Test Bank and Solution Manual for Personal Finance, 4th Canadian Edition by Jeff Mad.

Test Bank & Solution Manual for Personal Finance, Fourth Canadian Edition (4th Edition) by Jeff Mad bestsudy284@gmail.com

Personal Finance, Canadian Ed., 4e (Madura) Overview of a Financial Plan True/False 1) Many people who believe they have strong personal finance skills do not really understand some basic personal finance concepts.

Answer: TRUE Diff: 1 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 2) The per capita debt of Canadians has multiplied by more than five times since 1981.

Answer: FALSE Diff: 1 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 3) A good example of a personal financial goal would be planning to purchase a home one day.

Answer: FALSE Diff: 2 Type: TF Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 4) The Financial Planning Standards Council (FPSC)sets out the steps needed to earn the Certified Financial Planner (CFP) designation.

Answer: TRUE Diff: 2 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 5) A car accident which is not fully covered by your insurance is an example of an unexpected expense you cannot plan for.

Answer: FALSE Diff: 2 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Applied

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6) An understanding of personal finance is necessary to judge the quality of advice that a financial adviser may give.

Answer: TRUE Diff: 1 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 7) The Financial Planning Standards Council (FPSC) is a profit-oriented organization created to benefit the public with regards to financial planning.

Answer: FALSE Diff: 1 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 8) Saving money for the downpayment on a house instead of saving for retirement is an example of an opportunity cost.

Answer: TRUE Diff: 2 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Applied 9) Financial advisers are in demand because most people lack understanding or are not interested in making their own financial decisions.

Answer: TRUE Diff: 2 Type: TF Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Recall 10) Generally, savings in an emergency fund will tend to earn higher interest than savings in a retirement plan.

Answer: FALSE Diff: 2 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 11) A complete financial plan consists of budgeting, tax planning, financing, and investing.

Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall

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12) The first step in budgeting is to evaluate your current financial position by determining your total assets and total liabilities.

Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 13) The value of what you own minus the value of what you owe is called your "net assets."

Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 14) During the "education" life stage it is important to establish good investing habits.

Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 15) If you do not have access to money to cover your cash needs, you may have insufficient liquidity.

Answer: TRUE Diff: 1 Type: TF Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Recall 16) Using a credit card to cover an unexpected expense is an example of using an emergency fund.

Answer: FALSE Diff: 1 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 17) Money management decisions include deciding how much money to contribute to long term retirement savings.

Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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18) If you have sufficient available credit there is no reason to consider holding liquid cash in an emergency fund.

Answer: FALSE Diff: 2 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Applied 19) Your financial plan should include a plan for protecting your assets and income through insurance coverage.

Answer: TRUE Diff: 1 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 20) An emergency fund contains the portion of savings that you have allocated to long-term needs.

Answer: FALSE Diff: 1 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 21) One of the considerations in determining your investment choices is evaluating the level of risk you are willing to take.

Answer: TRUE Diff: 1 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 22) Estate planning involves developing a plan to avoid all taxes upon death.

Answer: FALSE Diff: 2 Type: TF Categories: Investment Return and Risk Financial Type: Qualitative Skill Type: Recall 23) Most people act in a logical fashion when implementing a financial plan.

Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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24) There are four key steps in developing a financial plan: 1. Establishing goals; 2. Selecting the best options to reach your goals; 3. Comparing your plan to the plans of other people; and 4.

Revising your plan annually.

Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 25) An example of a 'SMART' goal is: Jack plans to save to buy a car in three years.

Answer: FALSE Diff: 3 Type: TF Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Recall 26) Jim's plan to reduce his spending on junk food by $20 per month and save those funds until he has a $2000 emergency fund is an example of a 'SMART' goal.

Answer: TRUE Diff: 2 Type: TF Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 27) When goal setting, in order to achieve financial success, goals should be set as aggressively as possible.

Answer: FALSE Diff: 1 Type: TF Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Recall 28) If prepared properly, financial plans are set for life and will rarely need to be changed.

Answer: FALSE Diff: 2 Type: TF Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 29) Saving too much for short-term needs does not limit your opportunity for long-term growth.

Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall

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30) Future spending decisions are less relevant to your financial success than past spending decisions.

Answer: FALSE Diff: 2 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 31) As long as you stay within your budget of spending $100 per month on eating out, there is no opportunity cost.

