Introduction to Personal Finance
Final Test Solutions
Course Introduction
Introduction to Personal Finance provides students with foundational knowledge and practical skills to effectively manage their financial lives. The course covers essential topics such as budgeting, saving, credit, debt management, investing basics, financial goal-setting, and understanding banking services. Students will learn how to make informed decisions regarding spending and borrowing, how to assess personal financial risks, and how to plan for short- and long-term financial needs. Emphasis is placed on developing responsible financial habits and understanding the impact of personal financial choices on overall well-being.
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) All of the following are true with regard to the demand for financial advisers except A) many people lack an understanding of personal finance.
B) many people prefer to rely on advisers rather than making their own decision. C) many people are just not interested in making their own financial decisions. D) the law requires that you use advisers before making investments.
Answer: D
Q2) A worker making $20 per hour decides to take a day of unpaid leave from work to attend a graduation ceremony. The worker ordinarily works and 8-hour day and is subjected to a total tax rate of 20%.What is the worker's total opportunity cost from the day of unpaid leave?
A) $8.00
B) $128.00
C) $112.00
D) $160.00
Answer: B
Q3) Amanda has cash of $100,a car worth $5,000,and books worth $200.Her liabilities include a car loan of $2,000 and a credit card balance of $100.What is the total of her assets,liabilities,and net worth?
Answer: Assets of $5,300,liabilities of $2,100,and a net worth of $3,200.
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Page 3
Chapter 2: Planning With Personal Financial Statements
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Sample Questions
Q1) Long term liabilities include all of the following except A) the amount due on a credit card.
B) the mortgage on a home.
C) three year car loan.
D) a student loan.
Answer: A
Q2) When you retire,which of the following will be key sources of cash flow?
A) C and D
B) Salary and wages
C) Interest and dividends
D) Social security and 401K
Answer: A
Q3) The difference between assets and liabilities is called A) surplus.
B) deficit.
C) net income.
D) net worth.
Answer: D
Q4) A(n)________ is a forecast of your future cash inflows and outflows.
Answer: budget
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Chapter 3: Applying Time Value Concepts
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Sample Questions
Q1) Money received today is worth more than the same amount of money received in the future.This is true because
A) money received today can grow at a compounded rate.
B) future inflation will devalue your current investments.
C) all goods and services will cost more in the future.
D) unique investment opportunities exist today, which may not be available in the future.
Answer: A
Q2) Yogi Berra Jr.has agreed to play for the New York Mets for $4 million per year for the next 10 years.What table would you use to calculate the value of this contract in today's dollars?
A) Present value of a single amount
B) Future value of an annuity
C) Future value of a single amount
D) Present value of an annuity
Answer: D
Q3) The process of obtaining present values is known as discounting.
A)True
B)False
Answer: True
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Chapter 4: Using Tax Concepts for Planning
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Sample Questions
Q1) If you are working part time while going to school and have no dependents other than yourself,do not itemize deductions and have no capital asset transactions,which Federal Income Tax return form should you file?
A) 1040EZ
B) 1120
C) 1040X
D) Since you are part time and make just a few thousand dollars, you do not need to file an income tax return.
Q2) Medicare taxes are 1.45% of your salary,regardless of the salary amount.
A)True
B)False
Q3) Which of the following conditions will not afford you a tax advantage?
A) Being over age 65
B) Being deaf
C) Being widowed within the past two years
D) Being blind
Q4) Tax credits amount to the same savings as tax deductions.
A)True
B)False
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Chapter 5: Banking and Interest Rates
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Sample Questions
Q1) If you have $10,000 that you do not currently need for expenses and you wish to put it somewhere so that it will earn a return,which of the following financial institutions would you not choose?
A) Savings institution
B) Finance company
C) Securities firm
D) Investment company
Q2) Jack has $1,000 that he wishes to invest for the next two years.One-year CDs are currently paying 8% while two-year CDs are paying 12% per annum.Economists are predicting that interest rates will rise by the end of the year.What is the minimum amount interest rates would have to increase to in order for the one-year CD to be better than the two-year CD?
