Test Bank For Personal Finance, 2nd Edition Vickie L. Bajtelsmit Chapter 1-14

Test Bank For Personal Finance, 2nd Edition Vickie L. Bajtelsmit Chapter 1-14

Chapter 1

To accompany Personal Finance, 2nd edition, by Vickie Bajtelsmit Summary: 47 questions. 46 Multiple Choice | 1 Multiple Select LO 1.1

8

17%

LO 1.2

14

30%

LO 1.3

5

11%

LO 1.4

8

17%

LO 1.5

12

26%

47

Easy

6

13%

Medium

40

85%

Hard

1

2%

47

Knowledge

6

13%

Comprehensive

18

38%

Application

17

36%

Analysis

6

13%

47

Calculations Percentage Change Calculation

#14

Percentage Change Calculation (with distractor)

#15

Percentage Change Calculation (multiple yrs.)

#16

Annual Percentage Change Calculation

#17

Fee Calculation

#34

Opportunity Cost Calculation

#40

1. Personal finance is a specialized area of study that focuses A) exclusively on investments and retirement planning. B) on financial management, household budgets, and investments. C) exclusively on investment management and household budgets. D) on individual and household financial decisions, such as budgeting, saving, spending, tax planning, insurance, and investments. Answer: D Solution: Personal finance is a specialized area of study that focuses on individual and household financial decisions, such as budgeting, saving, spending, tax-planning, insurance, and investments. Format: Multiple Choice Title: Test Bank 1.1 Personal Financial Planning Section: Why Study Personal Financial Planning? Learning Objective: 1.1 Describe the personal financial planning process, and explain how the elements of a comprehensive financial plan fit together. Difficulty: Easy Bloomcode: Knowledge AACSB: Knowledge Expected Time to Complete: 1 minute 2. Critical to the success of building a comprehensive financial plan is that you approach its creation in a logical order. The steps to success, in the correct order, are as follows: A) Secure basic needs, build and protect wealth, and establish a firm foundation. B) Secure basic needs, establish a firm foundation, and build and protect wealth. C) Build and protect wealth, establish a firm foundation, and secure basic needs. D) Establish a firm foundation, secure basic needs, and build and protect wealth. Answer: D Solution: Critical to the success of building a comprehensive financial plan is that you approach its creation in a logical order. The steps to success are: establish a firm foundation, secure basic needs, and build and protect wealth. Format: Multiple Choice Title: Test Bank 1.1 Steps to a Comprehensive Financial Plan Section: Elements of a Comprehensive Financial Plan Learning Objective: 1.1 Describe the personal financial planning process, and explain how the elements of a comprehensive financial plan fit together. Difficulty: Medium Bloomcode: Comprehension AACSB: Comprehension Expected Time to Complete: 2 minutes 3. The financial planning process includes five steps. Four of the steps are listed next:

   

Analyze your current financial status. Implement your financial plan. Monitor your progress and revise your plan as needed. Organize your financial information and set short-term and long-term goals.

What is the missing step? A) Identify and evaluate alternative strategies for meeting your goals. B) Understand the personal financial planning process. C) Acquire the necessary decision-making skills and tools. D) Build wealth and protection against emergencies. Answer: A Solution: The five steps in the financial planning process are as follows: 1. Organize your financial information and set short-term and long-term goals. 2. Analyze your current financial status. 3. Identify and evaluate alternative strategies for achieving your goals. 4. Implement your financial plan. 5. Monitor your progress and revise your plan as needed. Format: Multiple Choice Title: Test Bank 1.1 The Five Steps in the Financial Planning Process Section: The Personal Financial Planning Process Learning Objective: 1.1 Describe the personal financial planning process, and explain how the elements of a comprehensive financial plan fit together. Difficulty: Medium Bloomcode: Comprehension AACSB: Comprehension Expected Time to Complete: 2 minutes 4. An effective financial plan must be adaptable to changing circumstances. Which would not be a reason to take you back to Step 1 of the financial planning process? A) Changes in economic conditions B) Birth of a child C) Purchase of life insurance D) Marriage Answer: C Solution: Many changes will occur over the course of your life. Not only will changes in your personal circumstances (a new job, marriage, and children) affect your financial planning objectives and strategies but also may changes in economic conditions necessitate a revision of your comprehensive financial plan. Thus, revising your plan takes you continually back to the beginning of the process again. Life insurance is a result of changing a financial plan. Format: Multiple Choice Title: Test Bank 1.1 Section: The Personal Financial Planning Process

Learning Objective: 1.1 Describe the personal financial planning process, and explain how the elements of a comprehensive financial plan fit together. Difficulty: Medium Bloomcode: Application AACSB: Reflective Thinking Expected Time to Complete: 1 minute

5. Personal financial planning does not include which of the following? A) Buying insurance B) Deciding which make and model of car to buy C) Budgeting D) Assessing attitude toward risk Answer: B Solution: Personal financial planning includes budgeting, savings, buying insurance, and assessing attitudes toward risk. While determining the cheapest form of financing and the opportunity cost associated with purchasing a car is part of financial planning, the qualitative factors involved in the make and model of a vehicle is not. Format: Multiple Choice Title: Test Bank 1.1 Personal Financial Planning Section: Why Study Personal Financial Planning? Learning Objective: 1.1 Describe the personal financial planning process, and explain how the elements of a comprehensive financial plan fit together. Difficulty: Medium Bloomcode: Comprehension AACSB: Comprehension Expected Time to Complete: 1 minute 6. Which is not a necessary activity in securing your basic needs? A) Making purchase and credit decisions B) Managing cash for liquidity and emergencies C) Selecting financial institutions for checking and savings accounts D) Investing to achieve long-term goals Answer: D Solution: Securing your basic needs is the second element of a comprehensive financial plan. Making purchase and credit decisions, managing cash for liquidity and emergencies, and selecting financial institutions for checking and savings accounts are all activities necessary to completing this part of your plan, not longterm investments. Format: Multiple Choice Title: Test Bank 1.1 Secure Your Basic Needs Section: Elements of a Comprehensive Financial Plan Learning Objective: 1.1 Describe the personal financial planning process, and explain how the elements of a comprehensive financial plan fit together. Difficulty: Medium

Bloomcode: Comprehension AACSB: Comprehension Expected Time to Complete: 1 minute 7. Which is not a necessary activity in establishing a firm foundation? A) Protecting income and wealth from losses B) Acquiring necessary decision-making skills and tools C) Understanding the personal financial planning process D) Setting short-term and long-term goals Answer: A Solution: Establishing a firm foundation is the first element of a comprehensive financial plan. Acquiring necessary decision-making skills and tools, understanding the personal financial planning process, and setting short-term and long-term goals are all activities necessary to completing this part of your plan, not insurance protection. Format: Multiple Choice Title: Test Bank 1.1 Establishing a Firm Foundation Section: Elements of a Comprehensive Financial Plan Learning Objective: 1.1 Describe the personal financial planning process, and explain how the elements of a comprehensive financial plan fit together. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Thinking Expected Time to Complete: 1 minute 8. Which is not a necessary activity in building and protecting wealth? A) Writing a will B) Investing to achieve long-term goals C) Buying property and liability insurance D) Managing cash for liquidity and emergencies Answer: D Solution: Writing a will, investing to achieve long-term goals, protecting income and wealth from losses, and buying property and liability insurance are all activities necessary to completing this part of your plan, not cash/liquidity management. Format: Multiple Choice Title: Test Bank 1.1 Build and Protect Wealth Section: Elements of a Comprehensive Financial Plan Learning Objective: 1.1 Describe the personal financial planning process, and explain how the elements of a comprehensive financial plan fit together. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Thinking Expected Time to Complete: 1 minute

9. As you build your financial plan, you’ll need to consider the unique characteristics of your household that may influence spending and saving. Which of these factors is not unique to your household? A) Life cycle stage B) Family makeup C) Inflation and interest rates D) Values and attitudes Answer: C Solution: Factors unique to your household are your life cycle stage, family makeup, and values and attitudes. While economic factors, such as inflation and interest rates, are important considerations for everyone who is developing and implementing financial plans. Format: Multiple Choice Title: Test Bank 1.2 Factors That Influence Financial Planning Decisions Section: Factors That Influence Financial Planning Decisions Learning Objective: 1.2 Describe how individual characteristics and economic factors influence personal financial planning. Difficulty: Medium Bloomcode: Comprehension AACSB: Comprehension Expected Time to Complete: 1 minute 10. If your ____ are larger than your _____, your wealth is negative. A) expenses; debts B) debts; assets C) assets; debts D) assets; income Answer: B Solution: If your debts are larger than your assets, your wealth is negative. Format: Multiple Choice Title: Test Bank 1.2 Life Cycle Factors Section: Individual Characteristics and Your Financial Plan Learning Objective: 1.2 Describe how individual characteristics and economic factors influence personal financial planning. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Thinking Expected Time to Complete: 1 minute 11. A person’s fundamental beliefs concerning what is important in life are referred to as A) judgments. B) values. C) attitudes. D) opinions. Answer: B