Answer: FALSE Diff: 2 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Applied 32) From 2000 to 2014, Canada has the least indebted households of any of the G7 countries.

Answer: FALSE Diff: 1 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 33) The delinquency rate on personal loans by Canadian youth (age 18 to 25) is less than 10%.

Answer: FALSE Diff: 1 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 34) Taxes should have a minimal impact on your financial choices.

Answer: FALSE Diff: 1 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 35) Risk management may include deciding not to protect yourself against a given risk.

Answer: TRUE Diff: 2 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall

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Multiple Choice 1) As of 2015, the personal savings rate in Canada was approximately A) 3.9 percent B) 9.3 percent C) 4.2 percent D) 2.4 percent Answer: C Diff: 1 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 2) Which of the following best describes the level of debt for Canadians?

A) Total consumer bankruptcies decreased from 2014 to 2015.

B) The personal savings rate has been steadily increasing over the past 30 years.

C) From 2000 to 2014 household debt relative to income has increased from 110 percent to 166 percent.

D) As of 2016 the per capita debt of Canadians to $49,995.

Answer: C Diff: 2 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 3) Which of the following life stages involves the fewest objectives and milestones?

A) Late retirement B) Prime earning C) Early career D) Education Answer: D Diff: 1 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 4) The correct order of the key components of a financial plan is A) budgeting, insurance, financing, investing.

B) financing, insurance, budgeting, investing C) budgeting, financing, insurance, investing.

D) investing, financing, insurance, budgeting.

Answer: C Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall

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5) Opportunity cost represents A) short- versus long-term financial decisions.

B) what you give up as a result of making a decision.

C) the financial cost of any opportunity.

D) the non-financial cost of any opportunity.

Answer: B Diff: 2 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 6) An emergency fund is required in financial planning to A) maintain credit rating.

B) maintain your standard of living.

C) eliminate risk.

D) maintain adequate liquidity.

Answer: D Diff: 2 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Applied 7) John earns $3000 monthly income and he decides to set aside 10 percent as savings. In his savings, John wants to reserve 20 percent in his emergency fund. What amount would John accumulate in his emergency fund annually?

A) $600 B) $300 C) $360 D) $720 Answer: D Diff: 2 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Quantitative Skill Type: Applied 8) Credit is commonly used to cover both large and small expenses. What is the best way to think about credit?

A) Most Canadians do a good job managing credit compared to other G7 countries.

B) It is a better source of liquidity than an emergency fund.

C) It is an important part of liquidity but needs to be managed.

D) It should never be used for liquidity.

Answer: C Diff: 2 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall

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9) Which of the following is an example of an opportunity cost?

A) Renting an apartment near school instead of living with your parents B) Saving money instead of taking a vacation C) Saving for an emergency fund instead of maximizing your RRSPs D) They are all examples of opportunity cost.

Answer: D Diff: 1 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Applied 10) Which of the following is an example of investment risk in financial planning?

A) Loss of income due to short-term disability B) Loss of liquidity by locking in to a fixed-term deposit C) Loss of property by not buying insurance D) Loss of capital in a particular mutual fund Answer: D Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 11) Which of the following financial planning steps should occur during the "prime earning" life stage?

A) Creating a will and power of attorney B) Estate planning C) Investigate employer-based savings options D) Paying off all debts Answer: D Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 12) What is the process of forecasting future expenses and savings called?

A) Budgeting B) Planning C) Predicting D) Forecasting Answer: A Diff: 1 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall

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13) Which of the following is a decision that you would make during estate planning?

A) How you will maximize taxation and probate B) How much money you should allocate to retirement plans C) How your wealth will be distributed before and after your death D) How to enhance your net worth Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 14) Budgeting helps set goals by estimating on a monthly basis which of the following?

A) Assets and income B) Liabilities and expenses C) Income and expenses D) Net worth and income Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 15) What is first step in budgeting?

A) Determining your net worth B) Establishing good money management habits C) Assessing your current financial position D) Establishing a good credit rating Answer: C Diff: 1 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 16) What is the best way to describe liquidity?

A) Positive cash flow B) Access to credit C) Access to ready cash D) Effective money management Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall

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17) Which of the following is the best description of money management?

A) Decisions regarding how much money to retain in liquid form and short-term investing decisions B) Decisions regarding how much money to retain in total and long-term investing decisions C) Decisions regarding how much credit to have available in combination with liquid savings D) Decisions regarding what to do with surplus income over expenses on a monthly basis Answer: A Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 18) Which of the following best describes how credit should be used?

