Principles of Personal Finance Study Guide Questions
Course Introduction
Principles of Personal Finance introduces students to the fundamental concepts and practical skills necessary for effective money management in everyday life. The course covers topics such as budgeting, saving, investing, credit and debt management, insurance, taxes, and financial planning. Emphasizing informed decision-making and responsible financial behavior, students will learn how to create and manage personal budgets, set financial goals, understand banking and credit systems, and make wise choices regarding major purchases and investments. By the end of the course, students will be equipped with essential knowledge to build financial security and make sound financial decisions throughout their lives.
Recommended Textbook
Personal Finance 6th Edition by Jeff Madura
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21 Chapters
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Chapter 1: Overview of a Financial Plan
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Q1) Which of the following is an example of money management?
A) Putting your money in a savings account at your bank
B) Shopping around for the credit card with the best interest rate
C) Deciding to delay buying a new car until you can pay cash
D) Paying off a loan early to reduce the interest charges
Answer: A
Q2) Which of the following does not protect your assets and/or income?
A) Money insurance
B) Disability insurance
C) Automobile insurance
D) Life and health insurance
Answer: A
Q3) Which of the following is not a decision that you would probably encounter in managing your budget?
A) What expenses you should anticipate
B) How much money you should attempt to save each month
C) How you will allocate your estate among your heirs
D) How long you will take to pay off a specific loan
Answer: C
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Page 3
Chapter 2: Planning With Personal Financial Statements
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Sample Questions
Q1) A personal balance sheet presents
A) amounts budgeted for spending.
B) income and expenses for a period of time.
C) earnings on savings and investments.
D) items owned and amounts owed.
Answer: D
Q2) household assets
A)a summary of assets, liabilities and net worth
B)the difference between cash inflows and outflows
C)items owned by a household such as a home or car
D)a financial statement that measures cash inflows and outflows
Answer: C
Q3) David's liquidity ratio is 3.0.He has $1,000 in current liabilities.Therefore,he has ________ worth of liquid assets.
A) $3,000
B) $333
C) $4,000
D) $700
Answer: A
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Page 4
Chapter 3: Applying Time Value Concepts
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Sample Questions
Q1) To determine how much you must save each year to have enough for your daughter's college education,you would use the present value of $1 tables.
A)True
B)False
Answer: False
Q2) An annuity due differs from an ordinary annuity in that the payments occur at the beginning of the period instead of at the end of the period.
A)True
B)False
Answer: True
Q3) Time value of money is important because
A) you do not want to wait a long time to get paid.
B) deflation eats away at the value of a dollar.
C) the present value of future cash flows is affected by inflation.
D) time value of money is not as important to a person's finances as budgeting.
Answer: C
Q4) A stream of equal payments either received or paid at equal time intervals is a(n)________.
Answer: annuity
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Chapter 4: Using Tax Concepts for Planning
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Sample Questions
Q1) The key tax planning decisions in building your financial plan are knowing what tax savings are currently available to you and how you can increase your tax savings in the future.
A)True
B)False
Q2) Which of the following is not a tax credit mentioned in the chapter?
A) Child tax credit
B) Second income credit
C) College expense credit
D) Earned income credit
Q3) ________ is withheld at a rate of 6.2% on the first $118,500 of your 2015 earnings.
Q4) The standard deduction (assuming you are not over 65 or blind)is largest for A) single filers.
B) head of household filers.
C) married filing jointly.
D) married filing separately.
Q5) ________ and ________ are both reported on a Schedule B.
Q6) The ________ is a fixed amount deducted from adjusted gross income to determine taxable income.
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Chapter 5: Banking and Interest Rates
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Q1) A risk premium is the amount of interest you might receive over and above the risk-free return insured by the federal government.
A)True
B)False
Q2) Depository institutions are financial institutions that accept deposits (that are insured up to a maximum level)from individuals or firms and provide loans.