Solution: Values are fundamental beliefs about what is important in life. Format: Multiple Choice Title: Test Bank 1.2 Fundamental Beliefs Section: Individual Characteristics and Your Financial Plan Learning Objective: 1.2 Describe how individual characteristics and economic factors influence personal financial planning. Difficulty: Easy Bloomcode: Knowledge AACSB: Knowledge Expected Time to Complete: 1 minute 12. When the consumer price index (CPI) increases, A) you can buy goods and services cheaper. B) the prices of goods and services are more expensive. C) the value of the dollar is high. D) you will earn less on your investments. Answer: B Solution: In the United States, inflation is typically measured by the change in the CPI, which is a representative basket of more than 400 goods and services used by urban households, including food, housing, consumer goods, gasoline, and clothing. When the consumer price index (CPI) increases, the prices of goods and services become more expensive. Format: Multiple Choice Title: Test Bank 1.2 CPI Section: Economic Factors and Your Financial Plan Learning Objective: 1.2 Describe how individual characteristics and economic factors influence personal financial planning. Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 1 minute 13. As inflation _______, the spending power of money______. A) increases; increases B) decreases; decreases C) increases; decreases D) decreases; remains the same Answer: C Solution: Inflation refers to an increase in prices. As prices of goods and services go up, the spending power of your money goes down; thus, a dollar will not purchase as much as it previously did. Format: Multiple Choice Title: Test Bank 1.2 Inflation Section: Economic Factors and Your Financial Plan Learning Objective: 1.2 Describe how individual characteristics and economic factors influence personal financial planning.

Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 1 minute 14. Your salary was $32,000 in 2019. It increased to $35,000 in 2020. What was the percentage increase in your salary from 2019 to 2020? A) 8.57% B) 9.14% C) 9.38% D) 33.5% Answer: C Solution:

Format: Multiple Choice Title: Test Bank 1.2 Percentage Change Calculation Section: Economic Factors and Your Financial Plan Learning Objective: 1.2 Describe how individual characteristics and economic factors influence personal financial planning. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 15. Your salary was $28,000 in 2018 and $30,000 in 2019. In 2020, your salary was $34,000. What was the percentage increase in your salary from 2018 to 2020? A) 7.14% B) 11.76% C) 14.29% D) 21.43% Answer: D Solution:

Format: Multiple Choice Title: Test Bank 1.2 Percentage Change Calculation Section: Economic Factors and Your Financial Plan

Learning Objective: 1.2 Describe how individual characteristics and economic factors influence personal financial planning. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes

16. Your salary increased from $20,000 to $30,000 in five years. What is the percentage increase? A) 33% B) 50% C) 100% D) 150% Answer: B Solution:

Format: Multiple Choice Title: Test Bank 1.2 Percentage Change Calculation Section: Economic Factors and Your Financial Plan Learning Objective: 1.2 Describe how individual characteristics and economic factors influence personal financial planning. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 17. Your salary has increased 50% in 5 years. What is the annual percentage increase? A) 8.5% B) 8.7% C) 10% D) 11.2% Answer: A Solution: Annual percentage change = number of years.

– 1, where N =

Annual percentage change = – 1 = 0.085, or 8.5% Format: Multiple Choice Title: Test Bank 1.2 Annual Percentage Change Calculation Section: Economic Factors and Your Financial Plan Learning Objective: 1.2 Describe how individual characteristics and economic factors influence personal financial planning.

Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 18. The Federal Reserve often __________ the __________ rate to stimulate the economy. A) lowers; prime B) lowers; federal funds C) raises; federal funds D) raises; prime Answer: B Solution: The Federal Reserve (commonly called the Fed) controls the money supply in the economy in order to manipulate the rate of interest. The Fed lowers the federal funds rate to stimulate the economy and raises the federal funds rate to slow down the economy. Format: Multiple Choice Title: Test Bank 1.2 Federal Funds Section: Economic Factors and Your Financial Plan Learning Objective: 1.2 Describe how individual characteristics and economic factors influence personal financial planning. Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 1 minute 19. Why do interest rates on different types of borrowing, such as federal funds and mortgages, tend to track each other and the inflation rate? A) They are all long-term maturities. B) They are all short-term maturities. C) They are all affected similarly by economic conditions. D) They all have the same risks. Answer: C Solution: The interest rates on different types of borrowing, such as Federal Funds and mortgages, tend to track each other, and the inflation rate, because they are all affected similarly by economic conditions. Format: Multiple Choice Title: Test Bank 1.2 Interest Rates Section: Economic Factors and Your Financial Plan Learning Objective: 1.2 Describe how individual characteristics and economic factors influence personal financial planning. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Thinking Expected Time to Complete: 1 minute

20. The federal funds rate is the rate that A) banks charge customers for short-term loans. B) the Federal Reserve charges banks for short-term loans. C) banks charge each other for short-term loans. D) credit card issuers use as the teaser rate. Answer: C Solution: The federal funds rate is the interest rate that banks charge each other for short-term loans. Format: Multiple Choice Title: Test Bank 1.2 Federal Funds Rate Section: Economic Factors and Your Financial Plan Learning Objective: 1.2 Describe how individual characteristics and economic factors influence personal financial planning. Difficulty: Easy Bloomcode: Knowledge AACSB: Knowledge Expected Time to Complete: 1 minute 21. An expansion is a phase in the economic cycle that is characterized by _____ business investment and ______ employment opportunities. A) decreasing; decreasing B) increasing; increasing C) decreasing; increasing D) increasing; decreasing Answer: B Solution: An expansion is the growth phase in the economic cycle that is characterized by increasing business investment and increasing employment opportunities. In times of growth and low unemployment, salaries tend to rise more quickly, and there are better opportunities for advancement. Section: The Economy and the Job Market Format: Multiple Choice Title: Test Bank 1.2 Economic Factors and Your Financial Plan Learning Objective: 1.2 Describe how individual characteristics and economic factors influence personal financial planning. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Thinking Expected Time to Complete: 1 minute 22. Which of the following are parts of the economic cycle? (Select any two) A) Expansion B) Extension C) Decline D) Inflation

E) Recession F) Unemployment Answer: A and E Solution: The economy experiences a pattern of ups and downs, commonly referred to as the economic cycle, or business cycle. A low point in the cycle is called a recession (or, in the extreme, a depression) and the high point is called an expansion. Format: Multiple Select Title: Test Bank 1.2 Economic Cycles Section: Economic Factors and Your Financial Plan Learning Objective: 1.2 Describe how individual characteristics and economic factors influence personal financial planning. Difficulty: Medium Bloomcode: Comprehension AACSB: Comprehension Expected Time to Complete: 1 minute 23. Which of the following is not one of the recommended SMART guidelines for personal financial goals? A) Realistic B) Attainable C) Manageable D) Specific Answer: C Solution: The key to setting effective financial goals is to make them SMART: specific, measurable, attainable, realistic, and time-specific. Format: Multiple Choice Title: Test Bank 1.3 SMART Goals Section: The Goal-Setting Process Learning Objective: 1.3 Create a prioritized list of short-term and long-term personal financial goals. Difficulty: Easy Bloomcode: Knowledge AACSB: Knowledge Expected Time to Complete: 1 minute 24. Rosa graduated at the top of her high school class, and has set the following goal as part of her financial plan: ―graduate from college with a B.S. in Business Management.‖ Which aspect of the SMART goal model is missing from her goal? A) The goal is not specific. B) The goal is not measurable. C) The goal is not attainable. D) The goal is not time-specific. Answer: D

Solution: When you set SMART goals, it must be with specific due dates, as they are much more effective. Our natural inclination is to put off difficult tasks, so we need to set near-term and long-term targets to be sure we stay on track. Format: Multiple Choice Title: Test Bank 1.3 SMART Goal Guidelines Section: The Goal-Setting Process Learning Objective: 1.3 Create a prioritized list of short-term and long-term personal financial goals. Difficulty: Medium Bloomcode: Application AACSB: Reflective Thinking Expected Time to Complete: 1 minute 25. Andre graduated from college this year and obtained a well-paid job with a large accounting firm. Andre has developed the following goal: ―save for retirement.‖ This goal meets which criteria of the SMART goal model? A) Specific B) Measurable C) Time-Specific D) None Answer: D Solution: ―Save for retirement” does not meet any of the criteria listed as a SMART goal. A specific goal must clearly identify what you want to achieve: how much and at what interval will you save, such as ―save $400 per month until 65 years.‖ A measurable goal must be accounted to show progress, such as ―having your monthly saving automatically deposited to a retirement saving account.‖ A time-specific goal must be set with specific due dates, to be effective, such as ―direct-depositing $400 from your biweekly paycheck into your IRA until you reach 65 years old.‖ Format: Multiple Choice Title: Test Bank 1.3 Smart Goal Guidelines Section: The Goal-Setting Process Learning Objective: 1.3 Create a prioritized list of short-term and long-term personal financial goals. Difficulty: Medium Bloomcode: Application AACSB: Reflective Thinking Expected Time to Complete: 1 minute 26. Your goals will differ depending on your stage in the life cycle and your family makeup. Which is not an appropriate short-term savings goal? A) Spring break vacation B) Emergency fund C) Down payment on a home D) Life insurance Answer: C

Solution: Short-term goals should be reasonably accomplished within the next year, such as buying life insurance, taking a vacation, or setting aside an emergency fund. Estimating the costs of attaining the financial objectives is necessary in establishing a reasonable time frame for the respective goals. Format: Multiple Choice Title: Test Bank 1.3 Smart Goal Guidelines Section: The Goal-Setting Process Learning Objective: 1.3 Create a prioritized list of short-term and long-term personal financial goals. Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 1 minute 27. For many households, repayment of high-interest debt is an important financial goal. Using the following table, estimate the payments necessary to pay off $2,500 in credit card debt in two years at 15% APR.

