Consumer Finance
Final Exam Questions
Course Introduction
Consumer Finance explores the principles and practices that govern the personal financial decisions of individuals and households. The course covers topics such as budgeting, credit and debt management, saving and investing, insurance, retirement planning, and the impact of taxes on personal finances. Students will learn to analyze financial products, assess risk, and make informed choices regarding major expenditures and long-term financial strategies. Emphasis is placed on practical applications, ethical considerations, and understanding the influence of psychological and societal factors on consumer behavior. By the end of the course, students will be equipped with the knowledge and tools necessary to make sound financial decisions throughout their lives.
Recommended Textbook
Personal Financial Planning 1st Edition by Lewis Altfest
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Page 2
Chapter 1: Introduction to PFP
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Q1) Financial planners are best characterized as:
A) People with designations, education, and experience, who are trained to practice personal financial planning.
B) People with households that recognize that they must plan for their household's financial future.
C) People that integrate macroeconomic theories into capital budgeting decisions using a logical, scientific approach.
D) People that integrate psychology and sociology theories into investment decisions using a behavioral approach.
E) None of the above characterizes financial planners.
Answer: A
Q2) Which of the following is the market-established worth of a product or a financial instrument?
A) Market value
B) Fair value
C) Cash flow
D) Investments
E) Book value
Answer: A
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Chapter 2: Time Value of Money
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Q1) What is a perpetual annuity?
A) A stream of investment payments that are funded through borrowing.
B) A stream of investment payments that are assumed to continue forever.
C) An annuity investment that is passed down as an inheritance.
D) All of the above.
E) None of the above.
Answer: B
Q2) If the value of the principal today is $17,567 and the interest rate is 0.93%, what is the total simple interest income at the end of fifteen years?
A) $17,567
B) $2,540.60
C) $82,765.65
D) $300.56
E) None of the above.
Answer: B
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Chapter 3: Beginning the Planning Process
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Q1) Economists quantify goals in:
A) Financial terms.
B) Utility terms.
C) Leisure terms.
D) Behavioral terms.
E) None of the above.
Answer: B
Q2) Financial advisors should set aside judgments for the balance of the consultation when:
A) The client expresses dismay over the advisor's fee.
B) The advice extends beyond hard financial practices and the client's wishes to the advisor's own preferences.
C) The advice does not maximize the advisor's own interests.
D) All of the above.
E) None of the above.
Answer: B
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Chapter 4: Household Finance
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Q1) How does a multiperson household lead to financial efficiencies?
A) Reduction in income fluctuation.
B) Specialization of task.
C) Economies of scale.
D) All of the above.
E) Only b and c.
Q2) What percentage of U.S. households consist of married couples with children?
A) A little less than 75 percent.
B) A little more than 50 percent.
C) A little less than 40 percent.
D) A little more than 30 percent.
E) None of the above.
Q3) What is the goal of a household?
A) To earn as much money as it can.
B) To maximize utility.
C) To identify and manage revenues and expenses.
D) All of the above.
E) None of the above.
Q4) What are the similarities and differences between household and business financial processes for each of the following?
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Chapter 5: Financial Statements Analysis
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Q1) Which of the following is not applicable to a traditional household statement of cash flows?
A) Resembles business cash flow statement.
B) Calculates net cash flows properly.
C) Handles revenues properly.
D) It is simpler than a functional household statement of cash flows.
E) All of the above are applicable to a traditional household statement of cash flows.
Q2) How is the performance for period recorded according to GAAP business?
A) As a "fair" presentation of results for the period.
B) As a capitalized as asset on balance sheet, not as an expense on income statement.
C) As a proper matching of revenues and costs for the period in an income statement.
D) All of the above.
E) None of the above.
Q3) How are each of the following items recorded according to GAAP business?
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7
Chapter 6: Cash Flow Planning
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Q1) Which of the following is not a goal of cash flow planning?
A) Reducing tax liability.
B) Planning for retirement.
C) Paying off credit card debt.
D) Eliminating risk.
E) All of the above are goals of cash flow planning.
Q2) The ability to accumulate investments with no intention of converting them into purchases in the future is the:
A) Bequest motive.
B) Independence motive.
C) Precautionary motive.
D) The investment motive.
E) None of the above.
Q3) What is purchasing power?
A) The inverse of one plus the inflation rate.
B) The risk of having your money decline in what it can buy over time due to inflation.
C) The amount of goods and services a fixed sum of money will buy.
D) The added responsibility and opportunities of the leader of a household.
E) None of the above.
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Chapter 7: Debt
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Q1) Borrowing helps by providing funds that allow one to:
A) Raise one's standard of living today.
B) Make investments such as those for the house and its possessions.
C) Finance a business.
D) All of the above.
E) Both a and b.
Q2) Financial leverage is greater:
A) The lower the amount of interest expense and debt repayment commitments.
