Introduction to Financial Planning Practice
Questions
Course Introduction
Introduction to Financial Planning provides students with foundational knowledge and practical skills necessary to analyze personal financial situations and make informed decisions. The course covers key topics such as budgeting, saving, investing, credit management, insurance, retirement planning, and tax strategies. Emphasis is placed on understanding financial goals, creating comprehensive financial plans, and utilizing tools to manage risk and build wealth. Students will engage in real-world scenarios to develop critical thinking and problem-solving abilities essential for effective financial planning, both personally and professionally.
Recommended Textbook
Personal Finance 6th Edition by Jeff Madura
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21 Chapters
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Page 2
Chapter 1: Overview of a Financial Plan
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Sample Questions
Q1) Personal finance does not include the process of planning your
A) spending.
B) financing.
C) investing.
D) spirituality.
Answer: D
Q2) A measure of your wealth is
A) the highest level of education you've attained.
B) the amount of your annual income.
C) the value of what you own minus the value of what you owe.
D) your tax bracket.
Answer: C
Q3) Which of the following is not an asset?
A) Your house that you rent
B) Your car that you financed
C) Your coin collection given to you by your grandfather
D) Your textbooks
Answer: A
Q4) During his ________ your Uncle Harvey decides to cut you out of his will.
Answer: estate planning
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Chapter 2: Planning With Personal Financial Statements
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Sample Questions
Q1) Which of the following will not increase your liquidity?
A) Selling a boat and depositing the proceeds in your checking account
B) Selling a car in exchange for cash
C) Selling stock in exchange for cash
D) Using cash to purchase a home entertainment system
Answer: D
Q2) In the balance sheet,a(n)________ in assets ________ net worth.
A) increase; increases
B) decrease; increases
C) Both A and D are correct.
D) decrease; decreases
Answer: C
Q3) Careful budgeting and controlled spending lead to self-reliance and a feeling of financial freedom.
A)True
B)False
Answer: True
Q4) If your monthly disposable income equals $1,500 and you currently save $500/month,your savings rate is ________.
Answer: 33%
Page 4
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Chapter 3: Applying Time Value Concepts
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Sample Questions
Q1) At what annual rate would $200.00 grow to $497.60 in five years?
A) 19%
B) 18%
C) 20%
D) 22%
Answer: C
Q2) When money accumulates interest,it is said to be discounting.
A)True
B)False
Answer: False
Q3) To determine how long it would take an investment to double at 10 percent,you could scan down the 10% column until you reach a factor of approximately 2.0 on the ________ table.
A) Present value of $1
B) Future value of $1
C) Present value of an annuity
D) Future value of an annuity
Answer: B
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Chapter 4: Using Tax Concepts for Planning
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Sample Questions
Q1) dividend
A)interest earned from savings and debt securities
B)forms used to report interest and deductions
C)reportable income from any source
D)earnings from stocks
E)selling an asset for more than it cost
Q2) Comment on your level of knowledge to prepare your taxes.Do you need to hire a CPA or can you prepare them? Are you going to invest in any software that helps you prepare your return?
Q3) Sally's adjusted gross income is $38,000.She does not own a home,but has charitable contributions of $1,500 and interest on her car loan of $2,100.This year she also had medical expenses of $2,000.She is allowed a standard deduction of $6300 and one personal exemption of $4,000.What is Sally's taxable income?
A) $38,000
B) $31,300
C) $27,700
D) $29,200
Q4) ________ and ________ are both reported on a Schedule B.
Q5) A(n)________ offsets taxes by subtracting the full amount from the taxes owed.
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Chapter 5: Banking and Interest Rates
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Sample Questions
Q1) insurance company
A)financial institutions that accept deposits and provide loans
B)a nondepository institution that sells shares to individuals and uses the proceeds to invest in securities and create a mutual fund
C)a nondepositary institution that provides insurance to protect against adverse events
D)a nondepository institution that specializes in providing personal loans
E)nondepository institutions that facilitate the purchase and sale of securities by firm or individuals
F)financial institutions that offer a diverse set of services
Q2) The relationship between risk and return is positive because
A) the longer the term of the investment, the more exposed it is to negative inflation effects.