A) $113 B) $121 C) $226 D) $242 Answer: B Solution:

Format: Multiple Choice Title: Test Bank 1.3 Monthly Payments Necessary to Pay Off Debt

Section: The Goal-Setting Process Learning Objective: 1.3 Create a prioritized list of short-term and long-term personal financial goals. Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 1 minute 28. Financial planners must have a A) college degree with an emphasis or major in business. B) college degree and two years of experience in finance. C) securities license from the state of federal government. D) willingness to provide financial advice. Answer: D Solution: Because virtually anyone can claim to be a financial planner, you’ll need to carefully evaluate the educational credentials and certifications of any professional you are considering hiring. Format: Multiple Choice Title: Test Bank 1.4 Financial Planners Section: Selecting Qualified Financial Planning Professionals Learning Objective: 1.4 Know when and how to find qualified financial planning professionals. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Thinking Expected Time to Complete: 1 minute 29. Which of the following should not be a major factor when choosing a personal financial planner? A) Affiliation B) Certification C) Education D) Reputation Answer: A Solution: In choosing a professional to help you with your personal finances, you should consider education, certification, experience, reputation, and fees. Format: Multiple Choice Title: Test Bank 1.4 Factors to Consider in Choosing a Planner Section: Factors to Consider in Choosing a Planner Learning Objective: 1.4 Know when and how to find qualified financial planning professionals. Difficulty: Medium Bloomcode: Application AACSB: Reflective Thinking Expected Time to Complete: 1 minute

30. Which of the following has passed a comprehensive examination covering all the topic areas considered necessary in the practice of consumer financial planning and has at least three years of work experience in the field? A) Accredited Financial Planner (AFC) B) Certified Public Accountant (CPA) C) Certified Financial Planner (CFP) D) Chartered Financial Consultant (ChFC) Answer: C Solution: Planners who are Certified Financial Planners (CFP®) have passed a comprehensive examination covering all the topics considered necessary in the practice of financial planning, and they have at least three years’ work experience in the field. Format: Multiple Choice Title: Test Bank 1.4 Qualifications of Financial Planners with Certifications Section: Factors to Consider in Choosing a Planner Learning Objective: 1.4 Know when and how to find qualified financial planning professionals. Difficulty: Easy Bloomcode: Knowledge AACSB: Knowledge Expected Time to Complete: 1 minute 31. Integrity of the profession is essential to its long-term success. Which professional is not required to pass a comprehensive exam and adhere to a rigorous code of ethics? A) Certified Public Accountants (CPAs) B) Attorneys C) Certified Financial Planner (CFP®) D) All these professionals are required. Answer: D Solution: Because the integrity of the profession is essential to its long-term success, the Certified Financial Planner Board of Standards adheres to a stringent code of ethics to promote the highest principles and standards for certified financial planners. Similar standards are required of Certified Public Accountants (CPAs) and attorneys. Format: Multiple Choice Title: Test Bank 1.4 Professional Requirements Section: Factors to Consider in Choosing a Planner Learning Objective: 1.4 Know when and how to find qualified financial planning professionals. Difficulty: Easy Bloomcode: Knowledge AACSB: Knowledge Expected Time to Complete: 1 minute

32. In a __________ arrangement, the planner is compensated for every financial product sold but does not receive any payment for developing a personal financial plan. A) Fee-only B) Commission-only C) fee plus commission D) fee offset by commission Answer: B Solution: In a commission-only arrangement, the planner receives no payment for helping you develop your financial plan or managing your portfolio but receives a commission when you buy or sell a financial product, such as mutual fund shares or an insurance policy. Format: Multiple Choice Title: Test Bank 1.4 How Are Planners Paid Section: How Are Planners Paid? Learning Objective: 1.4 Know when and how to find qualified financial planning professionals. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Thinking Expected Time to Complete: 1 minute 33. In a fee-only arrangement, the planner is typically compensated with an annual fee that is based on the A) number of financial products purchased. B) value of financial products purchased. C) number of meetings with the client. D) value of the client’s assets being managed. Answer: D Solution: In a fee-only arrangement, the planner is typically compensated with an annual fee that is based on the value of the client’s assets being managed, such as one percent per year of your investment portfolio or an hourly free for services. Format: Multiple Choice Title: Test Bank 1.4 Fee-Only Compensation Arrangement Section: How Are Planners Paid? Learning Objective: 1.4 Know when and how to find qualified financial planning professionals. Difficulty: Medium Bloomcode: Comprehension AACSB: Comprehension Expected Time to Complete: 1 minute 34. Dolores’s purchased 1,000 shares of the S&P 500 index (SPY) at $300 per share, inside her $1.1 million fee-only account this year. The planner’s firm charges

commissions of $0.27 per share and 1% on fee-based accounts. How much does her planner charge this year? A) $270 B) $3,000 C) $11,000 D) $11,270 Answer: C Solution: Although the firm can charge both commissions and fees in a fee-based account, Dolores’ account is a fee-only account. The planner charges a percentage fee of the assets in the respective account (1%per year of your investment portfolio). Hence, $1,100,000 × 0.01 = $11,000. Format: Multiple Choice Title: Test Bank 1.4 Fee Calculation Section: How Are Planners Paid? Learning Objective: 1.4 Know when and how to find qualified financial planning professionals. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 35. Henry pays his financial planner a one percent fee based on the value of the assets in his investment account. He noticed on his year-end statement that the firm rebated a $1,200 credit to his account. His planner said that was because the firm made $1,200 in dealer concessions from an IPO that he purchased. What type of fee arrangement is this? A) Fee-based B) Fee-only C) Fee plus commission D) Fee offset by commission Answer: D Solution: In a fee offset by commission arrangement, the planner charges a fee for services, as in a fee-only arrangement, but reduces the fee if commissions are later earned on products purchased by the client. This reduces the conflict of interest inherent in the commission-only arrangement, because the planner does not make extra money by selling you the financial products. In a fee-only arrangement, the planner would be prohibited from selling any investment that includes additional compensation. Format: Multiple Select Title: Test Bank 1.4 Planner Fee Arrangements Section: How Are Planners Paid? Learning Objective: 1.4 Know when and how to find qualified financial planning professionals. Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 1 minute

36. One of the biggest mistakes people make in their finances is that they are too _____ in their assumptions. A) specific B) optimistic C) pessimistic D) conservative Answer: B Solution: One of the biggest mistakes people make in their finances is that they are too optimistic in their assumptions. Being able to make reasonable assumptions is a critical component of successful decision making. Format: Multiple Choice Title: Test Bank 1.5 Assumptions Used in Financial Planning Section: Make Reasonable Assumptions Learning Objective: 1.5 Consider opportunity costs and marginal effects in making personal finance decisions. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Thinking Expected Time to Complete: 1 minute 37. If you are considering working part-time at a second job in addition to your regular one, you should only consider A) total costs and benefits of both jobs. B) total costs and benefits of each job. C) marginal costs and marginal benefits. D) marginal costs of each job and total benefits. Answer: C Solution: If you are considering working part-time at a second job in addition to your regular one, you should only consider marginal costs and marginal benefits and not the total costs and benefits of both jobs. The term ―marginal‖ refers to the change in outcome, or the additional benefit or cost, that will result from the decision you make. In choosing between two possible jobs, you’ll consider how much extra benefit you would get from the additional job and balance that against the extra financial and human cost. Format: Multiple Choice Title: Test Bank 1.5 Apply Reasoning Section: Make Reasonable Assumptions Learning Objective: 1.5 Consider opportunity costs and marginal effects in making personal finance decisions. Difficulty: Hard Bloomcode: Application AACSB: Reflective Thinking Expected Time to Complete: 2 minutes 38. You are considering adding a wood shop to your home. You enjoy woodworking and could make some items for sale. In considering this addition, you only look at

the extra cost of the shop and the potential benefits of having the shop. This is an example of A) opportunity cost consideration. B) sensitivity analysis. C) marginal reasoning. D) reasonable assumptions. Answer: C Solution: The term ―marginal‖ refers to the change in outcome, or the additional benefit or cost, that will result from the decision you make. In applying marginal reasoning, you will consider only the additional benefits that the shop brings and not the general benefits of having the addition in the first place. In choosing the addition, you’ll consider how much extra benefit you would get from the shop and balance that against the extra financial cost and burden. Format: Multiple Choice Title: Test Bank 1.5 Apply Reasoning Section: Make Reasonable Assumptions Learning Objective: 1.5 Consider opportunity costs and marginal effects in making personal finance decisions. Difficulty: Medium Bloomcode: Application AACSB: Reflective Thinking Expected Time to Complete: 1 minute 39. In deciding whether to attend graduate school full-time, estimating your lost earnings while you are in school is an example of A) marginal reasoning. B) sensitivity analysis. C) future value. D) opportunity cost. Answer: D Solution: Every financial decision you make has an opportunity cost, a measure of what you have to give up in order to take a particular action. You must decide whether the costs of attending graduate school and giving up the earnings from your job will be worth the net increase in earnings after graduation. Format: Multiple Choice Title: Test Bank 1.5 Apply Reasoning Section: Make Reasonable Assumptions Learning Objective: 1.5 Consider opportunity costs and marginal effects in making personal finance decisions. Difficulty: Medium Bloomcode: Application AACSB: Reflective Thinking Expected Time to Complete: 1 minute