A)True
B)False
Q3) Financial institutions that accept deposits (that are insured up to a maximum level)from individuals and provide loans are called
A) finance companies.
B) depository institutions.
C) investment companies.
D) nondepository institutions.
Q4) credit 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.
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Chapter 6: Managing Your Money
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Sample Questions
Q1) Which of the following is not a money market investment?
A) Shares of corporate stock
B) NOW account
C) Savings account
D) Treasury bills
Q2) Since the potential for default is very low for some types of money market securities,it's not necessary to assess the risk before investing your money in one.
A)True
B)False
Q3) You buy a T-bill,which has a par value of $10,000 for $9,600 and the T-bill has a one-year maturity.What will be your return?
A) 2.5%
B) 4.2%
C) 4.8%
D) 6.0%
Q4) The $500 minimum balance you are required to keep in your NOW checking account represents an opportunity cost.
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 is not true regarding revolving open-end credit?
A) Credit cards are an example of it.
B) A specific maximum amount of credit is established.
C) If the balance is not paid off over a period of months, a penalty is incurred.
D) Interest is charged on the remaining balance each month.
Q2) FTC
A)copying credit information from the magnetic strip on a credit card
B)something you should install on your computer to protect you from hackers and worms
C)Bsomething you should never carry in your wallet
D)the federal agency that acts as a clearinghouse for all identity theft complaints
E)obtaining information on a person's identity from discarded items
Q3) Using more credit than can be repaid is a primary cause of individual bankruptcies.
A)True
B)False
Q4) Discuss the reasons why someone would wish to steal your identity.
Q5) Name and briefly discuss three tactics that an identity thief may use.
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Page 9
Chapter 8: Managing Your Credit
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Sample Questions
Q1) 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.
Q2) It is a good practice to review your credit card statement online as often as daily or weekly in order to
A) make sure there are no fraudulent charges.
B) make sure there are no duplicate or erroneous charges from merchants.
C) monitor your spending patterns.
D) A, B and C are all correct.
Q3) A credit card statement lists purchases that were made with the credit card as well as any balance carried forward from the previous statement.
A)True
B)False
Q4) The interest charged on purchases and cash advances on credit cards is computed in the same way.
A)True
B)False
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Chapter 9: Personal Loans
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Sample Questions
Q1) Financial institutions typically provide home equity loans up to ________ of the value of the equity in a home.
A) 98%
B) 80%
C) 70%
D) 45%
Q2) The most favorable car financing is that of
A) commercial banks.
B) credit unions.
C) car dealers.
D) There is no one best deal every time; it pays to shop around.
Q3) Which of the following is a true statement about student loans?
A) All student loans are provided by the U.S. government.
B) All student loans have fixed interest rates.
C) Interest payments on some loans are deferred until the students graduate and enter the workforce.
D) Interest is tax deductible for those at all income levels.
Q4) ________ is a method of computing interest based on the existing principal amount of the loan.
Q5) List four components of a loan contract
Page 11
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Chapter 10: Purchasing and Financing a Home
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Sample Questions
Q1) For a conventional mortgage,a lender typically requires a down payment of 10 to 20% of the home's selling price.
A)True
B)False
Q2) The size of the monthly payment on a mortgage is not dependent on the A) principal borrowed.
B) interest rate.
C) maturity.
D) broker's commission.
Q3) The purchase of a home represents a potential liability if you need to move quickly and the home does not appreciate rapidly in value.
A)True
B)False
Q4) Annual property taxes for homes are usually
A) less than 0.5% of the home value.
B) 0.5% to 1% of the home value.
C) 1% to 2% of the home value.
D) greater than 2% of the home value.
Q5) List four key components of closing costs.
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Chapter 11: Auto and Homeowners Insurance
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Sample Questions
Q1) Auto insurance rates are based upon
A) whether you keep your car in the garage or not.
B) your marital status.