B) The greater the amount of interest expense commitments but not debt repayment commitments.
C) The lower the amount of debt repayment commitments but not interest expense commitments.
D) The greater the amount of interest expense and debt repayment commitments.
E) Both b and c
Q3) What are the overall limits associated with pension loans?
A) 50% of the borrower's vested account balance or $50,000, whichever is less.
B) 50% of the borrower's vested account balance or $100,000, whichever is less.
C) 75% of the borrower's vested account balance or $50,000, whichever is less.
D) 75% of the borrower's vested account balance or $50,000, whichever is less
E) None of the above.
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Chapter 8: Non Financial Investments
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Q1) Which of the following best describes financial assets?
A) Assets in which ownership is represented and traded solely through pieces of paper.
B) Assets that can be sold currently in a public forum for fair value at low transaction costs.
C) Assets that you can see or touch that have market value.
D) All of the above.
E) None of the above.
Q2) Real assets differ from financial assets as:
A) Real assets generally decline in value over time while financial assets often maintain or increase in value over time.
B) Financial assets generally decline in value over time while real assets often maintain or increase in value over time.
C) Real assets are generally used in the household currently while financial assets may be reserved for future use.
D) Both b and c.
E) Both a and c.
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Chapter 9: Financial Investments
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Q1) Which of the following is a weakness associated with mutual funds?
A) Overhead costs.
B) Tax.
C) Diversification.
D) Both a and b.
E) Both b and c.
Q2) Which of the following is the holding period return?
A) (Sum of dividends or interest paid - Gains in principal invested)/Original cost.
B) (Sum of dividends or interest paid + Gains in principal invested)/Original cost.
C) (Gains in principal invested - Sum of dividends or interest paid)/Original cost.
D) (Gains in principal invested + Sum of dividends - interest paid)/Original cost.
E) None of the above.
Q3) Please list and explain nine strengths associated with mutual funds.
Q4) Please list and explain eleven fundamental risks associated with financial assets.
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11
Chapter 10: Risk Management
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Q1) What is the third step of the risk management process?
A) Match appropriate risk management tools to exposure.
B) Establish exposure.
C) Implement.
D) Identify available risk management tools.
E) None of the above.
Q2) Which of the following defines risk management in practical terms?
A) The process by which we identify risks and control them so that we are able to achieve individual goals.
B) The process by which we identify risks and eliminate them so that we are able to achieve individual goals.
C) The process by which we identify risks and eliminate them so that we are able to achieve societal goals.
D) All of the above.
E) None of the above.
Q3) Please list and describe eight risk management approaches.
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Chapter 11: Other Insurance
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Q1) An individual is more likely to take out insurance when:
A) The individual believes that he or she is at less risk for a negative occurrence than the population at large and the insurance cost has not been raised for that increased occurrence.
B) The individual believes that he or she is at less risk for a negative occurrence than the population at large and the insurance cost has been raised for that increased occurrence.
C) The individual believes that he or she is at more risk for a negative occurrence than the population at large and the insurance cost has not been raised for that increased occurrence.
D) The individual believes that he or she is at more risk for a negative occurrence than the population at large and the insurance cost has been raised for that increased occurrence.
E) None of the above.
Q2) Please list the type of dwelling and type of coverage associated with the eight types of homeowner's policies.
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13
Chapter 12: Retirement Planning
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Q1) Which of the following is a strength of a traditional annuity?
A) They can significantly reduce longevity risk.
B) Annuities allow you to receive a fixed sum of money each year.
C) Lack of liquidity once you annuitize.
D) Both a and b.
E) Both b and c.
Q2) How many years of projected retirement are a female that retires at age 65 expected to have?
A) 16.
B) 19.
C) 22.
D) 25.
E) 28.
Q3) The point at which an employee is entitled to a stated amount of nonrevocable benefits from an employer is known as:
A) Limit point.
B) Statement date.
C) Vesting.
D) Pension date.
E) Either a or b.
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Chapter 13: Educational Planning
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Q1) What is the maximum reduction of financial aid associated with money in the student's parents' account?
A) 5.6%.
B) 12.4%
C) 29.4%.
D) 35%.
E) None of the above.
Q2) The interest rate on which of the following is a maximum of 8.3 percent regardless of market rates?
A) Federal PLUS loans.
B) Federal Perkins loans.
C) Stafford loans.
D) All of the above.
E) None of the above.
Q3) Qualified tuition plans are also known as:
A) Section 529 plans.
B) Coverdell Education Savings Accounts.
C) Stafford plans.
D) All of the above.
E) Both a and b.
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Chapter 14: Tax Planning
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Q1) Which of the following is an example of conversion?
A) Shifting income from a higher to a lower income person.
B) Transforming income from one taxed at an ordinary income tax rate to taxation at a more favorable rate.
C) Selling investments with losses to reduce current taxes.
D) Both a and b.
E) Both b and c.