A) Credit should be used at any time as long as you are able to make the minimum monthly payments.

B) Credit should be used at any time as long as it can be repaid in full within 90 days.

C) Credit should be used only when necessary since you must repay borrowed funds with interest.

D) Credit should never be used under any circumstances.

Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 19) What is the best measure of a person's or family's net wealth?

A) The value of their assets B) The amount of annual income less applicable taxes C) The value of what they own minus the value of what they owe D) The value of their gross income minus the value of their expenses Answer: C Diff: 1 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 20) Which of the following would not be a factor in evaluating your current financial position?

A) Income B) Expenses C) Budgeting D) Assets Answer: C Diff: 1 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall

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21) Your current net worth will be increased by which of the following actions?

A) Changing your monthly savings from 15 percent to 10 percent of your earnings B) Receiving a $500 birthday present from your grandmother C) Buying a new stereo system and putting the entire amount on your credit card D) Using $350,000 you have in savings to purchase a rental property Answer: B Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 22) Which of the following should first be used to cover any short-term cash deficiencies?

A) An interest free loan from family or friends B) Retirement savings C) A cashable short-term investment D) A line of credit Answer: C Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 23) Which of the following will most affect your ability to manage your liquidity?

A) Choosing between a high-interest and a low-interest credit card B) Determining how much money to save versus how much to spend C) Determining which short-term investments to keep your emergency fund in D) Owning versus renting a home Answer: B Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 24) How much money to retain in a liquid form and how to allocate funds among short-term investment instruments is called A) investment management.

B) money management.

C) credit management.

D) liquidity management.

Answer: B Diff: 1 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Recall

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25) What is the term used to describe decisions on how much credit you need to support spending and which sources of credit to use?

A) Investment management B) Money management C) Credit management D) Liquidity management Answer: C Diff: 1 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 26) Which of the following is a credit management decision?

A) Purchasing a used car with cash B) Putting money into an emergency fund C) Obtaining a student loan to attend college or university D) Putting money into short-term investments Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 27) 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 car until you can pay for it with cash D) Purchasing life insurance to protect your spouse should you pass away Answer: A Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 28) Under which component of a financial plan would the following decision fall: determining how much you can afford to borrow, the length of the loan, and appropriate interest rate, when considering how to afford your car purchase?

A) Liquidity B) Financing C) Budgeting D) Credit management Answer: B Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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29) In the early career life stage of financial planning, which of the following is the most important to address?

A) Maintaining job security B) Considering when to get married C) Saving for a child's future education D) Paying off student loans and short-term debts Answer: D Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 30) John is in the family and mid-career life stage of financial planning. Which of the following is most important for John to address?

A) Reviewing insurance needs B) Paying off student loans C) The pay yourself first principle D) Establishing a credit rating Answer: A Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 31) Usually, people should first consider having a will and power of attorney in which life stage of financial planning?

A) Early career B) Early retirement C) Prime earning D) Mid career Answer: D Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 32) Which of the following is included in risk management?

A) Determining your risk tolerance for investing in the stock market B) Determining your credit risk for obtaining a $400 000 mortgage C) Deciding whether to rent or buy your home D) Insuring your home Answer: D Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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33) What are the options on whether to or how to protect against risk?

A) Avoid it, insure it, accept it or share it B) Avoid it, reduce it, accept it or share it C) Eliminate it, avoid it, reduce it, accept it D) Homeowner, car, life and health insurance Answer: B Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 34) A type of insurance that protects assets is A) home insurance.

B) self-insurance.

C) disability insurance.

D) health insurance.

Answer: A Diff: 1 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 35) Which of the following would be the primary objective of investing?

A) Earning a return necessary to meet your goals B) Understanding your risk tolerance C) Acquiring an estate D) Earning the highest return possible Answer: A Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 36) Retirement planning should take place A) when you retire.

B) shortly before you retire.

C) well before you retire.

D) the day you start your first job.

Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall

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37) One benefit of estate planning is A) protecting your wealth against unnecessary taxes.

B) sheltering your wealth against all taxes.

C) ensuring that your wealth is distributed according to intestacy laws.

D) ensuring you have enough money to fund your retirement.

Answer: A Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 38) Which of the following is correct?

A) Saving part of your income will increase your net worth.