B) investors need to be compensated with additional return on investment to bear additional risk.
C) not every investment has risk, so there is really no distinct relationship.
D) Both A and B are correct.
Q3) The risk-free rate on borrowed funds is determined by the ________ and ________ of funds.
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Chapter 6: Managing Your Money
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Sample Questions
Q1) To calculate interest earned,multiply the deposit amount by the annual interest rate times the adjustment for the investment period.
A)True
B)False
Q2) liquidity
A)a series of decisions made over a short-term period regarding cash inflows and outflows
B)ability to cover cash deficiencies
C)cash outflows are more than inflows
Q3) An advantage of a NOW account over a traditional checking account is that your money is more readily available to you.
A)True
B)False
Q4) Describe the relationship between return and liquidity using a one-year CD and a checking account to illustrate.
Q5) Money management is a series of decisions made over a short-term period regarding cash inflows and outflows.
A)True
B)False
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Chapter 7: Assessing and Securing Your Credit
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Sample Questions
Q1) The use of credit may result in ________ spending and ________ debt.
A) controlled; reduced
B) excessive; increased
C) excessive; reduced
D) controlled; increased
Q2) If a person obtains your credit card number by standing close enough to you to either see your credit card or hear you speak the number during a telephone call,they are
A) shoulder surfing.
B) dumpster diving.
C) pretexting.
D) skimming.
Q3) ________ is short-term credit provided by some department stores to consumers to purchase specific items.
Q4) The impact of credit ________ saving and ________ spending.
A) increases; decreases
B) decreases; increases
C) decreases; decreases
D) Credit has no relationship on saving and spending.
Q5) List at least three disadvantages of using credit.
Page 9
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Chapter 8: Managing Your Credit
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Sample Questions
Q1) Credit cards are commonly used to pay for items such as clothing,car repairs,or a new car.
A)True
B)False
Q2) Creditors are willing to extend credit when the economy is weak to stimulate purchases.
A)True
B)False
Q3) Cash advances on credit cards normally cost you interest from the date of the advance and also a transaction fee of 1 to 2 %.
A)True
B)False
Q4) Which of the following is not a method for computing interest on credit cards?
A) Previous balance method
B) Average daily balance method
C) Present value of future payment method
D) Adjusted balance method
Q5) The ________ is usually about 20 days after the credit card statement is closed.
Q6) Discuss how many credit cards you think you should have and why.
Q7) Describe the advantages and disadvantages of credit cards.
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Chapter 9: Personal Loans
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Sample Questions
Q1) Leasing a car is a good option if you drive many miles a year.
A)True
B)False
Q2) collateral
A)assets of a borrower that back a secured loan
B)interest rate multiplied by the principal
C)rate that measures the finance expenses
Q3) You could reduce the size of your monthly payments by
A) agreeing to a higher interest rate.
B) borrowing the same amount of money but for a shorter period of time.
C) borrowing more money initially for the same period of time.
D) lengthening the maturity of the loan.
Q4) A personal loan is different from a credit card in that it is normally used to finance one large purchase.
A)True B)False
Q5) The most common source of financing for a personal loan is from a financial institution.
A)True
B)False
Page 11
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Chapter 10: Purchasing and Financing a Home
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Sample Questions
Q1) If the rent on an apartment is $600 per month,which is equal to a mortgage payment on a house,how much additional tax savings will you realize if $200 of the monthly mortgage payment is interest and your tax bracket is 25%?
A) $50
B) $600
C) $2,500
D) $7,200
Q2) As a result of the financial crisis of 2008-2009,some financial institutions accepted a(n)________ arrangements in which the lender accepted the proceeds of the sale of a home as full payment on the debt owed even though the proceeds were less than the debt owed.
A) mortgage modification
B) foreclosure
C) refinancing
D) short-sale
Q3) Online real estate services are more convenient,but usually charge higher commissions than traditional full-service real estate companies.