A) 16%
B) 14%
C) 12%
D) 10 %
Q3) Securities firms primarily sell insurance to protect individuals from adverse events.
A)True
B)False
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Chapter 6: Managing Your Money
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Sample Questions
Q1) To achieve both liquidity and an adequate return,you should consider investing in A) only one money market investment with a high return and low liquidity.
B) only one money market investment with low return and high liquidity.
C) multiple money market investments with varied returns and levels of liquidity.
D) multiple money market investments with high returns and high liquidity.
Q2) You should attempt to have a sufficient amount of funds in liquid assets to draw on when your cash outflows exceed your cash inflows.
A)True
B)False
Q3) ________ risk is the risk that a borrower may not repay on a timely basis.
A) Credit
B) Interest rate
C) Liquidity
D) Asset
Q4) Since CDs are insured by the FDIC,the rates are usually the same from one institution to another.
A)True
B)False
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Chapter 7: Assessing and Securing Your Credit
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Sample Questions
Q1) Which of the following items should not be removed from your wallet?
A) Social Security card
B) Birth certificate
C) Infrequently used credit cards
D) Drivers license
Q2) Your credit report can be requested online and should be checked periodically for errors.
A)True
B)False
Q3) ________ is a credit arrangement where the balance may be paid off monthly and interest is only charged on the remaining unpaid amount.
A) The credit report
B) The credit payment history
C) Revolving open-end credit
D) The debit report
Q4) With a credit score of over 500,you should have no problem getting approval for credit purchases.
A)True
B)False
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Chapter 8: Managing Your Credit
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Sample Questions
Q1) Congress has passed regulations that protect consumers who use credit card services.
A)True
B)False
Q2) Credit cards can eliminate the need for carrying large amounts of cash.
A)True
B)False
Q3) All of the following are disadvantages of proprietary credit cards except
A) your purchases are limited to a single merchant per card.
B) you may need several credit cards.
C) you receive several billing statements.
D) it takes considerable time to process your application to allow you to begin obtaining credit.
Q4) On a credit card,a finance charge is applied to
A) any purchase.
B) any balance not previously paid.
C) current purchases.
D) future purchases.
Q5) If you include all fees charged by a lender and the simple interest rate,the result will be the ________.
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Chapter 9: Personal Loans
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Sample Questions
Q1) The proceeds from a home equity loan can be used for any purpose including a vacation,tuition payments,or health care expenses.
A)True
B)False
Q2) A few years ago Mary purchased a home for $100,000.Today the home is worth $150,000.The remaining balance on the mortgage is $50,000.If Mary can borrow up to 80% of the market value of the equity,the maximum amount she can borrow is
A) $80,000.
B) $70,000.
C) $100,000.
D) $50,000.
Q3) Regarding the amount of money borrowed on a loan,all of the following are true except
A) the amount is based on how much the lender believes you can pay back in the future.
B) you should borrow slightly more than you need to cover future inflation.
C) you should only borrow the amount you need.
D) you will have to pay interest on the entire amount.
Q4) List four components of a loan contract
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Page 11
Chapter 10: Purchasing and Financing a Home
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Sample Questions
Q1) When a mortgage lender provides loans to borrowers without sufficient income or a down payment,the lender is said to provide a ________ mortgage.
A) VA
B) subprime
C) prime
D) FHA
Q2) The type of mortgage that is usually the shortest term and will require further action at the end of it is a(n)
A) graduated payment mortgage.
B) balloon payment mortgage.
C) adjustable rate mortgage.
D) fixed rate mortgage.
Q3) You should consider the school system near a home only if you have or are likely to have school-aged children.
A)True
B)False
Q4) Before you buy a house,you should conduct a(n)________ to determine if the price is comparable to similar houses in the area.
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Page 12
Chapter 11: Auto and Homeowners Insurance
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Sample Questions
Q1) Given the large number of uninsured drivers,uninsured motorist coverage is needed.