B) Increasing your income will always increase your net worth.

C) Liquid savings are not necessary if you have access to adequate credit.

D) Insurance is only relevant when you have a small net worth.

Answer: A Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 39) Regarding cash flow, which of the following is correct?

A) Insurance payments are a cash inflow.

B) Selling an investment is a cash outflow.

C) Buying items on sale is a cash outflow.

D) Mortgage payments are a cash inflow.

Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 40) Which of the following goals would be 'SMART'?

A) Reduce debt payments.

B) Save 40% of your income for an annual vacation.

C) Save $100 per month to create a $4000 emergency fund.

D) Invest for a safe and comfortable retirement.

Answer: C Diff: 2 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied

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41) Planning to pay off a car loan in three years' time is classified as A) investment planning.

B) increasing cash flow.

C) a medium-term goal.

D) a short-term goal.

Answer: C Diff: 1 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 42) Which of the following would be classified as a medium-term goal?

A) Saving a down payment to purchasing a house in three years B) Buying new clothes to begin school this month C) Retiring in 10 years D) Paying for your two-year-old child's college education Answer: A Diff: 2 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 43) The ability of different people to manage their cash flow effectively can be strongly influenced by A) the economic environment of the day.

B) their need for immediate gratification.

C) their income level.

D) their socio-economic status.

Answer: B Diff: 2 Type: MC Categories: How Psychology Affects Your Financial Plan Financial Type: Qualitative Skill Type: Applied 44) Which of the following would defeat the efforts made in developing a successful financial plan?

A) Establishing realistic financial goals B) Considering your current financial position C) Identifying and evaluate alternative plans that could achieve your goals D) Evaluating your financial plan every five years Answer: D Diff: 1 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Recall

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45) Why is a net worth statement needed?

A) To determine your net cash flow on an annual basis B) To measure your cash accumulation C) To measure the value of your assets minus debts D) To measure expenses and develop priorities Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 46) Which is the most important consideration when establishing your financial goals?

A) The emergency fund must be established first.

B) Short-term goals should be your only priority.

C) Your goals should be as challenging as possible.

D) The goals should be specific, measurable and realistic.

Answer: D Diff: 2 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Recall 47) Alan has been thinking about his future and is figuring out what his biggest priorities are. At what stage of the planning process is he?

A) Selecting and implementing the best plan B) Determining financial goals C) Assessing his current financial position D) Identifying alternative plans to meet goals Answer: B Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 48) Alayne is preparing her budget for the first time. At what stage of the financial planning process is she?

A) Establishing financial goals B) Managing her financial resources C) Budgeting and tax planning D) Considering her current financial situation Answer: D Diff: 3 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied

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49) Nicole has been saving $500 each month for retirement in her RRSP for the past year, but has been carrying a balance on her credit card for four months now. She is concerned about the high interest charges she has been paying on her credit card. At what stage of the financial plan is she?

A) Evaluating the plan B) Establishing financial goals C) Considering alternate plans D) Revising the plan Answer: D Diff: 3 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 50) The rate of return on Marika's investments has not been sufficient to meet her retirement goals. What should Marika do regarding her financial plan?

A) Delay her retirement a few years B) Revise her plan C) Increase her income D) Reduce her expenses Answer: B Diff: 3 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 51) Alex has become stressed by his tight budget and is unwilling to stick to his financial plan.

What action should he take?

A) Establish his goals B) Re-evaluate his goals C) Implement the best plan D) Revise his plan Answer: D Diff: 2 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied

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52) Sharon had a net worth at the beginning of the year of $22 000. At the beginning of the year she received $1000 that she invested and earned 3 percent interest for the year. During the year she also saved $50 each week from her pay cheque in a no-interest chequing account. How much is her net worth at the end of the year?

A) $25 000 B) $25 630 C) $25 600 D) $23 030 Answer: B Diff: 2 Type: MC Categories: Developing a Financial Plan Financial Type: Quantitative Skill Type: Applied 53) If you have total assets of $10 000 and your net worth is $4000, how much liabilities do you have?

A) $4000 B) $6000 C) $10 000 D) $14 000 Answer: B Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Quantitative Skill Type: Applied 54) If John's total assets have increased from $10 000 to $15 000 and his liabilities from $5000 to $8000, by how much has John's net worth increased?