A)True
B)False
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Page 12
Chapter 11: Auto and Homeowners Insurance
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Sample Questions
Q1) comprehensive coverage
A)requires individuals who drive cars to purchase a minimum amount of liability insurance
B)pays for injuries to you or people in your car in an accident where you (the driver) are at fault
C)a set dollar amount that you are responsible for paying before any coverage is provided by your insurer
D)covers damage to your car as a result of theft, fire, vandalism, or various other events
E)vehicle insurance to cover various injuries, your property, and the property of others
F)covers damage to your car when you are at fault in an accident
Q2) All of the following may qualify so an applicant for an auto insurance discount,except
A) making high grades.
B) completing a driver's training program.
C) having several cars insured with the same company.
D) being under 25 years old.
Q3) List two ways to reduce your homeowner's insurance premiums.
Q4) List four ways to reduce your auto insurance premiums.
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Page 13
Chapter 12: Health and Disability Insurance
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Sample Questions
Q1) Which of the following is not a true statement?
A) More than half of all individuals in the United States will need long-term care in some period during their life.
B) Medicare covers most of the expenses associated with long-term care.
C) The cost of an aide providing basic care at home can exceed $1,000 per week.
D) For individuals who enter a nursing home, the cost is about $46,000 per year on average.
Q2) What are some of your considerations in choosing a long-term care insurance policy?
Q3) As you develop your long term personal financial plan,consideration of purchasing disability insurance and paying the premiums is very important when
A) you are raising a family and have significant financial responsibilities.
B) you are nearing retirement and want to protect your net worth.
C) you begin collecting social security as a way to supplement your retirement income.
D) you begin to feel ill.
Q4) Social Security is the easiest disability coverage to qualify for benefits.
A)True
B)False
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Page 14
Chapter 13: Life Insurance
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Sample Questions
Q1) How much term life insurance should you have to provide your family with $75,000 per year pretax for general expenses for 40 years,plus immediately pre-fund two $100,000 college accounts for your two children in the event of your death.Assume your death benefit could be invested at 6% per year for the entire period.
A) $1,200,000
B) $1,357,000
C) $1,328,472
D) Not enough information to determine the answer
Q2) How much insurance would be needed in order to provide for a family for 20 years if the pretax income necessary to cover living expenses is $50,000 and the money can be invested at 6%?
A) $573,500
B) $1,000,000
C) $833,333
D) $2,100,000
Q3) A lump sum settlement option is usually the best choice,even if a beneficiary is not very good at managing large sums of money.
A)True
B)False
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Page 15
Chapter 14: Investing Fundamentals
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Sample Questions
Q1) Publicly traded indexes are typically purchased by investors who expect an increase in
A) an inflation index.
B) an unemployment index.
C) an index representing the political approval rating of the president of the United States.
D) a particular stock index.
Q2) Name three applications of present and future value concepts to stocks.
Q3) The largest market where existing securities are sold is called the ________ market.
A) primary
B) secondary
C) third
D) fourth
Q4) Of the following statements about a day trader,which is not correct?
A) They have a short-term focus.
B) They may buy and sell on the same day.
C) They are more risk averse than most investors.
D) Day trading may be their career.
Q5) Newly issued securities are traded in the ________.
Page 16
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Chapter 15: Investing in Stocks
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Sample Questions
Q1) Fundamental analysis is based on all of the following except
A) the firm's revenue.
B) the firm's earnings.
C) the firm's stock price over the last year.
D) the firm's sensitivity to economic conditions.
Q2) Which of the following actions of the U.S.government could not be considered part of fiscal policy?
A) Federal Reserve actions to adjust interest rates
B) Raising the capital gains tax rate
C) Construction of a new dam
D) Providing job training for the unemployed
Q3) The means by which the U.S.government imposes taxes on individuals and corporations and by which it spends its money is called ________ policy.
A) taxing
B) fiscal
C) financial
D) spending
Q4) A brokerage firm that executes your transactions without offering investment advice is a(n)________.
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Chapter 16: Investing in Bonds
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Sample Questions
Q1) When a bond has a par or face value of $1,000 and a 6% coupon rate,the semiannual payment would be $60.
A)True
B)False
Q2) Bonds with longer maturities are more sensitive to interest rate movements than bonds that have shorter maturities.
