Principles of Personal Finance Exam Preparation Guide
Course Introduction
Principles of Personal Finance is an introductory course designed to equip students with foundational financial management skills necessary for personal and professional success. Topics covered include budgeting, saving, investing, credit management, insurance, taxes, and retirement planning. Through practical examples and real-life scenarios, students develop the ability to make informed decisions regarding their financial resources, set achievable financial goals, and understand the impact of their choices within the broader economic landscape. This course emphasizes the importance of financial literacy in building long-term wealth and achieving financial security.
Recommended Textbook
Personal Finance 6th Edition by Jeff Madura
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21 Chapters
2466 Verified Questions
2466 Flashcards
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Page 2
Chapter 1: Overview of a Financial Plan
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Sample Questions
Q1) Money management decisions include deciding how much credit to obtain to support your spending and what sources of credit to use.
A)True
B)False
Answer: False
Q2) Liquidity cannot be enhanced using sound money and credit management.
A)True
B)False
Answer: False
Q3) Which of the following is not a way that insurance is designed to protect your wealth?
A) Protecting the assets that you own
B) Limiting your exposure to potential liabilities
C) Protecting your income
D) Protecting your investments from downturns in the stock market
Answer: D
Q4) Most investments are subject to ________,which is the uncertainty surrounding their potential return.
Answer: risk
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Chapter 2: Planning With Personal Financial Statements
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Sample Questions
Q1) Jennifer has assets of $100,000 and $10,000 of debt.She could
A) borrow more money, since her debt ratio is low.
B) apply for a bank loan, but expect to be turned down.
C) borrow approximately $200,000 at below market rates.
D) not borrow more money until she pays off her current debt.
Answer: A
Q2) The primary goal of financial planning is to
A) increase earnings.
B) maximize cash inflows.
C) maximize wealth.
D) minimize financial risk.
Answer: C
Q3) Debts that are to be paid off within a year are called A) intermediate-term liabilities.
B) one-year liabilities.
C) current liabilities.
D) insignificant debts.
Answer: C
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) The time value of money can be used to estimate future savings with periodic deposits of funds.
A)True
B)False
Answer: True
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) If I deposit a sum of money today and want it to double in 10 years,I will need to receive an interest rate of slightly above ________.
Answer: 7%
Q4) The difference between an ordinary annuity and an annuity due is that with an annuity due the payments occur at the ________ of each period.
Answer: beginning
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Chapter 4: Using Tax Concepts for Planning
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Sample Questions
Q1) The timing on the sale of an investment asset earning a capital gain makes little or no difference in the amount of taxes that are owed.
A)True
B)False
Q2) Which item below cannot be taken as an itemized deduction?
A) Medical expenses
B) Charitable contributions
C) Child and dependent care expenses
D) Real estate taxes
Q3) An earned income credit is a special credit that reduces the amount of taxes owed by taxpayers who earn high incomes.
A)True
B)False
Q4) Comment on a large tax refund.Is it a good use of your funds considering present value concepts? Does the government pay you interest? What can you do to change your withholding or recalculate it?
Q5) A(n)________ offsets taxes by subtracting the full amount from the taxes owed.
Q6) Describe how taxes affect your personal budget,income statement,and balance sheet.
6
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Chapter 5: Banking and Interest Rates
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Sample Questions
Q1) ________ are nondepository institutions that facilitate the purchase or sale of securities by firms or individuals by providing investment banking services and brokerage services.
A) Finance companies
B) Securities firms
C) Insurance companies
D) Investment companies
Q2) The term structure of interest rates is measured by a(n)________,which shows the interest rate offered at each maturity level.
A) economist
B) yield curve
C) pie chart
D) index
Q3) Debit cards allow you to pay for a purchase later when the bill arrives.
A)True
B)False
Q4) debit card
A)automatically deducts an amount from a checking account
B)extends the payment time through credit
Q5) Describe four factors you should consider when choosing a financial institution.
Page 7
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Chapter 6: Managing Your Money
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Sample Questions
Q1) money management
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
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) cash deficiency
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
Q4) Describe three types of risk associated with various money market instruments.
Q5) Which of the following affords you access to a "sweep account"?
A) Asset management account
B) NOW account
C) MMDA account
D) MMF
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Chapter 7: Assessing and Securing Your Credit
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Sample Questions
Q1) Free credit reports are accessible to all U.S.consumers at A) www.creditreport.com.
B) www.freecreditreport.com.
C) www.annualcreditreport.com.
D) www.experian.com.
Q2) Name and briefly discuss three tactics that an identity thief may use.
Q3) Identity thieves that have systematically infiltrated corporations and financial institutions in order to facilitate large-scale identity thefts are usually a part of A) the Federal Trade Commission.
B) The Internal Revenue Service.
C) a well-organized crime ring.
D) a political party.
Q4) All of the following situations are valid reasons to borrow funds except A) a medical emergency.
B) a college education.