A) $4000 B) $3000 C) $5000 D) $2000 Answer: D Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Quantitative Skill Type: Applied

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55) An investor who earns $65 000 from employment and saves 4.5 percent from his total income would have increased her net worth in one year by A) $3000.

B) $2900.

C) $2925.

D) $0.

Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Quantitative Skill Type: Applied Essay 1) Discuss the pros and cons of using consumer credit to supplement liquidity needs.

Answer: Many possibilities.

Cons: It can lead to personal debt getting out of control.

Some credit, such as credit cards, are a very expensive source of liquidity.

If people are already using credit a lot, then have an actual financial set back, they may not be able to keep up debt payments.

Available credit can be cancelled/reduced by the lender at any time and this may happen right when you need it most.

From 2014 -2015 bankruptcies increased, the delinquency rate on personal loans for youth (1825) increased 11.7%, so there is clearly risk.

Pros: If used judiciously, credit cards provide a "interest free" loan for a few weeks each month.

Holding funds in an emergency fund that pays no interest (which is the current economic environment) is not an attractive option for an investor.

There are many very low interest sources of credit available to people these days and if only used for emergencies, this can be more cost effective than holding funds in a liquid emergency fund.

Diff: 3 Type: ES Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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2) Write out three goals in SMART format.

Answer: There are many possibilities, however, they must be specific, measurable, action oriented, realistic and time bound.

Examples: Save $200 per month for four years in order to have $5000 to purchase a second-hand Honda Fit. Save $1000 per month from age 30 to 65 in order to be able to retire at age 60 with a similar lifestyle to pre-retirement.

Pay off a student loan of $20 000 over five years by making payments of $400 per month at an interest rate of 7.5 percent.

Diff: 3 Type: ES Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 3) Name the six steps in the financial planning process and give an example of one activity that would occur at each step.

Answer: Many possibilities but overall cover these topics: Step 1 Make SMART goals. Establish your financial goals: determine short, medium and longterm goals.

Step 2 Consider current financial position: Cash flow, budget, balance sheet and net worth.

Review spending habits and cash flow. Make your personal financial statements and budget.

Step 3 Calculate various alternatives to reach the goals. Identify alternate plans. Review different options that would enable you to reach your various goals successfully Step 4 Select and implement a plan. Start the required savings, or insurance etc. previously determined. Be prepared to make specific financial decisions based on your discipline and risk tolerance and realistic cash flow.

Step 5 Evaluate your plan: monitor the progress of each component of the plan. Check if the plan is working and you are on track after a few months, and at least once a year.

Step 6 Revise your plan if it is not working out. Or if your circumstances have changed, update your goals and plans appropriately. Review your willingness to follow the plan and adjust it according to your current lifestyle.

Diff: 3 Type: ES Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied

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4) Explain four sources from which you could obtain assistance with your financial plan and identify any areas of caution you should observe while accepting such advice.

Answer: Possible options: 1. Financial adviser: potential conflict of interest, driven by commissions 2. Bank adviser: only able to sell in-house product or incompetent advice 3. Investor education websites: dedicated to improve investor know-how, make sure it is legitimate and get a second opinion before following any online advice 4. Financial institution websites: watch for conflict of interest, bias, can be useful for certain calculations etc.

5. Government agency websites: generally safe but limited to general recommendations 6. Referrals from friends: ask critical questions Diff: 3 Type: ES Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Applied 5) Explain why an increase in your income may or may not necessarily mean an increase in net worth.

Answer: 1. It does not make any difference what you make, it matters what you do with it.

2. If you get a raise of $1000 per month you could spend it on nicer clothes and entertainment and add nothing to your assets over the year.

3. If you used the $1000 to reduce your debt (e.g., pay down a student loan, or pay off a credit card balance), that would increase your net worth.

4. If you contributed the $1000 each month to your investment account, you would increase your net worth.

5. Most people will spend the money sitting in their bank account, but if you 'pay yourself first', by contributing automatically to a savings or investment account, then your net worth will increase painlessly.

Diff: 3 Type: ES Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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Personal Finance, Canadian Ed., 4e (Madura) Part 1 Tools for Financial Planning - Applying Time Value Concepts True/False 1) Time value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today.

Answer: FALSE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 2) Future value depends on the interest rate and number of years invested but is independent of the number of compounding periods.

Answer: FALSE Diff: 1 Type: TF Categories: Future Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Recall 3) The present value of an annuity can be obtained by discounting the individual cash flows of an annuity and totalling them.

