Personal Financial Planning- Unit 1 Exam

Establishing how people differ in the way they spend their money is: A) Generally not of concern to advisors because everyone has the ability and knows how to spend. B) The third step of the financial planning process. C) Not a part of cash flow planning. D) The second step of the financial planning process. E) The first step of the financial planning process.

A) Generally not of concern to advisors because everyone has the ability and knows how to spend.

What is the underappreciated advantage associated with steady savings? A) It allows dollar cost averaging into investments. B) Steady savings allows even those without significant cash flow to save. C) It provides for nonhousehold members. D) It has significant tax advantages. E) None of the responses are correct.

A) It allows dollar cost averaging into investments.

Which of the following best describes a household? A) An organization of multiple people who live in the same dwelling and share financial and other resources intended for the well-being of its members. B) An organization of one or more people who live in the same dwelling and share financial and other resources intended for the well-being of its members. C) None of the statements best describe a household. D) A structure for one individual that lives in the same home. E) A organized financial relationship with a relative.

B) An organization of one or more people who live in the same dwelling and share financial and other resources intended for the well-being of its members.

Which of the following needs did the psychologist Abraham Maslow believe that people first try to satisfy? A) The need for safety. B) Basic or physiological needs. C) The need for cash. D) The need for belonging. E) Self-esteem needs.

B) Basic or physiological needs.

Which of the following are not considered part of the financial plan? A) Risk Management B) Capital budgeting C) Employee benefits D) Investment planning E) Tax planning

B) Capital budgeting

What are the overall limits associated with pension loans? A) 50% of the borrower's vested account balance or $50,000, whichever is less. B) 75% of the borrower's vested account balance or $50,000, whichever is less. C) 75% of the borrower's vested account balance or $50,000, whichever is less. D) 50% of the borrower's vested account balance or $100,000, whichever is less.

A) 50% of the borrower's vested account balance or $50,000, whichever is less.

How do savings influence the theory of consumer choice? A) All responses are correct. B) Savings allow us to make selections that are not only made for this year but for future periods as well. C) Savings allow us to consider a more realistic multi-year time frame. D) Savings allow us to consider a wide range of multi-year consumption bundles.

A) All responses are correct.

Which of the following statements about personal financial planning is inaccurate? A) All statement responses are accurate. B) Personal financial planning is used by people to anticipate and plot their future actions to reach their goals. C) Personal financial planning is used to solve a problem or to structure a plan for the future. D) Personal financial planning is the analysis and decision-making extension of personal finance.

A) All statement responses are accurate.

Why is it easier for homeowners to qualify to purchase a larger house with an adjustable rate mortgage? A) Because lenders tend to look at total interest costs in relation to household income in the first year of the loan. B) Because lenders tend to look at total interest costs in relation to household expenses in the first five years of the loan. C) Because lenders tend to look at total interest costs in relation to household income for the term of the entire loan. D) Because lenders tend to look at total interest costs in relation to household expenses in the first year of the loan.

A) Because lenders tend to look at total interest costs in relation to household income in the first year of the loan.

Which of the following best describes unrationed borrowers? A) Borrowers that have sufficient internal cash flow and assets to be able to select the loan maturity offering the most attractive rates. B) Borrowers that are allowed to borrow as much money as they wish, as they are in the lowest risk class. C) None of these responses describe unrationed borrowers. D) Borrower that are short of internal cash flow and would like to borrow more credit at comparable interest rates than is available.

A) Borrowers that have sufficient internal cash flow and assets to be able to select the loan maturity offering the most attractive rates.

Which of the following best characterizes the household enterprise? A) It attempts to run the household as efficiently as possible in order to provide as much time and money as possible for pleasurable activities. B) It attempts to maximize pleasurable activities so as to minimize time-wasting activities. C) It attempts to minimize pleasurable activities so as to maximize revenue-generating opportunities. D) It attempts to earn as much money as possible.

A) It attempts to run the household as efficiently as possible in order to provide as much time and money as possible for pleasurable activities.

Which of the following is not a characteristic of debt? A) It does not help one even out life cycle style needs. B) All of the choices are characteristics of debt. C) It allows an outlay for a significant capital expenditure. D) It may make it possible to balance the peaks and valleys in one's spending pattern.

A) It does not help one even out life cycle style needs.