C) purchasing a car in order to return to the workforce.
D) borrowing for every day living expenses.
Q5) Paying your phone bill and electric bill on time each month will help you to establish a(n)________.
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Chapter 8: Managing Your Credit
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Sample Questions
Q1) A personal credit card statement does not contain which of the following?
A) Previous balance
B) Current balance
C) Account number
D) Who purchased the item
Q2) Credit card companies' fees cannot exceed ________of the initial credit limit.
A) more than 5%
B) more than 10%
C) more than 50%
D) more than 25%
Q3) If you find yourself with an excessive credit card balance,the first thing you should do is
A) borrow funds from family members.
B) quit school and get a job.
C) spend as little as possible.
D) file for personal bankruptcy.
Q4) Finance charges apply only to balances that were not paid in full before their due date in the current billing period.
A)True
B)False
Page 10
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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) All of the following are true regarding a cosigner on an account except
A) the cosigner is responsible for any unpaid balance.
B) the lender may not seize the assets of the cosigner.
C) cosigning an account is a big liability and should be taken seriously.
D) cosigning on a loan can restrict the amount that the cosigner is able to borrow.
Q3) You obtain a loan of $3,000 to be repaid over one year.Assume you are charged 12% interest based on the add-on method.You monthly payments would be A) $280.
B) $300.
C) $360.
D) $270.
Q4) A loan provided to finance the expenses of a person pursuing a college degree is called a(n)________.
Q5) List four components of a loan contract
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Chapter 10: Purchasing and Financing a Home
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Sample Questions
Q1) In negotiating for the purchase of a home,which of the following is unlikely to be included in the negotiating process?
A) Possession date
B) Repairs that are to be made
C) A pile of wood for the fireplace
D) Cost of moving the buyer's possessions into the home
Q2) Describe some of the advantages and disadvantages of purchasing a home yourself instead of renting.
Q3) On the purchase of a home,one "point" is equal to
A) $100.
B) $1,000.
C) 1% of the amount being financed.
D) 1% of the purchase price.
Q4) Since most of the problems have already been fixed,older homes usually have lower maintenance expense than newer homes.
A)True
B)False
Q5) For a conventional mortgage you will typically need a(n)________ of from 10% to 20% of the selling price of the home you are purchasing.
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Chapter 11: Auto and Homeowners Insurance
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Sample Questions
Q1) Lessening your exposure to an illness by getting periodic health checkups is an example of
A) avoiding risks.
B) reducing risks.
C) accepting risks.
D) transferring risks.
Q2) A common form of auto insurance fraud is
A) faking an accident or injury.
B) stealing merchandise from a car.
C) driving without a valid license.
D) None of the above.
Q3) Your automobile insurance policy contains policy limits of 200/300/100.If you have an accident in which you are deemed at fault and two people sustain bodily injuries that result in combined claims of $450,000,how much of the claim will not be covered under your insurance policy?
A) $250,000
B) $150,000
C) $350,000
D) $450,000
Q4) List four ways to reduce your auto insurance premiums.
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Chapter 12: Health and Disability Insurance
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Sample Questions
Q1) ________ insurance is provided by private insurance companies to cover medical expenses that are not covered by Medicare.
Q2) 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.
Q3) Because of COBRA,you can continue to remain covered by your employer's health insurance plan for no more than one year after you stop working for your employer.
A)True
B)False
Q4) Medicare is a government health insurance program for those over 65 years of age who can show need for financial assistance.
A)True
B)False
Q5) What steps would you take to evaluate and choose health care insurance options?
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Chapter 13: Life Insurance
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Sample Questions
Q1) In using the Internet to price insurance,which of the following is not true?
A) It is fast and convenient.
B) It is usually more expensive.
C) There is less pressure.
D) You can compare rates among several companies at once.
Q2) When choosing a life insurance company,you should consider all of the following criteria except
A) the financial condition of the company.
B) the cost of the policy.
C) the types of policies offered.
D) the length of the application.
Q3) A person's need for life insurance varies quite a bit over his or her lifetime. A)True B)False
Q4) The cheapest form of life insurance that provides coverage for a specified time period is ________.
Q5) Name four factors that are utilized in the budget method of calculating life insurance.
Q6) The ________ in a life insurance policy allows the beneficiary to receive the proceeds in different ways.
Page 15
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Chapter 14: Investing Fundamentals
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Sample Questions
Q1) Before you start to invest,you should ensure liquidity by owning A) individual stocks.
B) money market securities.
C) options and puts.
D) corporate bonds.
Q2) If you purchase 100 shares of XYZ Corporation for $50 per share,receive a dividend check for $200,and then sell the stock for $62 per share,what will your return on the stock be?
A) 4%
B) 424%
C) 24%
D) 28%
Q3) If you purchase 100 shares of Ajax Corporation for $15 a share and one year later sell it for $20 a share,what was your return if the stock paid $2 per share dividends? (Ignore commissions and trading fees.Round to the nearest whole percent.)