Answer: TRUE Diff: 1 Type: TF Categories: Present Value of an Annuity Financial Type: Qualitative Skill Type: Recall 4) To convert the table from ordinary annuity to annuity due is to multiple the annuity payment by (1+ i).

Answer: TRUE Diff: 2 Type: TF Categories: Present Value of an Annuity Financial Type: Qualitative Skill Type: Recall 5) Ten percent compounded quarterly with 10 years' investment means 40 compounding periods.

Answer: TRUE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied

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6) The shorter the time period, the lower the future value interest factor, other things being equal.

Answer: TRUE Diff: 2 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 7) The longer the time period, the higher the present value interest factor, other things being equal.

Answer: FALSE Diff: 2 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 8) The higher the interest rate, the higher the future value interest factor, other things being equal.

Answer: TRUE Diff: 2 Type: TF Categories: Future Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 9) The higher the interest rate, the lower the present value interest factor, other things being equal.

Answer: TRUE Diff: 2 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 10) If you invested $10 000 when you turned 20 years of age and received a return of 11 percent annually, you would have over two million dollars when you turned 70.

Answer: FALSE Diff: 3 Type: TF Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 11) The rent charged for the use of money is called a dividend.

Answer: FALSE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall

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12) Compound interest means earning interest on interest.

Answer: TRUE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 13) The concept of time value of money only applies to rare financial planning problems.

Answer: FALSE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 14) The process of obtaining a present value is called discounting.

Answer: TRUE Diff: 1 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 15) Present value of the first year is determined by the future value divided by (1 + i).

Answer: TRUE Diff: 2 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 16) The nominal interest rate is also called an annual percentage rate (APR).

Answer: TRUE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 17) The effective interest rate is the stated or quoted interest rate by the financial institutions.

Answer: FALSE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall

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18) The nominal interest rate is the actual rate of interest you earn or pay.

Answer: FALSE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 19) The effective rate of interest and compounding frequency have an inverse relation.

Answer: FALSE Diff: 3 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Applied 20) Jill will have reached her goal of saving $23 000 to buy a car if she puts away $420 a month in a 7% annual interest savings account for four years.

Answer: TRUE Diff: 3 Type: TF Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 21) You make regular monthly rental payments at the beginning of each month. This is an example of an annuity due.

Answer: TRUE Diff: 3 Type: TF Categories: Future Value of an Annuity Financial Type: Qualitative Skill Type: Applied 22) You make regular monthly life insurance payments at the end of each month. This is an example of an annuity due.

Answer: FALSE Diff: 2 Type: TF Categories: Future Value of an Annuity Financial Type: Qualitative Skill Type: Applied 23) To calculate the present value, all you need is the amount of money in the future, the interest rate, and the number of years the money will be compounded.

Answer: FALSE Diff: 2 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied

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24) John wants to have a $10 000 down payment for his car in three years. If he puts away $7000 today and gets a 12.7% annual return, he will have the money he needs.

Answer: TRUE Diff: 3 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 25) Future value interest factor (FVIF) uses $1.00 to calculate the $1.00 over time with a given interest rate and the number of periods the $1.00 is compounded.

Answer: TRUE Diff: 2 Type: TF Categories: Future Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Recall 26) Mary deposits $4000 at the beginning of each year and the money will grow to 30 years with 12 percent compounded annually.

Answer: TRUE Diff: 3 Type: TF Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied

in

27) ABC Bank offers term deposits with 7.8 percent compounded quarterly, while XYZ Bank offers term deposits with 8 percent compounded annually. We know that ABC Bank offers a higher effective rate of return.

Answer: TRUE Diff: 3 Type: TF Categories: Interest Rate Conversion Financial Type: Quantitative Skill Type: Applied 28) ABC Bank offers term deposits with 8 percent compounded annually, while XYZ Bank offers term deposits with 7.8 percent compounded monthly. ABC Bank offers a higher effective yield.

Answer: FALSE Diff: 3 Type: TF Categories: Interest Rate Conversion Financial Type: Quantitative Skill Type: Applied

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29) Discount refers to the process of earning interest on interest.

Answer: FALSE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 30) If you borrow money, you will receive interest.

Answer: FALSE Diff: 2 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 31) Fred is 29 and just sold an antique for that he purchased at age nine for annual rate of return on this antique is 7.2 percent.