What was the expected result of the law changes arising from the Bankruptcy Abuse Prevention and Consumer Act of 2005? A) It will be more difficult to file for bankruptcy. B) The number of Chapter 14 bankruptcy filings will increase. C) It will be easier to file for bankruptcy. D) It will be more difficult for a lender to collect unpaid principal when a borrower files for bankruptcy. E) More debtors will try to file without the help of a lawyer.

A) It will be more difficult to file for bankruptcy.

The capacity to find a seller or buyer of an asset at its current value is: A) Marketability. B) Always super difficult. C) Liquidity. D) Emergency substitute. E) Liquidity substitute.

A) Marketability.

Why do the disciplines of psychology and sociology have a role in the practice of personal financial planning? A) They provide behavioral, rather than logical, explanations for how people act. B) They help us understand how people and households allocate scarce resources. C) They explain how people should act. D) They provide therapies that can reduce the anxiety faced by clients. E) They provide logical, rather than emotional, explanations for how people act.

A) They provide behavioral, rather than logical, explanations for how people act.

The net effect of government supported organizations such as Fannie Mae, Ginnie Mae, and Freddie Mac is to: 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. C) To narrow credit and offer it at a more expensive rate than might otherwise prevail. E) To broaden credit but offer it at a more expensive rate than might otherwise prevail.

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

What is the pure life cycle motive? A) To provide monies to even out differences in earnings over time. B) To take advantage of investment opportunities that can make achievement of our financial goals easier. C) To provide monies for the down payment or full purchase of longer-lived assets such as durable goods or educational expenditures. D) To provide a fund to cover future uncertainties such as fluctuating income, sickness, inflationary effects on expenditures, etc. E) To sacrifice today so that your future lifestyle can improve.

A) To provide monies to even out differences in earnings over time.

Biologists argue that: A) We are programmed through our genetic makeup to strive for certain objectives. B) Our goals are influenced by the way we were raised by our families and other groups of people in our environment. C) The sole driver of behavior is derived from prehistoric man. D) The underlying goal of most human behavior is to have as many pleasurable experiences as possible.

A) We are programmed through our genetic makeup to strive for certain objectives.

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 (including households with children). C) Above average growth of the single-adult-household category (excluding households with children). D) Below average growth of the single-adult-household category (including households with children). E) None of the responses are correct.

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

Which of the following are placed on the right-hand side of the balance sheet? A) Credit card debts. B) All of the items should be on the right side of the balance sheet. C) Taxes outstanding. D) Mortgage debt.

B) All of the items should be on the right side of the balance sheet.

Which of the following characterizes communication? A) It is the ability to transmit a message successfully to another person. B) All of the responses are correct. C) It is necessary even if you are honest, knowledgeable, and concerned. E) It is required to demonstrate to others that we possess desirable traits.

B) All of the responses are correct.

Which of the following is not a reason why financial planning procedures must be monitored and reviewed periodically? A) Individual goals change B) All of the responses are reasons why financial planning procedures must be monitored and reviewed periodically C) The financial environment changes D) Life situations change E) Incomes change

B) All of the responses are reasons why financial planning procedures must be monitored and reviewed periodically

Which of the following is not a reason why we include projections in a statement? A) To adjust our plans according to our forecasts. B) All of the responses are reasons why we include projections in a statement. C) To forecast resources to meet those needs. D) To better anticipate needs.

B) All of the responses are reasons why we include projections in a statement.

Peer groups are: A) None of the responses are correct. B) Friends and associates with similar backgrounds, against whom we measure ourselves. C) Households in a similar demographic category, against whom the advisor measures a household's financial health. D) Analysts that review a household's wealth from an objective and non-judgmental perspective. E) Analysts that review a household's wealth from a subjective and behavioral perspective.

B) Friends and associates with similar backgrounds, against whom we measure ourselves.

Which of the following are not placed on the left-hand side of the balance sheet? A) All of these entries are placed on the left-hand side of the balance sheet. B) Household equity. C) Furniture and fixtures. D) IRAs. E) Bonds and bond funds.

B) Household equity.

An implication of the life cycle theory is that: A) All responses are implications of the life cycle theory. B) Households are planners whose actions extend beyond their current resources and pleasurable activities today to future needs and assets to meet them. C) Household spending decisions are based on the amount of income they earn currently. D) Utility can be measured by only emotional assessment methods.