40. Desiree currently works as a manager of an electronics store earning an annual salary of $50,000. She noticed an internal job opening for a regional manager that pays $100,000 salary, but an MBA is required for consideration. The cost for a fulltime MBA program in two years is $60,000. What is her opportunity cost for attending graduate school, without consideration for time value of money? A) $100,000 B) $120,000 C) $160,000 D) $220,000 Answer: C Solution: $60,000 cost of MBA program + $100,000 two years of missed earnings = $160,000 Format: Multiple Choice Title: Test Bank 1.5 Opportunity Cost Calculation Section: Consider Opportunity Costs Learning Objective: 1.5 Consider opportunity costs and marginal effects in making personal finance decisions. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 41. Which type of decision maker is spontaneous and often makes ―gut‖ decisions? A) Rational decision maker B) External decision maker C) Internal decision maker D) Intuitive decision maker Answer: D Solution: An intuitive decision maker is spontaneous and often makes ―gut‖ decisions. Format: Multiple Choice Title: Test Bank 1.5 Decision-Making Styles Section: Decision-Making Styles Learning Objective: 1.5 Consider opportunity costs and marginal effects in making personal finance decisions. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Thinking Expected Time to Complete: 1 minute 42. Holly is uncomfortable with change. She spends a lot of time thinking over alternatives, even for relatively inconsequential decisions. She is a typical A) agonizer. B) antagonizer. C) intuitive decision maker. D) analytical decision maker.

Answer: A Solution: An agonizer puts off making decisions as long as possible, spends a lot of time thinking over alternatives, even for relatively inconsequential decisions, and is uncomfortable with change. Format: Multiple Choice Title: Test Bank 1.5 Type of Decision-Making Section: Decision-Making Styles Learning Objective: 1.5 Consider opportunity costs and marginal effects in making personal finance decisions. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Thinking Expected Time to Complete: 1 minute 43. You are calculating your potential return on your stock investments. If you calculate different possible returns based on assuming a variety of interest rates and stock market conditions, this is an example of A) reasonable assumptions. B) sensitivity analysis. C) marginal analysis. D) opportunity cost. Answer: B Solution: Sensitivity analysis asks the question, ―What effect would it have on my personal finances if my assumptions turn out to be wrong?‖ By considering the outcomes under different assumptions, you can reduce the risk that your plan will have an unexpected impact on your finances. Format: Multiple Choice Title: Test Bank 1.5 Reasoning Application Section: Make Reasonable Assumptions Learning Objective: 1.5 Consider opportunity costs and marginal effects in making personal finance decisions. Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 1 minute 44. You have estimated that, if your investments earn 10 percent per year, you can retire at age 65. If you reestimate your retirement date assuming a lower investment return, you are using A) average reasoning. B) sensitivity analysis. C) marginal reasoning. D) opportunity cost. Answer: B

Solution: Sensitivity analysis asks the question, ―What effect would it have on my personal finances if my assumptions turn out to be wrong?‖ By reconsidering the expected investment returns, you are reducing the risk that your plan will not reach your goal. Format: Multiple Choice Title: Test Bank 1.5 Reasoning Application Section: Make Reasonable Assumptions Learning Objective: 1.5 Consider opportunity costs and marginal effects in making personal finance decisions. Difficulty: Medium Bloomcode: Application AACSB: Reflective Thinking Expected Time to Complete: 1 minute 45. If you must seek advice from a number of people before making a decision, you would be considered a (an) A) rational decision maker. B) intuitive decision maker. C) external decision maker. D) internal decision maker. Answer: C Solution: External decision makers must obtain opinions and confirmation from others before making decisions, because they have trouble making decisions independently. Format: Multiple Choice Title: Test Bank 1.5 Type of Decision-Making Section: Decision-Making Styles Learning Objective: 1.5 Consider opportunity costs and marginal effects in making personal finance decisions. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Thinking Expected Time to Complete: 1 minute 46. Which of the following is a possible negative consequence for overly rational decision makers? A) Reduced investment returns B) Difficulty staying on a budget C) Too much debt D) Avoiding professional help Answer: A Solution: If you’re an overly ―rational‖ decision maker, you may suffer negative consequences, such as taking too long to make a decision, which can result in reduced or missed investment returns. Format: Multiple Choice

Title: Test Bank 1.5 Type of Decision-Making Section: Decision-Making Styles Learning Objective: 1.5 Consider opportunity costs and marginal effects in making personal finance decisions. Difficulty: Medium Bloomcode: Application AACSB: Reflective Thinking Expected Time to Complete: 2 minutes 47. Which type of decision maker is most likely to have trouble sticking to a budget and, as a result, may fall into debt? A) Rational decision maker B) External decision maker C) Intuitive decision maker D) Internal decision maker Answer: C Solution: If you’re overly spontaneous in making financial decisions, you may have trouble sticking to a budget, have too much debt, pay too much for major purchases, or incur personal costs from taking too many wrong turns in life. Format: Multiple Choice Title: Test Bank 1.5 Type of Decision-Making Section: Decision-Making Styles Learning Objective: 1.5 Consider opportunity costs and marginal effects in making personal finance decisions. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Thinking Expected Time to Complete: 1 minute

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Chapter 2 Test Bank To accompany Personal Finance, 2nd edition, by Vickie Bajtelsmit Summary: 67 questions: 64 Multiple Choice | 3 Multiple Select LO 2.1 LO 2.2 LO 2.3 LO 2.4

19 22 15 11 67 Knowledge Comprehensive Application Analysis Evaluation Synthesis

28% 33% 22% 16%

Easy Medium Hard

9 24 11 19 2 2 67

13% 36% 16% 28% 3% 3%

Calculations Net Worth Calculation Net Worth (with distractors) Calculation Balance Sheet Calculation Net Cash Flow (with distractors) Calculation Liquidity ratio Calculation Liquidity ratio (multiple distractors) Calculation Debt Payment Ratio (with distractors) Calculation Savings Ratio (with distractors) Calculation Debt Ratio (with distractors) Calculation Mortgage Debt Service Ratio (with distractor) Calculation Savings Ratio (with distractor) Calculation FV Lump-sum Calculation FV Lump-sum Calculation FVA Calculation FVA Calculation FVA-due Calculation Present Value of a Lump Sum PVA Calculation PMT Calculation PVA Calculation (Evaluation of 2 scenarios) Net Worth (itemized sub-category) Calculation FVA Calculation (convert to periodic rate)

10 53 4 67

15% 79% 6%

22 15 16 17 27 30 31 32 33 35 39 41 46 47 54 55 56 58 63 65 62 18 53

1. It is recommended that tax records be kept A) 3 years, because most IRS audits occur within three years of filing a return. B) 5 years, because most IRS audits occur within five years of filing a return. C) 7 years, because most IRS audits occur within three years of filing a return. D) 7 years, because most IRS audits occur within five years of filing a return. Answer: C Solution: Any documents that support tax deductions should be filed with your tax records. Although most Internal Revenue Service (IRS) audits occur within three years of filing a return; they can also occur later, so it’s generally recommended that you keep tax records for seven years to be safe. Format: Multiple Choice Title: Test Bank 2.1 How Long Should You Keep Records Section: What Financial Records Do You Need to Keep? Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Medium Bloomcode: Comprehension AACSB: Comprehension Expected Time to Complete: 1 minute 2. Bills for utilities, telephone, car expenses, and other irregular expenses that are not tax deductible should be kept for A) one month. B) one year. C) five years. D) seven years. Answer: B Solution: Bills for utilities, telephone, car expenses, and other irregular expenses that are not tax-deductible should be kept for a full year so that you can accurately report the costs in your budget and personal cash flow statements. Format: Multiple Choice Title: Test Bank 2.1 How Long Should You Keep Records Section: What Financial Records Do You Need to Keep? Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Format: Multiple choice Section: 2.1 Learning Objective: 2.1 Difficulty: Easy Bloomcode: Knowledge AACSB: Comprehension Expected Time to Complete: 1 minute