Answer: FALSE Diff: 3 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied

. Fred's

32) The higher the interest rate, the higher the present value, other things being equal.

Answer: FALSE Diff: 2 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied Multiple Choice 1) Approximately how much would you need to invest today, to receive $200 in ten years, if you received an annual interest rate of ten percent?

A) $65 B) $77 C) $87 D) $97 Answer: B Diff: 2 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied

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2) The present value interest factor is A) always less than 1.0.

B) always more than 1.0.

C) assumes simple interest.

D) always between 1.0 to 2.0.

Answer: A Diff: 1 Type: MC Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 3) Financial institutions quote rates with different compounding periods. What is the term for the actual interest rate paid or earned?

A) Effective B) Nominal C) Real D) Absolute Answer: A Diff: 1 Type: MC Categories: Interest Rate Conversion Financial Type: Qualitative Skill Type: Recall 4) What is the term for the interest rate financial institutions quote?

A) Nominal B) Effective C) Annual D) Real Answer: A Diff: 1 Type: MC Categories: Interest Rate Conversion Financial Type: Qualitative Skill Type: Recall 5) You will receive $100 at the end of year one, $200 at the end of year two, and $300 at the end of year three. What is the present value of these cash flows today if the discount rate is 13 percent annually?

A) $553 B) $453 C) $423 D) $383 Answer: B Diff: 3 Type: MC Categories: Present Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 7 © 2019 Pearson Canada Inc.

6) Mary wants to have $150 after six years by depositing $100 today and earning six percent interest compounded annually for the next six years. Can Mary attain her financial goal of having $150 lump sum six years later?

A) Yes, the future value is more than $150.

B) Yes, the present value is more than $150.

C) No, the present value is less than $150.

D) No, the future value is less than $150.

Answer: D Diff: 1 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 7) What is the future value of $200 deposited today at eight percent interest compounded annually for three years?

A) $252 B) $250 C) $248 D) $249 Answer: A Diff: 1 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 8) What is the highest effective rate attainable with a 12 percent nominal rate?

A) 12.85 percent B) 12.75 percent C) 12.65 percent D) 12.55 percent Answer: B Diff: 2 Type: MC Categories: Interest Rate Conversion Financial Type: Quantitative Skill Type: Applied 9) If John makes annual year-end payments of $8337.83 on a 20-year loan with an annual interest rate of 7.5 percent, what is the original principal amount for John's loan?

A) $82 000 B) $83 325 C) $85 700 D) $85 000 Answer: D Diff: 3 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 8 © 2019 Pearson Canada Inc.

10) An antique was originally purchased 50 years ago for $2 and today is worth $600. What is the approximate annual rate of return realized on the sale of this antique?

A) 18 percent B) 12 percent C) 9 percent D) 13 percent Answer: B Diff: 3 Type: MC Categories: Present Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 11) Nick invests $50 000 today and the fund guarantees an ordinary annuity of $12 345 for six years. What is the approximate rate of return?

A) 11.6 percent B) 8.0 percent C) 12.5 percent D) Insufficient information to calculate Answer: C Diff: 3 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 12) Danny invests $124 090 in a fund and expects to receive $10 000 per year, at the end of each year, for the next 30 years. What is the approximate interest rate provided on the annuity?

A) 8 percent B) 6 percent C) 9 percent D) 7 percent Answer: D Diff: 2 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied

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13) What is the present value of an ordinary annuity paying $1550 each year for 15 years, with an interest rate of 6.6 percent per annum?

A) $19 589 B) $16 528 C) $14 481 D) $13 568 Answer: C Diff: 2 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 14) The future value of $676 deposited at 5.85 percent compounded annually for five years is closest to A) $845.

B) $962.

C) $907.

D) $898.

Answer: D Diff: 2 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 15) If the interest rate is zero, the future value interest factor equals A) 0.0.

B) -1.0.

C) 1.0.

D) Undefined Answer: C Diff: 1 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 16) How long will it take Ivy's money to triple in value at 12 percent compounded quarterly?

A) 9.5 years B) 9.7 years C) 9.3 years D) Not enough information Answer: C Diff: 3 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied

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17) If you borrow $20 000 as a five-year loan from the bank and the bank requires you to make end-of-year payments of $4878.05, what is the annual interest rate on this loan?