C) the number of miles and the type of driving you do each year.
D) the condition of your vehicle.
Q2) If you have a car accident in which a person in the other car is injured,the type of insurance that would protect you from financial loss is
A) life insurance.
B) homeowners insurance.
C) health insurance.
D) auto insurance.
Q3) In general,insurance companies generate their revenue from the payments received for policies and from the return earned from investing the payments until the funds are needed to cover claims.
A)True
B)False
Q4) The coverage that is designed to protect you if you cause an accident where the driver or passenger of the other car sustains injuries and sues you is called ________.
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Chapter 12: Health and Disability Insurance
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Q1) The managed health care plan with higher costs,but a greater choice of health care providers is the ________.
Q2) One of the problems with changing jobs is that you will immediately lose your health insurance and may not be able to get new insurance right away.
A)True
B)False
Q3) A(n)________ plan requires that individuals pay health care providers and then put in a claim for reimbursement.
Q4) Which of the following statements regarding health insurance is not true?
A) It limits your potential liabilities and helps you receive the necessary medical care.
B) Health insurance is offered by private insurance companies and the government.
C) There are many more options available for homeowner's insurance than for health insurance.
D) Blue Cross and Blue Shield is the nation's largest health care insurer.
Q5) Most people obtain health insurance through group plans offered by employers.
A)True B)False
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Chapter 13: Life Insurance
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Sample Questions
Q1) Which of the following policies will not give you a cash settlement if you terminate the policy?
A) Whole life
B) Universal life
C) Decreasing term life
D) Variable life
Q2) You are putting $100 a month into a passbook savings account to pay for your child's college education.You worry that if you die before you have enough saved,your child will not be able to get a college education.Which of the following types of life insurance would best fit your needs at the lowest cost?
A) Whole life
B) Universal life
C) Decreasing-term
D) Variable life
Q3) During the time the policy is in effect,term life insurance has a good savings and investment component.
A)True
B)False
Q4) What are the three most popular types of life insurance?
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Chapter 14: Investing Fundamentals
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Q1) Which of the following are not factors that may impact the return on stock or bond investments?
A) An individual investor's comfort with the level of risk of an investment.
B) Recent weakness in China's economy.
C) Increasing interest rates in the U.S. economy.
D) Increasing inflation in the U.S. and Europe.
Q2) Which one thing do you always have with common stock?
A) Dividends
B) Voting rights
C) Capital appreciation
D) A guarantee of at least par value
Q3) All of the following are true statements about common stock dividends except A) dividends are based upon earnings.
B) no dividends may be paid.
C) dividends are usually between 1% and 3% of the stock's price.
D) dividends are contractually guaranteed to common stockholders.
Q4) Most investors are fully aware of the risk involved when pursuing investments that have the potential for very large returns.
A)True
B)False
Page 16
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Chapter 15: Investing in Stocks
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Sample Questions
Q1) Stocks that are subject to more uncertainty tend to have a
A) wider range in prices over time.
B) narrower range in prices over time.
C) higher closing price.
D) higher annual dividend.
Q2) The ________ is a measure of inflation that represents prices of products such as coal,lumber,and metals that are used to produce other products.
A) CPI
B) PPI
C) inflation index
D) cost of living index
Q3) The most up-to-date quotes of stock prices may be found in The Wall Street Journal.
A)True
B)False
Q4) Stocks are usually bought or sold in round lots,which are multiples of $100.
A)True
B)False
Q5) Compare and contrast a full-service brokerage firm and a discount brokerage firm.
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Chapter 16: Investing in Bonds
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Q1) convertible
A)long-term securities issued by government agencies or corporations
B)par value or the amount returned to the investor at maturity
C)bonds that can be converted into stock
D)annualized return on a bond if held to maturity
Q2) Name and explain two risks involved with bonds.
Q3) If a bond's price is lower than the principal amount,its yield to maturity will be ________ the coupon rate.