A) 10%
B) 33%
C) 47%
D) 40%
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Chapter 15: Investing in Stocks
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Sample Questions
Q1) When you buy a stock on margin,your gain is magnified if the stock goes up in value.
A)True
B)False
Q2) Stocks are usually bought or sold in round lots,which are multiples of $100.
A)True
B)False
Q3) Which of the following is not a reason some investors never purchase stock?
A) They are afraid of the risk.
B) They lack the knowledge.
C) They like safe investments such as CDs.
D) They don't want to make better returns.
Q4) Technical analysis and fundamental analysis are methods commonly used by investors to value stocks.
A)True
B)False
Q5) The Stimulus Act of 2009,which provided funds to try to stimulate the economy during the financial crisis,is an example of the government's use of ________ to affect economic growth.
Q6) The largest stock exchange in the United States is the ________.
Page 17
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Chapter 16: Investing in Bonds
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Sample Questions
Q1) The ________ strategy is intended to generate periodic and stable interest income.
A) interest rate
B) maturity matching
C) passive
D) active
Q2) 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
Q3) The advantage of a convertible bond to the investor is
A) higher coupon interest rates.
B) ability to "own the upside" if the company performs well.
C) convertibility protects the investor if the stock decreases in value.
D) none of these are advantages.
Q4) An advantage to owning bonds is that investors can sell them to other investors in the primary market before the bonds reach maturity.
A)True
B)False
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Chapter 17: Investing in Mutual Funds
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Sample Questions
Q1) There is no limit on the number of open-end mutual fund shares that a company can offer.
A)True
B)False
Q2) Which of the following is not a source of profits for owners of a stock mutual fund?
A) Dividends distributed by the mutual fund
B) Interest distributed by the mutual fund
C) Capital gains distributed by the mutual fund
D) Capital gains from the sale of their shares in the mutual fund
Q3) Before investing in a mutual fund the very least you should do is
A) read the prospectus.
B) consult an attorney.
C) open an account with a broker.
D) consult a certified financial planner.
Q4) Index stock funds always contain the stock of every company in a particular index. A)True B)False
Q5) The price of shares in a mutual fund is referred to as the ________.
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Chapter 18: Asset Allocation
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Q1) The more ________ the returns of individual investments in a portfolio,the more ________ the portfolio's returns are over time.
A) similar; volatile
B) different; volatile
C) steady; unsteady
D) aggressive; predictable
Q2) List two considerations that affect your asset allocation decision.
Q3) During the financial crisis in 2008-2009,investors who were diversified across industries
A) experienced no losses.
B) experienced large gains.
C) experienced significant losses because most industries were suffering from weak economic conditions.
D) experienced losses in financial services companies but not in other industries.
Q4) The more volatile the returns of individual investments in a portfolio,the more volatile the portfolio's returns are over time.
A)True
B)False
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Chapter 19: Retirement Planning
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Sample Questions
Q1) In estimating the future value of your retirement investments,you would consider all of the following except
A) the amount invested.
B) your annual return.
C) the number of years you will invest.
D) the age at which your spouse will retire.
Q2) The tax characteristics of a Roth IRA and a traditional IRA differ in terms of initial contributions and withdrawals after retirement.
A)True
B)False
Q3) When deciding whether to invest in a traditional IRA or a Roth IRA one would consider all of the following,except
A) the amount of income you expect to have during retirement.
B) whether you are covered by an employer-sponsored retirement plan and, if so, how much income you earn.
C) the marginal income tax rate you expect to have during retirement.
D) whether you want the money to accumulate tax-free or not.
Q4) List three sources of income when you retire.
Q5) Describe two types of annuities.
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Chapter 20: Estate Planning
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Sample Questions
Q1) If you die without a will,you are said to have died
A) intestate.
B) unlucky.
C) tragically.
D) irresponsibly.
Q2) Once you have a positive net worth to be distributed upon your death,you should consider creating a will.
A)True
B)False
Q3) ________ is the act of planning how wealth will be allocated on or before your death.
A) Asset allocation
B) Estate planning
C) Liquidity planning
D) Management planning
Q4) Which of the following is not accomplished during probate?
A) Payment of claims against the estate
B) Validation of the will
C) Determination of legal heirs
D) Trading of the estate's assets among the heirs
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Chapter 21: Integrating the Components of a Financial Plan
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Sample Questions
Q1) The easiest way to begin investing and building wealth is by
A) inheriting from your grandparents.
B) buying high growth stocks early and often.
C) spending less than you make and invest excess cash flow on a routine monthly basis.
D) investing in high yield bonds.
Q2) retirement account
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) Which of the following key documents should not be kept in a safety deposit box?
A) The only copy of your will
B) Your monthly bank statement
C) Original copies of life insurance policies
D) Deed to your house
Q4) Most people set financial goals early in life and these goals rarely change.
A)True
B)False
Q5) What are four types of financial investment balances that you should monitor?
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