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

Which of the following is not a step in the personal financial planning decision making process? A) Establish the scope of the activity B) Identify and report tax evasion to the authorities C) Compile and analyze the data D) All of the responses are steps in the personal financial planning decision making process E) Gather data and identify goals

B) Identify and report tax evasion to the authorities

Which of the following characterizes personal financial planning services before 1970? A) None of the responses are correct. B) It was primarily available to the very wealthy. C) It was widely available to the general population. D) It primarily focused on insurance issues. E) It primarily focused on tax issues.

B) It was primarily available to the very wealthy.

Which of the following is typically not a characteristic of young clients? A) They place great emphasis on their current standard of living. B) Low risk tolerance. C) All of the responses characterize young clients. D) Estate planning is not on their minds. E) Savings are given lower priority.

B) Low risk tolerance.

Which of the following is not a consideration when deciding whether to prepay one's mortgage? A) Liquidity risk. B) Marketability risk. C) All of these are considerations. D) The riskiness of prepayment and investment alternatives. E) The after-tax interest cost on the debt retired should be compared with the after-tax return on investment alternatives.

B) Marketability risk.

Which of the following factors will result in a lower credit score? A) Children. B) One wage earner. C) Married. D) Favorable credit history. E) All of these factors will result in a higher credit score.

B) One wage earner.

Which of the following is not a characteristic of the cash flow statement? A) It represents how much cash has been generated over a period of time. B) The cash flow statement is fairly difficult to understand and measure. C) It includes all household operations that require financial resources. D) It may be the single best measurement of the household's financial performance. E) All of the responses are characteristics of the cash flow statement.

B) The cash flow statement is fairly difficult to understand and measure.

We naturally select: A) The consumption bundle that provides us with the lowest price given the attractiveness. B) The consumption bundle that provides us with the greatest enjoyment given our budget constraint. C) None of these statements are correct. D) The consumption bundle that provides us with the lowest price given our budget constraint.

B) The consumption bundle that provides us with the greatest enjoyment given our budget constraint.

Financial leverage is greater: A) The greater the amount of interest expense commitments but not debt repayment commitments. B) The greater the amount of interest expense and debt repayment commitments. C) The lower the amount of debt repayment commitments but not interest expense commitments. D) The lower the amount of interest expense and debt repayment commitments.

B) The greater the amount of interest expense and debt repayment commitments.

What is the goal of cash flow planning? A) To enable our net cash flows to grow as rapidly as possible, subject to our tolerance for risk. B) To plan income and expense flows so that work, cost of living, savings and investment and financing issues interact in an optimal way to provide the highest returns possible. C) To spend as much as possible on pleasureable activities. D) To minimize payments to the government. E) To present a current picture of the household's financial condition.

B) To plan income and expense flows so that work, cost of living, savings and investment and financing issues interact in an optimal way to provide the highest returns possible.

Life cycle stages include: A) Infant, child, adolescent, young adult, adult, elderly. B) Young, middle aged, and senior. C) None of the responses are correct. D) Student, employed, unemployed, retired. E) Child, adult, and elderly.

B) Young, middle aged, and senior.

What is a traditional cash flow statement? A) A cash flow statement that separates all inflows and outflows. B) All of the responses are correct. C) A cash flow statement that lumps together paydown of debt and interest payments. D) A cash flow statement that distinguishes between flows based on operating, capital expenditures, and debt repayment.

C) A cash flow statement that lumps together paydown of debt and interest payments.

Borrowing helps by providing funds that allow one to: A) Raise one's standard of living today. B) Finance a business. C) All of the responses are correct. D) Make investments such as those for the house and its possessions.

C) All of the responses are correct.

The conclusion of the client interview typically includes: A) The advisor summing the points covered during the meeting. B) The advisor establishing a date or other plan for action. C) All of the responses are correct. D) The advisor indicating that the time is drawing to a close.

C) All of the responses are correct.

Which of the following is not a reason for the popularity of credit cards? A) It is an alternative to holding large cash balances. B) Convenience. C) All of these answers are reasons for the popularity of credit cards. D) Bank loans are more costly for amounts under a few thousand dollars when fixed costs and transaction costs are included. E) t can be used to even out flows of expenditures.

C) All of these answers are reasons for the popularity of credit cards.

Which of the following is not a rule that can help you become a more effective listener? A) Keep your responses to the topic being discussed. B) Do more listening than talking. C) Avoid trying to get into the other person's way of thinking. D) Focus your full attention.