Q2) Which of the following is an example of the tax impact on risk management?
A) Taxes influence the timing of transactions and preparation for payment of sums due.
B) The calculation of returns is often done on an after-tax basis.
C) The calculation of the cost of borrowing is done on an after-tax basis.
D) There is often a clear preference for tax-deductible employee health and life insurance.
E) None of the above.
Q3) Please list and explain eight tax planning strategies.
Q4) Please detail the principal components of the tax return.
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Page 16
Chapter 15: Estate Planning
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Q1) A bank account set up with the words "in trust for" or "trustee for" is:
A) A gift.
B) A trust.
C) Neither a gift nor a trust.
D) Both a gift and a trust.
E) None of the above.
Q2) Which of the following is an advantage of a bequest over a gift?
A) Bequests allow the grantor to maintain all assets for household use.
B) Bequests postpone providing assets to younger people.
C) Bequests allow you to observe the benefits of your bequest.
D) Both a and b.
E) Both b and c.
Q3) Which of the following is irrelevant to the outcome strategies associated with estate planning?
A) Whether assets are joint or separately owned.
B) The original cost.
C) Current fair market value.
D) All of the above are relevant.
E) All of the above are irrelevant.
Q4) What are the fourteen steps of estate planning?
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Chapter 16: Stocks, Bonds and Mutual Funds
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Q1) Are municipal bonds subject to both federal and state taxes if purchased in the state in which you reside?
A) Yes.
B) No.
C) They are only subject to state taxes
D) They are only subject to federal taxes.
E) None of the above.
Q2) As bond maturity increases, the bond's risk:
A) Increases.
B) Decreases.
C) Does not change.
D) Sometimes increases and sometimes decreases.
E) Is inversely related to the value of the bond.
Q3) Due to changes in interest rates,
A) A premium bond has greater fluctuation in price than a discount bond.
B) A premium bond has identical fluctuation in price as a discount bond.
C) A discount bond has a greater fluctuation in price than a premium bond.
D) Both discount and premium bonds do not fluctuate in price.
E) None of the above.
Q4) List and provide a detailed explanation for nine types of bond funds.
Page 18
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Chapter 17: Background Topics
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Q1) During which of the followings decades was the average real GDP growth highest in the U.S.?
A) 1950-1959.
B) 1960-1969.
C) 1970-1979.
D) 1980-1989.
E) 1990-1999.
Q2) Which of the following financial institutions provide both deposits and loans?
A) Credit unions.
B) Trust companies.
C) Finance companies.
D) Both a and b.
E) All of the above.
Q3) For each of the following types of business organizations, detail the organization's economic, taxation, legal, and life cycle characteristics.
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19
Chapter 18: Capital Needs Analysis
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Q1) Why does Total Portfolio management include correlations among assets and liabilities?
A) Because the household is the sum of its separate assets less its liabilities.
B) Because the household is an operating enterprise in which the individual activities influence each other.
C) Because correlations measure the riskiness of individual assets and liabilities.
D) Both a and b.
E) Both b and c.
Q2) What is financial integration?
A) Using all assets and liabilities, all cash flows, all household activities, and all future plans to arrive at decisions.
B) Including all current and future resources and information in decision making.
C) Making one decision at a time based strictly on the merits of that item.
D) Both a and b.
E) Both b and c.
Q3) Please list the 11 steps associated with a retirement needs analysis.
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Chapter 19: Behavioral Financial Planning
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Q1) Which of the following best defines behavioral finance?
A) The study of human makeup and actions that explain logical economic and financial behavior.
B) The study of human makeup and actions that result in deviations from logical economic and financial behavior.
C) The study of market actions that explain logical economic and financial behavior.
D) Both b and c.
E) None of the above.
Q2) Which of the following statements is inaccurate?
A) Life goals are based on basic emotions and higher level feelings.
B) Life goals extend beyond traditional finance.
C) Life goals do not have a financial component.
D) All of the above statements are accurate.
E) All of the above statements are inaccurate
Q3) What are the strengths and weaknesses of behavioral finance relative when compared to classical finance?
Q4) Please list and describe six common heuristics.
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21
Chapter 20: Completing the Process
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Q1) What is the goal of personal financial planning?
A) To maximize the revenue of household "member-owners" over their life cycle.
B) To minimize the expenses of household "member-owners" over their life cycle.
C) To minimize the degree of risk faced by household "member-owners" over their life cycle.
D) To provide the highest standard of living possible for household "member-owners" over their life cycle.
E) All of the above.
Q2) Why is there a need for the financial plan to integrate all financial actions?
A) Due to the possibility that the justification for some actions may be forgotten.
B) Due to the limited resources households have.
C) To satisfy certain regulation that financial planners must follow.
D) All of the above.
E) None of the above.
Q3) Please list 8 distinguishing features of personal financial planning theory, and describe the benefit of each.
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