly over a long period of time is called
dollar-cost averaging
Lina has 20/40/15 automobile liability coverage and is involved in an accident that is her fault. Damages suffered by the other parties in the accident are as follows: First person¾bodily injury $10,000 Second person¾bodily injury $12,000 Third person¾bodily injury $25,000 Property damage $18,000 How much of these claims will not be covered by the insurance company and therefore come out of Lina's budget?
$10,000
Maria purchased 100 shares of JAX stock for $30 per share and sold this same stock one year later for $29 per share. She paid commissions of $50 when she purchased the stock and $45 when she sold the stock. Dividends of $2 per share were paid during the year. The capital loss on this stock transaction was
$195
How much would one pay in points on a $145,000 loan if 2 points were charged?
$2,900
Amy Lou Young purchased a health insurance policy with a $500 deductible and 40 percent coinsurance. If Amy Lou incurs $6,500 in covered medical expenses, her policy will pay
$3,600
Jensen and Flubb, Inc., has 17,000 shares of common stock outstanding with a market value of $86 a share. Jensen and Flubb's total sales over the past year were $2,860,000. What is this company's price-to-sales ratio?
0.51
Marvin was widowed at age 38 when his children were 8 and 10 years of age. Assuming his deceased spouse was eligible for Social Security survivor's benefits, how many years would Marvin be in the "blackout period"?
12 years
Gary purchased 250 shares of PAC stock for $37 per share and sold this same stock one year later for $44 per share. He paid commissions of $15 when he purchased the stock and $10 when he sold the stock. Dividends of $1.50 per share were paid during the year. The total rate of return on this investment was
22.70%
Refer to Figure 9-1. Assuming Janice and Ronald are willing to accept the higher risk of the loan 4 adjustable-rate mortgage (ARM), what is the highest possible interest rate they would be paying after three years?
7.75%
Gloria purchased a $1,000 bond for $935. The coupon rate of interest is 7.5 percent, and the bond matures in 12 years. What is Gloria's current yield on this bond?
8.02 percent
The typical required loan-to-value ratio today is no more than
80 percent
Seth and Alexandra Moore of Berrien Spring, Michigan have an annual income of $78,000 and want to buy a home. Currently, mortgage rates are 6 percent. The Moores want to take out a mortgage for 30 years. Real estate taxes are estimated to be $4800 per year for homes similar to what they would like to buy, and homeowner's insurance would be about $1500 per year. (a) Using a 28 percent front-end ratio, what are the total annual and monthly expenditures for which they would qualify? (b) Using a 36 percent back-end ratio, what monthly mortgage payment (including taxes and insurance) could they afford given that they have an automobile loan payment of $470, a student loan payment of $350, and credit card payments of $250? (Hint: Subtract these amounts from the total monthly affordable payments for their income to determine the amount left over to spend on a mortgage.)
A) $78,000 x .28= 21,840 annually & 1820 monthly 2) 78,000 x .36 = 28,080 / 12 = 2,340 - 470 - 350 - 250 = $1,270
A lease typically protects the landlord but not the renter. T/F
False
An original tenant who subleases to another tenant is automatically released from financial responsibility for future rent payments.
False
Bonds are shares of ownership in a corporation. T/F
False
Bonds pay dividends to the bondholder on a regular basis.
False
Common stockholders in a corporation that goes bankrupt could lose not only their original investment but might need to come up with more money to cover the corporation's obligations.
False
Diversification reduces all risk. T/F
False
Earthquake insurance is covered under the standard homeowner's insurance policies. T/F
False
For most homeowners, mortgage payments represent total housing costs.
False
Owing more on a home than its current market value is referred as being in default.
False
Technical analysis has proved to be a prominent tool in aiding investors to choose stocks. T/F
False
Term life insurance costs far more than cash-value life insurance. T/F
False
The major reason that people buy life insurance is to protect the person whose life is insured. T/F
False
Typically if your home is foreclosed you will owe any remaining debt between what the home is sold for at auction and the amount owed on the mortgage.
False
When considering insurance, loss frequency is more important than loss severity. T/F
False
When the other driver is at fault, damages to your car must be paid by the other driver's property damage liability coverage. T/F
False
Most investors nearing retirement are aggressive in investment philosophy. T/F
False
One should invest in a tax-free investment rather than a taxable investment whenever a tax-free investment opportunity is available. T/F
False
The more efficient a market for investments the easier it is to find bargains. T/F
False
Sally is in the 15 percent marginal tax bracket, Ben is in the 25 percent marginal tax bracket, and Julie is in the 28 percent marginal tax bracket. On the basis of only this information, a municipal bond investment would be most attractive to
Julie
Comprehensive automobile insurance protects against property damage losses caused by perils. Which one of the following is not a covered peril?
Rollover
Which of the following types of companies would tend to have the lowest P/E ratio?
Successful but stable
____ are sold on a discount basis with the gain at maturity representing the interest earned.
Treasury bills
A shareholder is also called a stockholder.
True
Automobile medical payments insurance will pay for the driver's injuries in an auto accident up to the policy limits. T/F
True
By using Monte Carlo simulations, investors can get a more realistic view of how much their current investments may yield in retirement. T/F
True
Capital gains (losses) are not realized until one actually sells the investment. T/F
True
Couples buying a home should generally put ownership in both names.
True
Earnings per share (EPS) indicate the income a company has available to pay as dividends and reinvest as retained earnings.