A)True
B)False
Q2) Insurance protects you against potential financial losses or liability that result from unexpected events.
A)True
B)False
Q3) A replacement cost rider is important to add to your homeowner's policy because
A) it replaces property that breaks or otherwise stops working.
B) in the event of a loss, your property is valued at the cost of replacement regardless of age or depreciation.
C) it will pay you depreciated value plus inflation for your property loss.
D) it is not important and is an expensive but low value rider.
Q4) A personal scheduled property floater should be added to your homeowner's insurance policy if
A) you or your spouse has expensive jewelry or watches
B) you have valuable original art in your home
C) you own an antique car and keep it in your garage
D) Both A and B are correct
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Chapter 12: Health and Disability Insurance
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Sample Questions
Q1) How much of a $2,000 medical bill would you pay if your policy contains a $400 deductible and a 10% coinsurance clause?
A) $200
B) $400
C) $160
D) $560
Q2) Medicare basic coverage (Part A) covers
A) hospital expenses, including surgeries.
B) outpatient hospital care.
C) physical therapy.
D) All of the above.
Q3) If you are disabled and have insurance,what types of resources,including those from your present job,do you have to cover the waiting period?
Q4) You must have Parts A and B of Medicare in order to qualify for Part D.
A)True B)False
Q5) Social Security is the easiest disability coverage to qualify for benefits. A)True B)False
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Chapter 13: Life Insurance
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Sample Questions
Q1) If no one else relies on your income,life insurance may not be necessary.
A)True
B)False
Q2) Life insurance is critical to protect a family's financial situation in the event that a breadwinner dies.
A)True
B)False
Q3) Of the following statements dealing with premiums on life insurance,which is not true?
A) Some factors that affect premiums are decided at birth.
B) Premiums will be higher if you buy insurance when you are older.
C) The kind of policy you buy will determine your premiums.
D) There are very few things you can do to reduce your life insurance premiums.
Q4) If you choose to receive your benefit in the form of equal payments for a certain number of years instead of a lump sum,you elected to receive a(n)
A) installment payments settlement.
B) interest payments settlement.
C) lump-sum settlement.
D) limited settlement.
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Chapter 14: Investing Fundamentals
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Sample Questions
Q1) An advantage of investing in corporate bonds is that they hold their value and pay predictable interest (coupon)payments periodically.
A)True
B)False
Q2) Day traders always trade
A) in the primary market.
B) in either the primary or secondary markets.
C) with an objective of buying and selling within two hours.
D) using margin funding.
Q3) Because dividends are fixed,the prices of preferred stock are not as volatile as those of common stock.
A)True
B)False
Q4) You can reduce your risk by
A) diversifying your investments.
B) having a shorter time horizon.
C) putting all of your investment in one successful company.
D) Both A and B are correct.
Q5) Describe common stock.
Q6) Name three applications of present and future value concepts to stocks.
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Chapter 15: Investing in Stocks
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Sample Questions
Q1) on margin
A)a brokerage firm that provides advice plus transaction services
B)a brokerage firm that executes transactions without giving advice
C)purchasing stock with funds borrowed from a brokerage firm
D)an order to buy or sell at the prevailing market price
E)an order to sell stock when the price falls to a specified level
Q2) Stocks would be most favorably affected by
A) a decline in interest rates and a decline in inflation.
B) an increase in interest rates and a decline in inflation.
C) a decline in interest rates and an increase in inflation.
D) an increase in interest rates and an increase in inflation.
Q3) Long established,"blue chip" companies list their shares on the
A) NYSE MKT LLC.
B) Over the Counter market.
C) NYSE.
D) NASDAQ.
Q4) Stocks are usually bought or sold in round lots,which are multiples of $100.
A)True
B)False
Q5) Is investing on margin what the average investor should do?
Page 17
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Chapter 16: Investing in Bonds
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Sample Questions
Q1) If you expect interest rates to rise over time,you should consider investing in bonds with longer maturities.
A)True
B)False
Q2) A bond's yield to maturity is above its coupon rate when
A) the bond's market price is above par value.