C) Avoid trying to get into the other person's way of thinking.

How do people select goods and services from those made available in the marketplace? A) By ranking goods and services into consumption bundles and ranking the bundles in order of satisfaction. B) By ranking goods and services into consumption bundles and ranking the bundles in order of price. C) By grouping goods and services into consumption bundles and ranking the bundles in order of attractiveness. D) By ranking goods and services in order of price, and then using these rankings to form consumption bundles. E) By ranking goods and services in order of attractiveness, and then using these rankings to form consumption bundles.

C) By grouping goods and services into consumption bundles and ranking the bundles in order of attractiveness.

What are financing activities? A) None of these responses are financing activities. B) The day-to-day financial functions of the household. C) Cash flows that come from changes in debt. D) Outlays on household related matters that provide benefit beyond the current year. E) The cash left over after our operating, capital expenditure, and debt activities.

C) Cash flows that come from changes in debt.

A household's sharing of fixed costs for shelter and other goods is an example of: A) Specialization of task. B) Reduction in income fluctuation. C) Economies of scale. D) Spend-through theory. E) None of the responses are correct.

C) Economies of scale.

What are the legal responsibilities associated with a household consisting of unmarried persons? A) Favorable tax treatment that result in tax deduction. B) Marital responsibilities set by the government. C) Few legal responsibilities unless set by contract recognized by state or local municipality. D) Reduction in risk of income fluctuation.

C) Few legal responsibilities unless set by contract recognized by state or local municipality.

Which of the following steps will not help in improving your credit rating? A) Pay all bills when due. B) Obtain and review your credit report. C) Increase the number of credit cards with outstanding balances. D) All of these steps will help in improve you credit rating. E) Plan future of credit.

C) Increase the number of credit cards with outstanding balances.

Which of the following is the market-established worth of a product or a financial instrument? A) Book value B) Investments C) Market value D) Cash flow D) Fair value

C) Market value

Which of the following is not applicable to a traditional household statement of cash flows? A) It is simpler than a functional household statement of cash flows. B) All of the responses apply to a traditional household statement of cash flows. C) Resembles business cash flow statement. D) Handles revenues properly. E) Calculates net cash flows properly.

C) Resembles business cash flow statement.

What is depreciation? A) None of the responses define depreciation. B) A non-tax deductible expense that depreciates household income. C) The projected reduction in asset value due to wear and tear or obsolescence. D) The projected increase in asset value due to capital gains. E) A non-tax deductible expense that depreciates household assets.

C) The projected reduction in asset value due to wear and tear or obsolescence.

Which of the following best defines household finance? A) The study of how much it costs to purchase a home. B) The study of how the number of people in a household can be maximized. C) The study of how a household and the people in it develop the cash flows necessary to support operations and provide for the well-being of its members. D) The study of how a household and the people in it can minimize the risk of bankruptcy. E) The study of how a household and the people in it limit expenditures and maximize cash inflows.

C) The study of how a household and the people in it develop the cash flows necessary to support operations and provide for the well-being of its members.

Behavioral finance can best be defined as: A) The study of how behavior is shaped by an individual's financial well-being. B) None of the responses are correct. C) The study of human actions in financial matters. D) How to improve people's decision-making abilities so that they can more easily achieve the goals they set. E) How to understand people's decision-making abilities so that they can more easily achieve the goals they set.

C) The study of human actions in financial matters.

Economists quantify goals in: A) Leisure terms. B) Behavioral terms. C) Utility terms. D) Financial terms. E) None of these terms.

C) Utility terms.

Why is theory useful to the personal financial planning process? A) It attempts to answer things in such a way as to confuse clients. B) All of the responses are correct. C) With theory, we can attempt to explain why people do what they do. D) The assumptions required by theory are always realistic. E) Theory encapsulates all of reality.

C) With theory, we can attempt to explain why people do what they do.

What is a household budget? A) An informal budget that the household uses to manage cash flows. B) A budget that is used to purchase a home. C) An informal budget that lists expenses but not sources of revenues. D) A formal budget that reflects all categories of household expenditures.

D) A formal budget that reflects all categories of household expenditures.

Which of the following is a reason why people do not save? A) They may be unable to visualize the long-term future. B) They may prefer greater spending today rather than in the future. C) They may be unable to estimate future revenues or current savings needs correctly. D) All of the responses are reasons people do not save.