True
Fortuitous means unexpected both in terms of timing and magnitude. T/F
True
Investment banking firms specialize in serving as intermediaries between companies issuing new stocks and bonds and the investing public.
True
Lease agreements may contain a variety of restrictions that are legally binding on tenants.
True
Risk is the uncertainty about whether a financial loss will occur and how large the loss will be. T/F
True
Savings is the accumulation of excess funds by intentionally spending less than you earn. T/F
True
Securities are negotiable instruments of ownership or debt.
True
The cost of replacing the household labor of a stay-at-home spouse should be included in life insurance planning. T/F
True
The largest portion of return on equity investments normally comes from capital gains as opposed to dividend income. T/F
True
Umbrella liability insurance policies provide for high dollar amounts of coverage over and above the basic policies. T/F
True
Use of leverage will increase the rate of return on a capital gain and also will increase the rate of loss on a capital loss. T/F
True
When the purchase contract is signed, the seller keeps the earnest money as a deposit against the purchase price.
True
With a cooperative, the owner holds a share of the corporation that owns and manages a group of housing units.
True
You can add coverage under your auto insurance policy to protect the driver and passengers in your car that is hit by an uninsured driver. T/F
True
A price-to-rent ratio above 15 can mean that the prices for homes in a community are inflated.
True
Betas are used to measure the risk of a security relative to the overall market.
True
The dividends promised to preferred stockholders must be paid before the common stockholders are paid. T/F
True
The money left over after a company pays its expenses and interest to bondholders is called profit. T/F
True
A mortgage applicant who anticipated increasing interest rates would be most interested in
a mortgage lock-in.
Property taxes are based on the ____ of the house.
assessed value
One can lower insurance premiums by doing all of the following except
avoiding coinsurance
Investors who have to depend current income from their investments to supplement their living expenses should invest in ____ stocks.
income and blue-chip
Buying an alarm system as an option on your new sports car is an example of
loss control
The type of order that instructs the broker to buy or sell securities at the prevailing price is called a ____ order.
market
Investors who do not want to lose any of the money that they have invested are most interested in
perservation of capital
Alexis and Maxwell have decided to invest their investment dollars: 40 percent in stocks, 30 percent in bonds, and 30 percent in cash equivalents. Over the past year, the market value of their bonds increased while the market value of their stocks declined. Using the asset allocation model, they should now
sell some of their bonds and buy more stocks.
Market risk is also known as
systematic risk
When a bond is purchased at its face value, yield to maturity will be ____ the coupon rate printed on the certificate.
the same as
Jillian wants to rent an apartment that has monthly rent payments of $850 and requires a $400 security deposit and a $500 damage deposit. In order to move in, Jillian will probably be required to pay
$1750
What is the average share cost for the dollar-cost averaging strategy shown below?
$34.29
Silvia and Jason would like to purchase a home with the following monthly expenses: Principal and interest $980 Homeowner's insurance $350 Real estate taxes $265 Utilities $205 The couple needs to have an annual gross income of at least ____ in order to qualify for a loan if the front-end ratio requirement is 26 percent.
$73,615
Andrew and Maureen paid the following housing expenses during the year: Mortgage interest $7,000 Mortgage principal $600 Property taxes $2,000 Homeowner's insurance $600 Maintenance $850 Utilities $1,900 What is the total dollar amount of the housing expenses that can be deducted on their taxes?
$9,000
The real rate of return on a tax-free investment yielding 7 percent annually would be ____ percent if the investor were in the 35 percent marginal tax bracket and inflation were 4 percent.
0.55 percent
Research suggests that you can eliminate random risk by holding ____ or more stocks and bonds.
15
Refer to Figure 14-1. What is the price/earnings ratio for Rosa's?
9.3
Which investment would not be an appropriate choice for a conservative investor?
Aggressive-growth stocks
Risk retention would be most appropriate in which of the following cases?
Coverage for loss of a contact lens
Which of the following information about specific companies must be issued only when a new security is issued?
Prospectus
Which of the following investments has the lowest risk?
T-bills
Stephanie bought 250 shares of Discover stock in 1988. Recently the company declared a four-for-one stock split. Which of the following statements is true?
The market value per share of the new stock is worth approximately one-fourth the value of the old stock.
Which of the following is true regarding growth stocks?
They often have betas of 1.5 or more.
Which of the following characteristics would cause a person to prefer renting over buying housing?
Unknown job stability in the geographical area
The type of mortgage where the interest rate can fluctuate up and down according to an index of interest rates is the ____ mortgage.
adjustable-rate
Mortgage lenders charge interest rates based on your
credit score
Credit term life insurance is a ____ policy with ____ named as beneficiary.
decreasing term; the creditor
The primary difference between a speculative risk and a pure risk is that there is a chance for ____ in a speculative risk but a chance for ____ in a pure risk.
gain and loss; only loss
For families with children the bulk of their life insurance need relates to their
income-replacement.
Using borrowed funds to make an investment is called
leverage.
When comparing buying versus renting comparable housing, renting requires a ____ annual cash flow while buying typically ____ one's tax liability.
lower; decreases
The most accurate and complex method of calculating life insurance needs is the
needs-based approach.
A real estate broker has a legal obligation to the
party who is paying him or her
Your collection of multiple investments in different assets chosen to meet your financial goals is your
portfolio.
When purchasing insurance, you should
shop around for the lowest-cost coverage.
To calculate the total estimate of the required rate of return on an investment, multiply
the beta value times the estimated market risk return plus the risk-free T-bill rate.