A) less than
B) more than C) equal to D) no relation to
Q4) Which of the following statements is not true of corporate bonds?
A) They are debt securities issued by large companies.
B) They have long-term maturity dates.
C) They are very secure and almost never default.
D) They can offer a predictable source of income.
Q5) List and describe three strategies for investing in bonds.
Q6) As an investor,why should you consider investing in bonds?
Q7) Another name for the par value of a bond is its ________.
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Chapter 17: Investing in Mutual Funds
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Q1) open-end mutual funds
A)funds that sell shares directly to investors and repurchase the shares when investors wish to sell them
B)annual expenses per share divided by the net asset value of a mutual fund
C)funds that sell directly to investors and do not charge a fee
D)amount by which a closed-end fund's share price in the secondary market is above the fund's NAV
E)market value of the securities that a mutual fund has purchased minus any liabilities owed
Q2) Before investing in mutual funds,discuss other issues that you would wish to address in your overall financial plan.
Q3) On January 1,you invest $10,000 in an open-end mutual fund selling for $25 per share that has a 2% load,1.5% management fee and 1% 12b-1 expense s.If the fund NAV appreciates to $28 by the time you sell it on December 31,what was your return on investment?
A) 9.76%
B) 11.2%
C) 8.7%
D) 14%
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Page 19
Chapter 18: Asset Allocation
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Q1) Investors who are 30 to 50 years old tend to focus their allocation on ________ because they can afford the risk.
A) life insurance
B) stocks
C) bonds
D) a house
Q2) Asset allocation should be restricted to stocks because they have the highest potential returns.
A)True
B)False
Q3) As you near retirement,you should allocate a substantial portion of your portfolio to ________ to reduce volatility.
A) stocks
B) bonds
C) real estate
D) gold
Q4) The stocks,bonds,and mutual funds that an investor owns comprise his/her ________.
Q5) List two considerations that affect your asset allocation decision.
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Chapter 19: Retirement Planning
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Q1) ESOP
A)a defined contribution plan for small firms (1 - 10 employees)
B)a retirement plan in which the employer contributes its own stock to the employee's retirement account
C)a defined contribution plan in which the employer contributes to employee retirement accounts based on a specified profit formula
D)a defined contribution plan that allows employees to contribute up to $18,000 per year in 2015 on a pre-tax basis
Q2) Both the one-participant 401(k)plan and the Simplified Employee Pension (SEP)plan are available to self-employed individuals for retirement savings.
A)True
B)False
Q3) 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
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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Q1) Which of the following is not a duty of the executor of an estate?
A) Collect money owed the estate
B) Decide how the assets will be distributed
C) Pay debts of the estate
D) Sell specific assets of the estate if necessary
Q2) A revocable living trust cannot be changed during the grantor's lifetime.
A)True
B)False
Q3) A person who manages assets for designated beneficiaries is called a
A) witness.
B) trustee.
C) grantor.
D) executor.
Q4) Which of the following is commonly chosen as an executor?
A) An attorney
B) A family member
C) A bank trust company employee
D) All of the above
Q5) A person who dies without preparing a will is said to have died ________.
Q6) Name three types of trusts.
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Chapter 21: Integrating the Components of a Financial Plan
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Q1) Stocks of smaller firms are more volatile than those of larger firms and,therefore,are not as liquid.
A)True
B)False
Q2) Some retirement plans,such as Roth IRAs,are more liquid than other plans.
A)True
B)False
Q3) One disadvantage of investing in retirement accounts is that these funds are typically not very liquid.
A)True
B)False
Q4) You are 25 years old and saving for an early retirement.Assuming you have a high risk tolerance,which of the following can best help you reach your goal of retiring early?
A) Municipal bond fund
B) Money market securities
C) Common stock
D) Certificates of deposit
Q5) What are three types of financing you have studied?
Q6) You should invest in ________ if you need periodic income.
23
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