3. A ______ is considered more secure than a _______ because it is a locked box at a remote location, which means thieves cannot access it during a home robbery. A) safe deposit box; lockbox B) lockbox; safe deposit box C) lockbox; dropbox D) dropbox; safe deposit box Answer: A Solution: A safe deposit box is considered more secure than a lockbox in your home because it is a locked box at a remote location, such as a bank, which means thieves cannot access it during a home robbery. Format: Multiple Choice Title: Test Bank 2.1 Where Should You Keep Important Documents Section: What Financial Records Do You Need to Keep? Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Expected Time to Complete: 1 minute 4. Which of the following is an asset? A) Student loans B) Home mortgage C) Automobile D) Credit card balance Answer: C Solution: An automobile is an asset. Loans are liabilities (debt). Format: Multiple Choice Title: Test Bank 2.1 Assets Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Easy Bloomcode: Comprehension AACSB: Comprehension Expected Time to Complete: 1 minute 5. Which of the following information is included on a household’s personal balance sheet? (Select any two.) A) The total annual earnings B) The value of everything that the household owns C) The total annual debt payments D) The amount of all debts owed to others

E) Household income F) Household expenses G) Household budget Answer: B and D Solution: A personal balance sheet is a financial statement that details the value of everything you own and subtracts what you owe to others. Format: Multiple Select Title: Test Bank 2.1 Balance Sheet Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 1 minute 6. Liquid assets are A) cash or near-cash assets that can be easily converted to cash without loss of value. B) assets you can easily sell. C) assets related to water and mineral rights. D) assets that are used for investment purposes. Answer: A Solution: Liquid assets are cash and near-cash assets that can easily be converted to cash without loss of value. Checking and savings accounts are examples of liquid assets. Format: Multiple Choice Title: Test Bank 2.1 Liquid Assets Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Easy Bloomcode: Knowledge AACSB: Comprehension Expected Time to Complete: 1 minute 7. Which of the following best defines market value? A) The price that was paid for the asset B) The price that an asset could be sold for today C) The purchase price of an asset minus depreciation D) The purchase price of an asset plus depreciation Answer: B Solution: The market value is the price you could sell an asset for today. This is usually not the same as what you paid for the asset.

Format: Multiple Choice Title: Test Bank 2.1 Valuing Your Assets and Debts Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping and prepare a personal balance sheet. Difficulty: Easy Bloomcode: Knowledge AACSB: Comprehension Expected Time to Complete: 1 minute

8. If you borrow to buy a new car with a note, which of the following items on the balance sheet will be affected? A) Assets Only B) Debts Only C) Assets and Debts D) Unable to Determine Answer: C Solution: For some assets, such as your car, there may be corresponding debt that was used to purchase it. In this case, a loan was used to purchase the care. Hence, the market value in the car will be included in the asset section of your balance sheet and the loan balance in the debt section. Format: Multiple Choice Title: Test Bank 2.1 Valuing Your Assets and Debts Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 1 minute 9. If you lease a new car, which of the following items on the balance sheet will be affected? A) Assets only B) Debts only C) Assets and debts D) Unable to determine Answer: B Solution: If you lease a car, your payment obligations are a debt; but you don’t own the car, so you shouldn’t include it as an asset. Format: Multiple Choice Title: Test Bank 2.1 Valuing Your Assets and Debts Section: Summarizing Your Financial Condition

Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 1 minute 10. If you have an insurance policy that has a cash surrender value, E) this represents an asset for you. F) this represents a liability for you. G) no value is entered on the balance sheet unless the policy is surrendered. H) the premiums still due are subtracted from the surrender value to arrive at market value. Answer: A Solution: An insurance policy is counted as an asset only if it’s a policy that accumulates cash value over time. If you cancel an insurance policy that has a cash surrender value, the insurer will return that amount of money to you. Because this is an available source of cash to you, you should count it as an asset. Format: Multiple Choice Title: Test Bank 2.1 Valuing Your Assets and Debts Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Medium Bloomcode: Application AACSB: Reflective Expected Time to Complete: 1 minute 11. A _______ shows only a single point in time, whereas a ________ reflects transactions that occur over a period of time. A) personal cash flow statement; personal balance sheet B) personal balance sheet; personal cash flow statement C) personal cash flow statement; net worth D) personal balance sheet; net worth Answer: B Solution: A personal balance sheet shows only a single point in time, whereas a personal cash flow statement reflects transactions that occur over a period of time. Format: Multiple Choice Title: Test Bank 2.1 Your Financial Condition Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Medium Bloomcode: Comprehension

AACSB: Reflective Expected Time to Complete: 1 minute 12. Which assets are considered liquid assets? (Select any two.) A) Money market accounts B) Market value of automobile(s) C) Home furnishings D) Cash value of life insurance E) Individual retirement account(s) Answer: A and D Solution: Liquid assets are cash and near-cash assets that can easily be converted to cash without loss of value. Money market accounts and life insurance with cash value are examples of liquid assets. Format: Multiple Select Title: Test Bank 2.1 Liquid Assets Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 1 minute

13. You purchased a car at the beginning of the year for $35,000 and you noticed a similar used car just sold for $28,000. You financed the purchased with a $30,000 auto loan and paid $5,000 from your savings. If your loan balance is currently $23,635, what is the current market value? A) $28,000 B) $28,635 C) $35,000 D) $21,635 Answer: A Solution: The market value is the price you could sell the asset for today. Since a similar used car was sold for $28,000, it represents the closest value that your car can be sold. Format: Multiple Choice Title: Test Bank 2.1 Market Value Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 2 minutes 14. Which of the following formulas is used to calculate personal net worth?

A) Total assets + Total debts B) Total assets - Total debts C) Total debts - Total assets D) Liabilities - Unpaid bills Answer: B Solution: A personal balance sheet is a financial statement that details the value of everything you own (assets) and subtracts what you owe to others (debts) to arrive at your net worth. Format: Multiple Choice Title: Test Bank 2.1 How Much Are You Worth Today Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Easy Bloomcode: Knowledge AACSB: Analytic Expected Time to Complete: 1 minute 15. Your assets total $100,000. Your total debts are $80,000. Your net worth is A) $20,000. B) $180,000. C) 0.8%. D) 1.2%. Answer: A Solution: Net worth = Total assets - Total debts Net worth = $100,000 in assets - $80,000 in debts = $20,000 Format: Multiple Choice Title: Test Bank 2.1 Net Worth Calculation Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 16. What is Veronica’s net worth if her assets total $15,000, her gross income is $40,000, her student loan debt is $20,000 (she has no other debts), and her annual expenses (including taxes) total $38,000? A) $2,000 B) $5,000 C) -$5,000 D) -$18,000

Answer: C Solution: Net worth = Total assets - Total debts Net worth = $15,000 in assets - $20,000 in debts = -$5,000 Format: Multiple Choice Title: Test Bank 2.1 Net Worth Calculation Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 17. Carlos has a net worth of $450,000 and debts worth $300,000. What amount of assets does Carlos have? A) $750,000 B) $300,000 C) $150,000 D) No debt Answer: A Solution: Net worth = Total assets - Total debts $450,000 = assets - $300,000 in debts = $750,000 Format: Multiple Choice Title: Test Bank 2.1 Balance Sheet Calculation Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 1 minute 18. Jane has liquid financial assets of $25,000, real estate assets of $125,000, credit card debt of $1,000, and an $89,000 mortgage. Calculate her net worth. A) $240,000 B) $150,000 C) $90,000 D) $60,000 Answer: D Solution: Net worth = Total assets - Total debts Total Assets = $25,000 financial assets + $125,000 real estate = $150,000 Total Debts = $1,000 credit card + $89,000 mortgage = $90,000 Net worth = $150,000 in assets - $90,000 in debts = $60,000 Format: Multiple Choice Title: Test Bank 2.1 Net Worth Calculation

Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Hard Bloomcode: Synthesis AACSB: Analytic Expected Time to Complete: 3 minutes 19. Insolvency occurs when a person A) has a positive net worth but is unable to pay his or her debt obligations with current income. B) has positive net worth but must sell existing assets to pay his or her debt obligations. C) is unable to pay his or her debt obligations as they come due. D) has spending exceeding income. Answer: C Solution: Insolvency is the inability to pay your debts as they come due, because your total debts exceed your total assets. Format: Multiple Choice Title: Test Bank 2.1 Insolvency Section: Summarizing Your Financial Condition Learning Objective: 2.1 Develop a system for financial record keeping, and prepare a personal balance sheet. Difficulty: Medium Bloomcode: Comprehension AACSB: Expected Time to Complete: 1 minute 20. A financial statement used to evaluate the relationship between your income and expenditures is known as a A) personal balance sheet. B) personal cash flow statement. C) cost-benefit statement. D) liquidity statement. Answer: B Solution: A personal cash flow statement is a financial statement used to evaluate the relationship between your income and your spending. Format: Multiple Choice Title: Test Bank 2.2 Income and Expenditures Section: Evaluating Your Personal Financial Situation Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Easy Bloomcode: Knowledge AACSB: Analytic

Expected Time to Complete: 1 minute 21. A personal cash flow statement A) shows income and expenditures at one specific point in time. B) uses the same information needed for the personal balance sheet. C) shows income and expenditures over a period of time. D) is necessary for calculating one’s net worth. Answer: C Solution: Where your personal balance sheet is a snapshot of your financial condition at a certain point in time, your personal cash flow statement shows inflows and outflows of cash over a period of time, often one month or one year. Format: Multiple Choice Title: Test Bank 2.2 Personal Cash Flow Statement Section: The Personal Cash Flow Statement Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Easy Bloomcode: Knowledge AACSB: Comprehension Expected Time to Complete: 1 minute 22. When recording inflows and outflows of cash for the cash flow statement, it is important to E) monitor your spending for at least two years to get an accurate picture. F) continue your normal spending behavior. G) record assets at their market value. H) track inflows more than outflows. Answer: B Solution: It is important not to alter your normal spending behavior, even temporarily, because what you record is the basis of future budgeting. You need to incorporate expenses accurately in your log, so that you can more realistically evaluate your current finances. Format: Multiple Choice Title: Test Bank 2.2 Recording Cash Outflows Section: The Personal Cash Flow Statement Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Expected Time to Complete: 1 minute 23. Which of the following information is included on a household’s personal cash flow statement? (Select any two.)