B) the bond's market price is below par value.
C) the bond is convertible and the stock has appreciated.
D) interest rates are lower than the prime rate.
Q3) Bonds with a ________ degree of default risk are most susceptible to default when economic conditions are ________.
A) low; strong
B) high; weak
C) high; strong
D) low; weak
Q4) Some ________ bonds are called junk bonds,which have a high level of risk.
A) Treasury
B) Municipal
C) Federal Agency
D) Corporate
Page 18
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Chapter 17: Investing in Mutual Funds
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Sample Questions
Q1) In order to maximize diversification it is a good idea to
A) invest in large, mid and small cap domestic mutual funds.
B) invest in high quality global bond mutual funds.
C) invest in international equity mutual funds.
D) invest in all funds mentioned in A, B and C.
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) In considering various fund characteristics,which of the following should you not consider?
A) Minimum investment
B) Investment objective
C) Investment company
D) S & P ratings
Q4) In general,it is prudent to purchase a no-load fund instead of a load fund.
A)True
B)False
Page 19
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Chapter 18: Asset Allocation
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Sample Questions
Q1) positive correlation
A)a property of stocks that behave in a dissimilar manner
B)allocating money across financial assets
C)a set of multiple investments in different assets
D)a property of stocks that behave in a similar manner
Q2) The greater the proportion of stocks to bonds in your portfolio,the greater the ________ risk.
A) interest rate
B) reinvestment
C) inflation
D) market
Q3) The objective of asset allocation is to
A) make investment decisions easier.
B) ensure the returns of the individual investments within a portfolio.
C) achieve a desired return on investment and eliminate the adverse risk of investing.
D) achieve a desired return on investment and maintain a tolerable risk level.
Q4) A portfolio can be less risky when its investments move in perfect tandem.
A)True
B)False
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Chapter 19: Retirement Planning
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Sample Questions
Q1) You can elect to receive Social Security retirement benefits
A) at the full retirement age, which is being raised from 65 to 69.
B) at age 62 and take a reduced amount.
C) and limit your ability to keep on working and earning income.
D) and not be taxed on them, no matter how much other income you have.
Q2) Which of the following is a defined-contribution plan intended for firms with 100 or fewer employees?
A) 401(k) plan
B) SEP plan
C) SIMPLE plan
D) 403(b) plan
Q3) If your retirement plan has no vesting requirement then it is not a
A) defined-benefit plan.
B) Roth IRA.
C) traditional IRA.
D) Keogh plan.
Q4) The Social Security system allows people to receive reduced benefits before their full retirement age.
A)True
B)False
Page 21
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Chapter 20: Estate Planning
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Q1) probate
A)a legal request for how your estate should be distributed upon your death
B)a document that specifies changes in an existing will
C)dying without a will
D)persons specified in a will to receive part of an estate
E)a will suitable for a smaller estate distributed to the spouse
F)the legal process that declares a will valid and ensures orderly distribution of assets
G)the person designated in a will to execute instructions regarding the distribution of your assets
Q2) The only reason for having a valid will is to have your estate distributed according to your plans.
A)True
B)False
Q3) Which of the following is not required to be an executor of an estate?
A) U.S. citizenship
B) Blood relationship to the deceased
C) Legal age
D) Not a convicted felon
Q4) The assets less liabilities of a deceased individual are called a(n)________.
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Chapter 21: Integrating the Components of a Financial Plan
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Sample Questions
Q1) It is easier to make monthly loan payments if you select financing that has relatively ________ maturities.
Q2) Most people set financial goals early in life and these goals rarely change.
A)True
B)False
Q3) A term life policy is the least expensive way to
A) build a big estate when you die.
B) insure your life and provide for your responsibilities in the event of unexpected death.
C) save for your retirement years as the policy builds cash value.
D) insure your health, ability to work and your life all in one policy.
Q4) As time passes,your financial position and goals are likely to change so you will need to revise your financial plan.
A)True
B)False
Q5) 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
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