D) All of the responses are reasons people do not save.

Which of the following is not a reason to communicate? A) To develop a relationship with another person. B) To convey specific facts. C) To persuade someone to follow your advice. D) All of these are reasons to communicate. E) To express your opinion or feelings about a matter.

D) All of these are reasons to communicate.

Which of the following is not a step in the household budgeting process? A) Compare budgeted with actual figures. B) Compute net cash flow. C) Compare net cash flows with goals and adjust. D) All of these are steps in the household budgeting process. E) Review results for reasonableness and finalize budget.

D) All of these are steps in the household budgeting process.

Which of the following designations does not have a broad educational requirement in financial planning? A) Chartered Financial Consultant (ChFC) B) National Association of Personal Financial Advisors (NAPFA) C) Registered Financial Advisor D) Chartered Financial Analyst (CFA) E)Certified Financial Planner (CFP) F) Personal Financial Specialist (PFS)

D) Chartered Financial Analyst (CFA)

Personality is relevant to personal financial planning. This is primarily because: A) Investment decisions are always based on behavioral factors. B) Understanding the client's personality allows the advisor to monitor the client for emotional outbursts. C) None of these responses is correct. D) Personality affects our tolerance for risk which influences our planning actions. E) The client's salary and career success is typically determined by the client's personality.

D) Personality affects our tolerance for risk which influences our planning actions.

What is household equity? A) The household's assets plus its liabilities. B) The household's liabilities minus its assets. C) None of these responses are correct. D) The household's net worth.

D) The household's net worth.

Which of the following best describes cash flow planning? A) None of the response describes cash flow planning. B) The recognition that cash flows can only be generated though strategic planning. C) Taking a current snapshot of assets and liabilities. D) The scheduling of current and future cash needs to achieve household goals. E) A financial planning scheduling strategy that links financial reviews to cash flows.

D) The scheduling of current and future cash needs to achieve household goals.

Which of the following best defines personal finance? A) The study of how people maximize risk for a given level of return B) The study of how people maximize return for a given level of risk C) The study of how ethics should influence financial management decisions D) The study of how people develop the cash flows necessary to support their operations and provide for their well-being E) The study of how people minimize risk for a given level of return

D) The study of how people develop the cash flows necessary to support their operations and provide for their well-being

The buying and selling of tangible goods and financial instruments is a feature of: A) a household B) a market structure C) an investment D) a market E) a visit to Walmart

D) a market

Which of the following is not a consideration when choosing the size of the emergency fund? A) The degree of risk. B) The availability of borrowing alternatives. C) Projections of future free cash flow to be generated. D) The amount of debt outstanding. E) All of the responses are considerations when choosing the size of the emergency fund.

E) All of the responses are considerations when choosing the size of the emergency fund.

Which of the following is not use to assess whether credit should be extended to a household? A) amount of income earned. B) The history of timely repayments of debt owed. C) Whether the loan is secured by an asset. D) The amount of debt outstanding. E) All of these factors are used to asses creditworthiness.

E) All of these factors are used to asses creditworthiness.

Understanding and improving people's decision-making abilities so that they can more easily achieve the goals they set is the objective of: A) Finance. B) Charging a commission. C) Behavioral finance. D) Risk management. E) Behavioral financial planning.

E) Behavioral financial planning.

Planning for yourself and others while you are alive, and for current and former members of your household and other people or institutions upon your death, is designated: A) Investment planning B) Retirement planning C) Special circumstances planning D) Cash flow planning E) Estate planning

E) Estate Planning

The ratio of liquid assets to total monthly household expenses is the: A) Discretionary cost percentage. B) Current ratio. C) Operating ratio. D) Nondiscretionary cost percentage. E) None of the responses are correct.

E) None of the responses are correct.

What are pro forma statements? A) Functional cash statements that were converted from traditional cash flow statements. B) None of the responses define a pro forma statement. C) Statements that do not include projections. D) Traditional cash statements that were converted from functional cash flow statements. E) Statements that include projections.

E) Statements that include projections.

What is empathy? A) Something not needed in the financial planning relationship. B) Speaking positively about another person's strongly held beliefs. C) Trying not to be judgmental about another person's position. D) Believing that you can rely on another person to perform as expected. E) Trying to place oneself in another person's position.

E) Trying to place oneself in another person's position.