A) The value of all household assets B) The amount of all debts owed to others C) Household income D) Household expenses E) Value of your car F) Mortgage balance Answer: C and D Solution: A personal cash flow statement is a financial statement used to evaluate the relationship between your household income and your household spending (expenses). Format: Multiple Select Title: Test Bank 2.2 Personal Cash Flow Statement Section: The Personal Cash Flow Statement Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 1 minute 24. Which is not a source of income in a personal cash flow statement? A) Scholarships B) Cash allowances or gifts from your parents or others C) Tax refund D) Alimony received Answer: C Solution: Scholarships, cash allowances or gifts from your parents or others, and alimony received are sources of income. A tax refund is a return of a payment (expense), not income. Format: Multiple Choice Title: Test Bank 2.2 Cash Inflows Section: The Personal Cash Flow Statement Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Expected Time to Complete: 1 minute 25. Fixed expenses are A) different dollar amounts each month. B) the same percentage of a person’s income each month. C) the same dollar amount in each payment period. D) more common than variable expenses. Answer: C

Solution: Fixed expenses are expenditures that easy to identify and track because they are the same from month to month, such as rent and car loan payments. Format: Multiple Choice Title: Test Bank 2.2 Fixed Expenses Section: The Personal Cash Flow Statement Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Easy Bloomcode: Knowledge AACSB: Analytic Expected Time to Complete: 1 minute 26. To get a realistic picture of actual expenditures, it is recommended that you keep a _____ spending log for at least a _____. A) daily; week B) daily; month C) weekly; month D) monthly; year Answer: B Solution: To get a realistic picture of actual expenditures, it is recommended that you keep a daily spending log to track your expenditures for at least a month to be sure that you’ve included even irregular cash outflows. At the end of the time period you have chosen, you can total the amounts entered in your spending log to put into your personal cash flow statement. Format: Multiple Choice Title: Test Bank 2.2 Spending Log Section: The Personal Cash Flow Statement Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Comprehension AACSB: Comprehension Expected Time to Complete: 1 minute 27. What is Veronica’s net cash flow if her assets total $15,000, her gross income is $40,000, her student loan debt is $20,000 (she has no other debts), and her annual expenses (including taxes) total $38,000? A) $2,000 B) $5,000 C) -$5,000 D) -$18,000 Answer: A Solution: Net cash flow = Total cash inflows − Total cash outflows Net cash flow = $40,000 cash inflows − $38,000 cash outflows = $2,000 Format: Multiple Choice

Title: Test Bank 2.2 Net Cash Flow Calculation Section: Net Cash Flow Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 28. The savings ratio will be negative if A) cash inflows exceed cash outflows. B) cash outflows exceed cash inflows. C) assets exceed debts. D) debts exceed assets. Answer: B Solution: The savings ratio will be negative if cash outflows exceed cash inflows. A negative savings ratio means that, rather than saving, you are accumulating more debt. Format: Multiple Choice Title: Test Bank 2.2 Negative Savings Ratio Section: Using Financial Ratios Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 1 minute 29. The liquidity ratio measures A) how many years you could pay your monthly expenses from your assets. B) how many months you could pay your monthly expenses from your liquid assets. C) the number of times that your liquid assets exceed your water bill. D) the number of times that your assets exceed your debts. Answer: B Solution: The liquidity ratio measures how many months you could pay your monthly expenses from your liquid assets. Format: Multiple Choice Title: Test Bank 2.2 Liquidity Ratio Section: Using Financial Ratios Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 1 minute

30. Don has assets of $5,000, of which $1,800 are in checking and savings accounts. His annual expenses are $15,000. Don’s liquidity ratio would be E) 0.120. F) 0.333. G) 1.440. H) 4.000. Answer: C Solution:

Format: Multiple Choice Title: Test Bank 2.2 Liquidity ratio Calculation Section: Using Financial Ratios Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 31. You have the following financial information on the Haring family: Total assets (including a house) Checking and savings account Monthly after-tax income Total monthly expenses Monthly savings Monthly debt payments Total debt (including mortgage)

$300,000 $10,000 $5,500 $5,000 $300 $2,000 $280,000

What is the Haring family’s liquidity ratio? A) 1.5 B) 2.0 C) 2.5 D) 3.0 Answer: B Solution:

Format: Multiple Choice Title: Test Bank 2.2 Liquidity Ratio Calculation Section: Using Financial Ratios Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 3 minutes 32. You have the following financial information on the Haring family: Total assets (including a house) Checking and savings account Monthly after-tax income Total monthly expenses Monthly savings Monthly debt payments Total debt (including mortgage)

$300,000 $10,000 $5,500 $5,000 $300 $2,000 $280,000

What is the Haring family’s debt payment ratio? A) 25% B) 28% C) 30% D) 36% Answer: D Solution:

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Format: Multiple Choice Title: Test Bank 2.2 Debt Payment Ratio Calculation Section: Using Financial Ratios Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 3 minutes 33. You have the following financial information on the Haring family: Total assets (including a house) Checking and savings account Monthly after-tax income Total monthly expenses

$300,000 $10,000 $5,500 $5,000

Monthly savings Monthly debt payments Total debt (including mortgage)

$300 $2,000 $280,000

What is the Haring family’s savings ratio? A) 4% B) 5% C) 10% D) 18% Answer: B Solution:

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Format: Multiple Choice Title: Test Bank 2.2 Savings Ratio Calculation Section: Using Financial Ratios Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 3 minutes 34. Which personal financial ratio measures the percent of your total assets that you’ve financed with debt? A) Debt ratio B) Debt payment ratio C) Mortgage debt service ratio D) Liquidity ratio Answer: A Solution: The debt ratio measures the percent of your total assets that you’ve financed with debt. The debt payment ratio and the mortgage debt service ratio measure your ability to pay your financial obligations. The liquidity ratio tells you how many months you could pay your monthly expenses from your liquid assets. Format: Multiple Choice Title: Test Bank 2.2 Debt Ratios Section: Using Financial Ratios Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic

Expected Time to Complete: 1 minute 35. Gross monthly income = $3,500 After-tax monthly income = $2,970 Total debt = $86,000 Total monthly debt payments = $402 Total assets = $113,000 Based on the information given, what is the debt ratio? E) 3% F) 47% G) 76% H) 131% Answer: C Solution:

Format: Multiple Choice Title: Test Bank 2.2 Debt Ratio Calculation Section: Using Financial Ratios Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 36. The debt payment ratio estimates the percentage of __________ that is used to cover required monthly ________ on all debts. A) after-tax income; minimum payments B) total income; minimum payments C) after-tax income; average payments D) total income; average payments Answer: A Solution: The debt payment ratio estimates the percentage of after-tax income that is used to cover required monthly minimum debt payments of all debts. Format: Multiple Choice Title: Test Bank 2.2 Section: Using Financial Ratios Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Comprehensive

AACSB: Analytic Expected Time to Complete: 1 minute 37. The mortgage debt service ratio measures the percentage of your gross income that you pay in A) mortgage payments. B) mortgage payments and property taxes. C) mortgage payments and homeowner’s insurance. D) mortgage payments, property taxes, and homeowner’s insurance. Answer: D Solution: The mortgage debt service ratio measures the percentage of your gross income that you pay in mortgage payments, property taxes, and homeowners’ insurance. Format: Multiple Choice Title: Test Bank 2.2 Mortgage Debt Service Ratio Section: Using Financial Ratios Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 1 minute 38. If interest rates increase significantly in the future, in what ways will your borrowing decisions and financial ratios be impacted? A) Higher rates will increase the amount of loan you can obtain because your debt payment ratios will increase. B) Higher rates will increase the amount of loan you can obtain because your debt payment ratios will decrease. C) Higher rates will reduce the amount of loan you can obtain because your debt payment ratios will increase. D) Higher rates will reduce the amount of loan you can obtain because your debt payment ratios will decrease. Answer: C Solution: Higher rates will reduce the amount of loan you can obtain because your debt payment ratios will increase. Monthly debt payment will increase by the higher rate, while your income remains the same. Format: Multiple Choice Title: Test Bank 2.2 Measuring Debt Usage Section: Using Financial Ratios Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Hard Bloomcode: Evaluation AACSB: Analytic Expected Time to Complete: 3 minutes

39. You estimate your monthly mortgage principal and interest will be $1,000, property taxes will be $160 per month, and homeowner’s insurance will be $50 per month. If your gross monthly income is $4,000 per month and your tax rate is 20 percent, what is your mortgage debt service ratio? A) 30.25% B) 37.80% C) 60.50% D) 65.20% Answer: A Solution:

Format: Multiple Choice Title: Test Bank 2.2 Mortgage Debt Service Ratio Calculation Section: Using Financial Ratios Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 40. Borrowing at _________ is a major reason for the ______ standard of living in the United States. A) low interest rates; declining B) high interest rates; declining C) low interest rates; rising D) high interest rates; rising Answer: C Solution: Access to low interest credit has been a major reason for the rising standard of living in the United States. Purchasing large assets like homes and autos over a manageable period of time raises the standard of living. Format: Multiple Choice Title: Test Bank 2.2 Measuring Debt Usage Section: Using Financial Ratios Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 2 minutes

41. Tyler’s monthly gross income is $4,200 and his monthly after-tax income is $3,400. He saves approximately $300 a month. What is his savings ratio? E) 7.14% F) 8.80% G) 18.00% H) 38.00% Answer: B Solution: :

–

Format: Multiple Choice Title: Test Bank 2.2 Savings Ratio Calculation Section: Using Financial Ratios Learning Objective: 2.2 Prepare a personal cash flow statement, and evaluate your financial situation using financial ratios. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 42. The basic idea of time value of money is that $1 to be received in the ________ is worth ______$1 received today because of the value of the compound interest. A) past; less than B) future; less than C) future; more than D) past; the same as Answer: B Solution: The basic idea of the time value of money is this: Money received today is worth more than the same dollar amount to be received in the future. This is true; because, if you get an amount of money today, you can invest it to earn compound interest so that it will grow over time. Format: Multiple Choice Title: Test Bank 2.3 Time Value of Money Section: The Power of Compound Interest Learning Objective: 2.3 Explain how compound interest benefits investors. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 2 minutes

43. ________ occurs when you earn interest on your investment balance and then leave the interest in the account so that you earn future interest on the__. A) Compounding; original balance B) Discounting; original balance C) Compounding; original balance plus the accumulated interest earnings D) Discounting; original balance plus the accumulated interest earnings Answer: C Solution: Compounding occurs when you earn interest on your investment balance and then leave the interest in the account so that you earn future interest on the original balance plus the accumulated interest earnings. Format: Multiple Choice Title: Test Bank 2.3 Compounding Section: The Power of Compound Interest Learning Objective: 2.3 Explain how compound interest benefits investors. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 1 minute 44. The time value of money is a good argument against saving money in a piggy bank at home, because the money will A) gain purchasing power over time due to inflation. B) lose purchasing power over time due to inflation. C) maintain purchasing power over time despite inflation. D) maintain purchasing power over time due to inflation. Answer: B Solution: The time value of money is a good argument against saving money in a piggy bank at home, because the money will lose purchasing power over time due to the eroding effects of inflation. Format: Multiple Choice Title: Test Bank 2.3 Inflation Section: The Power of Compound Interest Learning Objective: 2.3 Explain how compound interest benefits investors. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 2 minutes 45. You want to know how much $10,000 invested today is going to be worth 10 years from now. Which type of time value of money calculation should be used to solve this problem? A) Present value of a lump sum B) Future value of a lump sum C) Present value of an annuity D) Future value of an annuity

Answer: B Solution: You are solving for the future value of a $10,000 lump sum. Format: Multiple Choice Title: Test Bank 2.3 TVM Method Section: Time Value of Money Calculation Methods Learning Objective: 2.3 Explain how compound interest benefits investors. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 1 minute 46. You invest $1,000 today and earn 10% interest, compounded annually. How much will you have in five years? A) $1,475.19 B) $1,550.26 C) $1,610.51 D) $1,720.82 Answer: C Solution: Calculate the future value of a $1,000 lump sum in five years at 10% APY. Financial Calculator: Input N=5, I/Y=10, PV=-1,000, and Solve for FV = 1,610.51 Excel Function: ―=FV(Rate, Nper, Pmt, PV, Type)‖ =FV(0.10, 5, 0, -1000, 0) => 1,610.51 TVM Equation: Future value of a lump sum (FV) = PV × (1 + i)n Future value of a lump sum (FV) = $1,000 × (1 + 0.10)5 = $1,610.51 Format: Multiple Choice Title: Test Bank 2.3 FV Lump-Sum Calculation Section: Future Value: How Much Will My Money Grow? Learning Objective: 2.3 Explain how compound interest benefits investors. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 47. You deposit $200 today into a bank account. If the account earns 8% annually, how much will you have at the end of 10 years. E) $93 F) $432 G) $2,897 H) $3,329

Answer: B Solution: Calculate the future value of a $200 lump sum in 10 years at 8% APY. Financial Calculator: Input N=10, I/Y=8, PV=-200, and Solve for FV = 431.78 or 432 Excel Function: ―=FV(Rate, Nper, Pmt, PV, Type)‖ =FV(0.08, 10, 0, -200, 0) => 431.78 or 432 TVM Equation: Future value of a lump sum (FV) = PV × (1 + i)n Future value of a lump sum (FV) = $200 × (1 + 0.08)10 = $431.78 or $432 Format: Multiple Choice Title: Test Bank 2.3 FV lump-sum Calculation Section: Future Value of a Lump Sum Learning Objective: 2.3 Explain how compound interest benefits investors. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 48. If you receive a series of equal end-of-year payments over several years, this is an example of E) a perpetuity. F) an ordinary annuity. G) an annuity due. H) compounding. Answer: B Solution: An annuity is a series of payments of equal dollar amounts made at regular intervals for a period of time. An ordinary annuity is one in which each payment occurs at the end of the period. Format: Multiple Choice Title: Test Bank 2.3 Equal Series of Payments Section: Future Value: How Much Will My Money Grow? Learning Objective: 2.3 Explain how compound interest benefits investors. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 1 minute

49. An annuity is a series of _____ payments made at ________, for a period of time. A) equal; monthly intervals B) equal; regular intervals C) increasing; regular intervals D) decreasing; regular intervals

Answer: B Solution: An annuity is a series of equal payments made at regular intervals, for a period of time. Intervals doesn’t have to be monthly. Format: Multiple Choice Title: Test Bank 2.3 Annuity Section: Future Value: How Much Will My Money Grow? Learning Objective: 2.3 Explain how compound interest benefits investors. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 1 minute 50. An annuity due is a type of annuity in which each payment is made or received at A) the end of a period B) the beginning of a period C) predetermined intervals within a period D) any time Answer: B Solution: An annuity is a series of payments of equal dollar amounts made at regular intervals for a period of time. An annuity due is one in which each payment occurs at the beginning of the period. Format: Multiple Choice Title: Test Bank 2.3 Annuity Due Section: Future Value: How Much Will My Money Grow? Learning Objective: 2.3 Explain how compound interest benefits investors. Difficulty: Easy Bloomcode: Knowledge AACSB: Analytic Expected Time to Complete: 1 minute 51. Which of the following is true regarding future value, all else equal? A) The longer the term, the lower the future value. B) The higher the interest rate, the lower the future value. C) The shorter the term, the higher the future value. D) The lower the interest rate, the lower the future value. Answer: D Solution: Interest rates have a positive relationship to the future value. The lower the interest rate the lower the future value, and the higher the interest rate, the higher the future value. Format: Multiple Choice Title: Test Bank 2.3 Interest Rates and TVM Section: Future Value: How Much Will My Money Grow? Learning Objective: 2.3 Explain how compound interest benefits investors.

Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 2 minutes 52. In order to determine how much, you would need to save annually to finance your child’s college education in 10 years, you would use the E) future value of a lump sum. F) future value of an annuity. G) present value of a lump sum. H) present value of an annuity. Answer: B Solution: You would use the future value of an annuity to determine the annual savings required to fund the cost of college 10 years from now. Format: Multiple Choice Title: Test Bank 2.3 TVM Section: Future Value: How Much Will My Money Grow? Learning Objective: 2.3 Explain how compound interest benefits investors. Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 2 minutes 53. You save $250 at the end of every month from your paycheck. If you can earn 6% APY, compounded monthly, how much will you have saved in 5 years? A) $15,000 B) $16,911 C) $17,443 D) $20,406 Answer: C Solution: Calculate the future value of a $250 annuity for 60 months at a 6% APY (0.5% monthly periodic rate). The monthly periodic rate is 6% APY divided by 12 months in a year because the money compounds monthly. Financial Calculator: Input N=(5x12), I=(6/12), Pmt=-250, PV=0, and Solve for FV = 17,443 Excel Function: ―=FV(Rate, Nper, Pmt, PV, Type)‖ =FV((0.06/12), (5x12), -250, 0, 0) => 17,443 TVM Equation:

Format: Multiple Choice

Title: Test Bank 2.3 FVA Calculation Section: How Much Will My Money Grow? Learning Objective: 2.3 Explain how compound interest benefits investors. Difficulty: Hard Bloomcode: Synthesis AACSB: Analytic Expected Time to Complete: 4 minutes 54. If you are investing $2,500 a year (end-of-year payments) into a retirement account that earns 9% interest annually, how much will you have at the end of 20 years? E) $14,011 F) $127,900 G) $139,400 H) $141,911 Answer: B Solution: Calculate the future value of a $2,500 annuity for 20 years at 9% APY. Financial Calculator: Input N=20, I=9, Pmt=-2500, PV=0, and Solve for FV = 127,900 Excel Function: ―=FV(Rate, Nper, Pmt, PV, Type)‖ =FV(0.09, 20, -2500, 0, 0) => 127,900 TVM Equation:

Format: Multiple Choice Title: Test Bank 2.3 FVA Calculation Section: How Much Will My Money Grow? Learning Objective: 2.3 Explain how compound interest benefits investors. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 55. You plan to invest $2,000 every year (end-of-year payments) from now until you retire in 30 years. If you can earn 7% annually on your invested funds, how much will you have when you retire? E) $15,225 F) $25,081 G) $188,922 H) $204,146

AACSB: Ethics Expected Time to Complete: 1 minute 21. Which asset in the following list is the most liquid? A. Funds in a five-year certificate of deposit B. Funds in a checking account C. Funds in the stock market D. A real estate investment Answer: B Solution: Liquid investments are those that can easily be converted to cash without loss of value, such as funds in a checking or savings account. Format: Multiple Choice Title: Test Bank 3.2 Liquid Assets Section: The Role of Cash in Your Financial Plan Learning Objective: 3.2 Explain why cash management is an important component of your financial plan. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 1 minute 22. Which is not a general reason for holding cash? A. Managing transaction needs B. Preparing for cash emergencies C. Keeping up with inflation D. Making a temporary investment Answer: C Solution: Reasons for holding cash are: managing transaction needs; preparing for cash emergencies; and making a temporary investment. All these purposes are related to managing liquidity. Cash is the most susceptible for loss of purchasing power due to inflation. Format: Multiple Choice Title: Test Bank 3.2 Cash Management Section: Costs and Benefits of Holding Cash Learning Objective: 3.2 Explain why cash management is an important component of your financial plan. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 1 minute 23. The local credit union pays interest of 7% on amounts above $500 in a savings account. Because Gwen does not trust banks. She chooses not to have a savings account, and instead keeps $1,000 in cash in her home safe. What is Gwen’s annual opportunity cost of keeping her money at home instead of putting it in a savings account at the credit union?

A. $70 B. $35 C. $3.50 D. There is no opportunity cost to Gwen. Answer: B Solution: The opportunity cost is the interest that she could have earned at the bank. $500 x .07 = $35. Format: Multiple Choice Title: Test Bank 3.2 Opportunity Cost of Lost Interest Calculation Section: Costs and Benefits of Holding Cash Learning Objective: 3.2 Explain why cash management is an important component of your financial plan. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 24. Which is not an appropriate transaction account? A. Venmo B. Bank of America checking account C. PayPal D. Valley National 3% Certificate of Deposit Answer: D Solution: A transaction account, such as a bank checking account, or electronic wallets like Venmo or PayPal, allows you to easily deposit and withdraw funds, as well as make electronic payments in a timely fashion, and at minimal cost. Bank CDs offer attractive interest rates on deposit accounts, but the time required as a deposit, makes it inappropriate for a transaction account. Format: Multiple Choice Title: Test Bank 3.2 Transaction Accounts Section: Costs and Benefits of Holding Cash Learning Objective: 3.2 Explain why cash management is an important component of your financial plan. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 1 minute 25. Janice’s monthly expenses are $6,000, and she has $10,000 in checking and savings. Which of the following is true about her financial situation? A. Janice needs to try to reduce her spending. B. Janice needs to increase her emergency fund. C. Janice has too much in liquid assets. D. Janice should consider investing her $10,000 in a stock mutual fund to generate higher returns on her investment.

Answer: B Solution: Janice needs to increase her emergency fund. An emergency should cover at least 3-6 months of expenses. Format: Multiple Choice Title: Test Bank 3.2 Preparing for Cash Emergencies Section: Costs and Benefits of Holding Cash Learning Objective: 3.2 Explain why cash management is an important component of your financial plan. Difficulty: Medium Bloomcode: Application AACSB: Analytic Expected Time to Complete: 1 minute 26. A household with average household expenses of $3,000 a month should have a cash reserve for emergencies of at least A. $4,000. B. $5,000. C. $6,000. D. $10,000. Answer: C Solution: Minor cash emergencies, such as a car repair, can be handled with a relatively modest emergency fund. In contrast, being out of work for a few months can have much more serious effects. Sufficient liquid assets to cover two months is the minimum cash reserve for emergencies. $3,000 x 2 months = $6,000. Format: Multiple Choice Title: Test Bank 3.2 Cash Reserve Calculation Section: How Much Should You Hold in Cash? Learning Objective: 3.2 Explain why cash management is an important component of your financial plan. Difficulty: Medium Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 1 minute 27. Setting up automatic bill payment whenever possible will help ensure that A. your bills are paid on time. B. you avoid late payment fees. C. your credit rating is not adversely affected. D. All of the above Answer: D Solution: Setting up automatic bill payment whenever possible will help ensure that your bills are paid on time, avoid late payment fees, and your credit rating is not adversely affected. Format: Multiple Choice

Title: Test Bank 3.2 Auto Bill Payment Section: Rules of Effective Cash Management Learning Objective: 3.2 Explain why cash management is an important component of your financial plan. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 1 minute 28. The principle of paying yourself first means that you should A. set aside the money necessary for achieving personal goals after you spend money on non-essentials during the month. B. set aside the money necessary for achieving personal goals before you spend money on non-essentials during the month. C. pay your bills prior to setting aside money necessary for achieving personal goals during the month. D. pay your non-essential bills prior to setting aside money necessary for achieving personal goals during the month. Answer: B Solution: The principle of paying yourself first means that you should set aside the money necessary for achieving personal goals before you spend money on non-essentials during the month. Format: Multiple Choice Title: Test Bank 3.2 Pay Yourself First Section: Rules of Effective Cash Management Learning Objective: 3.2 Explain why cash management is an important component of your financial plan. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Thinking Expected Time to Complete: 1 minute 29. You need $25,000 in four years to start your own business. If you can earn 8% on your funds, how much do you need to invest today in order to reach your goal? E) $7,548 F) $15,854 G) $18,376 H) $34,012 Answer: C Solution: Calculate the present value required to reach $25,000 in 4 years from now, if earning 8% APY. Financial Calculator: Input N=4, I/Y=8, FV=25000, and Solve for PV = -18,376

Excel Function: ―=PV(Rate, Nper, Pmt, FV, Type)‖ =PV(0.08, 4, 0, 25000, 0) => -18,376 (

TVM Equation: (

)

)

Format: Multiple Choice Title: Test Bank 3.2 Pay Yourself First Calculation Section: Rules of Effective Cash Management Learning Objective: 3.2 Explain why cash management is an important component of your financial plan. Difficulty: Hard Bloomcode: Analysis AACSB: Analytic Expected Time to Complete: 2 minutes 30. A depository institution differs from a nondepository institution in that it gets its funds from _______, and its primary source of income is from __________. A. investors; investments B. customer deposits; interest earned on loans made to customers C. interest earned on loans made to customers; customer deposits D. the Fed; interest earned on loans made to customers Answer: B Solution: A depository institution differs from a nondepository institution in that it gets its funds from customer deposits, and its primary source of income is from interest earned on loans made to customers. Format: Multiple Choice Title: Test Bank 3.3 Depository Institutions Section: Depository Institutions Learning Objective: 3.3 Identify and evaluate the types of financial institutions that provide cash management services. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 2 minutes 31. Of the following, which is not a depository institution? (Select 2) A. Commercial bank B. Mutual fund company C. Life insurance company D. Credit union E. Online bank F. Savings and loan association

Answer: B and C Solution: Mutual Fund Company and Life Insurance Company are not depository institutions. Mutual funds invest capital provided by their investors, and life insurance companies invest premiums provided by its customers. Format: Multiple Select Title: Test Bank 3.3 Nondepository Institutions Section: Nondepository Institutions Learning Objective: 3.3 Identify and evaluate the types of financial institutions that provide cash management services. Difficulty: Medium Bloomcode: Comprehension AACSB: Reflective Thinking Expected Time to Complete: 1 minute 32. Depository institutions are considered less risky than nondepository institutions because ___________. A. they don’t make risky investments B. limited deposits are insured by the federal government C. unlimited deposits are insured by the federal government D. investments are protected by the federal government Answer: B Solution: Depository institutions are considered less risky than nondepository institutions because deposits held in these institutions are insured for up to $250,000 per depositor per account type, by the Federal Deposit Insurance Corporation (FDIC), a government-sponsored insurance agency. Format: Multiple Choice Title: Test Bank 3.3 Depository Institutions Section: Depository Institutions Learning Objective: 3.3 Identify and evaluate the types of financial institutions that provide cash management services. Difficulty: Medium Bloomcode: Comprehension AACSB: Analytic Expected Time to Complete: 1 minute 33. Which of the following correctly describe credit unions? (Select 3) A. Owned by depositors B. Owned by investors C. Not insured by the FDIC D. Insured by the FDIC E. Depository institution F. Nondepository institution Answer: A, C, and E Solution: A credit union is a special form of mutual depository institution. It gets its funds from checking and savings deposits and makes loans to its depositors, who are also the owners of the institution. Depositors in credit unions are insured