A)True
B)False
Q3) Investors purchase corporate bonds because
A) they are a risk-free investment.
B) they pay interest income.
C) they pay dividends.
D) the returns are higher than the returns from stocks.
Q4) risk premium
A)risk that a bond's price will decline in response to an increase in interest rates
B)compensation required for default risk
C)risk that the face value may not be repaid
Q5) Another name for the par value of a bond is its ________.
Q6) List and describe three strategies for investing in bonds.
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Chapter 17: Investing in Mutual Funds
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Sample Questions
Q1) Treasury bond funds with short maturities have ________ default risk and ________ interest rate risk.
A) high; low
B) high; high
C) limited; high
D) low; limited
Q2) High yield (junk)bond funds focus on relatively risky bonds issued by firms that are subject to
A) default risk.
B) interest rate risk.
C) exchange risk.
D) management risk.
Q3) The price per share for a closed-end mutual fund can differ from the fund's NAV per share.
A)True
B)False
Q4) Index mutual funds tend to have lower expenses than other types of mutual funds.
A)True
B)False
Q5) Mutual funds that are traded on stock exchanges are called ________.
Page 19
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Chapter 18: Asset Allocation
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Sample Questions
Q1) The price at which an option allows you to purchase or sell shares of stock is the ________ price.
Q2) Diversification is especially beneficial during periods where the stock market conditions are generally poor.
A)True
B)False
Q3) An alternative to purchasing real estate directly and finding renters is investing in a
A) management rental company.
B) real estate investment trust.
C) condominium.
D) townhouse.
Q4) To which of the following markets would an investment adviser recommend you allocate approximately 80% of your money if you wanted to maintain a relatively low degree of risk?
A) European stocks
B) Asian stocks
C) U.S. stocks
D) Latin American stocks
Q5) Asset allocation uses what to reduce your risk from investing?
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Chapter 19: Retirement Planning
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Sample Questions
Q1) Which of the following investments is least likely to be allowed with most defined-contribution plans?
A) Stock mutual funds
B) Bond mutual funds
C) Money market funds
D) Individual corporate bonds
Q2) List three sources of income when you retire.
Q3) What would be the difference in the tax consequences of an $18,000 withdrawal from a Roth IRA versus a traditional IRA if $15,000 represents long-term capital gains,$2,000 is short-term capital gains,and $1,000 is interest? Assume a tax rate of 30% and a capital gains tax rate of 10%.
A) $5,200 more in taxes with a traditional IRA
B) $4,800 more in taxes with a traditional IRA
C) $5,400 more in taxes with a traditional IRA
D) $5,400 more in taxes with a Roth IRA
Q4) An ESOP (employee stock ownership plan)is generally more risky than retirement plans invested in diversified mutual funds.
A)True
B)False
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Chapter 20: Estate Planning
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Sample Questions
Q1) A trust that is created by the terms of the will is called a(n)________ trust.
Q2) A will's key components may include all of the following except
A) distribution of the estate.
B) naming of the executor.
C) appointing of a guardian.
D) spelling out funeral arrangements.
Q3) A(n)________ is a document that specifies changes in an existing will.
A) letter of instruction
B) codicil
C) amendment
D) secondary will
Q4) To create a will,a person must be of legal age,be mentally competent,and not be subject to undue influence or threats from others.
A)True
B)False
Q5) In determining estate taxes,the estate is valued by subtracting all liabilities including funeral expenses from the value of all assets including a home.
A)True
B)False
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Chapter 21: Integrating the Components of a Financial Plan
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Q1) To monitor your financial plan over time,it is important to store finance-related documents in a safe and accessible place.
A)True
B)False
Q2) insurance
A)asset and income protection
B)a place to store your financial documents
C)a loan to purchase a home or condominium
D)amount saved for the future
Q3) You should make investments only after you have sufficient liquidity and sufficient insurance to protect your existing assets.
A)True
B)False
Q4) If you are a high-income individual,you should not invest in
A) stocks that pay cash dividends.
B) growth stocks.
C) municipal bonds.
D) global mutual funds.
Q5) ________ should be kept in a safe at home or in a safety deposit box at a bank.
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