A) 8 percent B) 6 percent C) 7 percent D) 4 percent Answer: C Diff: 3 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 18) Betty wants to accumulate $1 million by the end of 20 years by making equal annual yearend deposits over the next 20 years. Assuming Betty can earn 10 percent over this period, how much must she deposit at the end of each year?

A) $18 560 B) $22 480 C) $27 760 D) $17 460 Answer: D Diff: 3 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 19) Raymond has an investment of $25 000 now, and in three years it will mature and pay Raymond $32 000. What is the approximate annual interest rate he will receive?

A) 9.3 percent B) 8.6 percent C) 8.9 percent D) Insufficient information to calculate this question Answer: B Diff: 2 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 20) Assuming an inflationary economy, the future value interest factor is A) always equal to 1.0.

B) always less than 1.0.

C) always greater than 1.0.

D) always uncertain.

Answer: C Diff: 1 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Recall 11 © 2019 Pearson Canada Inc.

21) The future value of $810 deposited today at 7.71 percent compounded annually for four years is closest to A) $1620.

B) $1090.

C) $1060.

D) $1066.

Answer: B Diff: 2 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 22) What is the present value of $1000 to be received ten years from today, assuming an interest rate of nine percent per annum?

A) $402 B) $488 C) $470 D) $422 Answer: D Diff: 2 Type: MC Categories: Present Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 23) The amount to be invested today at a given interest rate over a specified period in order to equal a future amount is called the A) present value interest factor.

B) future value.

C) present value.

D) future value interest factor.

Answer: C Diff: 1 Type: MC Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Recall

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24) The future value of today's $200 to be received 10 years later with an interest rate of 10 percent per annum is A) $424.

B) $484.

C) $542.

D) $519.

Answer: D Diff: 2 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 25) If you want to have $10 000 for a down payment on a new car in three years' time, assuming an interest rate of 4.5 percent compounded annually, how much money do you need to deposit as a lump sum today?

A) $8650 B) $8712 C) $8112 D) $8763 Answer: D Diff: 2 Type: MC Categories: Present Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 26) Raymond wants to save the college tuition fees his child will need in ten years by starting with a deposit of $6500 today and depositing another $500 at the end of each year. How much will Raymond have in ten years if he gets a rate of return of four percent?

A) $15 625 B) $11 960 C) $15 865 D) $17 023 Answer: A Diff: 3 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied

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27) If you want to save $40 000 for a down payment on a home in five years, assuming an interest rate of 4.5 percent compounded annually, how much money do you need to save at the end of each month?

A) $666 B) $609 C) $622 D) $597 Answer: D Diff: 3 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 28) Hazel needs to plan the mortgage amount she can afford. How much would she need to pay at the end of each month on a mortgage of at six percent interest, calculated semiannually and amortized over 30 years?

A) $555 B) $1211 C) $1199 D) $1190 Answer: D Diff: 3 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 29) How much interest would Aleem save if he paid off his mortgage over 15 years instead of 30 years? His mortgage is $100 000 at six percent interest calculated semi-annually.

A) $64 111 B) $107 069 C) $58 297 D) $62 959 Answer: D Diff: 3 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied

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30) Julian is a student relying on student loans. He feels he would like to borrow an extra $4000 each year for the next four years to take vacations to recover from studying. Assume that no interest accrues until he completes his education and begins paying off the loan. The interest rate for the loan amount will be seven percent per year compounded monthly and he will pay it off over five years by making end of month payments. What would his monthly payment be on this loan?

A) $374 B) $267 C) $271 D) $316 Answer: D Diff: 3 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 31) Rebecca is retiring next month when she turns 65. She can select a pension that pays $1745 at the end of every month guaranteed for the rest of her life, but not indexed for inflation, or take a lump sum of $312 000. Assume she can invest the lump sum at five percent annually and draw the same income as the pension. What age must she reach for the monthly pension to be the better choice?

A) 89 B) 90 C) 92 D) 93 Answer: C Diff: 3 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 32) Jessie won a lottery and was given the following choice. He could either take $5000 at the end of each month for 25 years, or a lump sum of $700 000. Assuming annual compounding at approximately what interest rate would he would be indifferent between the two choices?

A) 12.3 B) 6.7 C) 7.0 D) 7.3 Answer: D Diff: 3 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied

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33) Ishan plans to retire at age 40 with a decent lifestyle. He assumes that he can safely earn a real return of 4% annually on his money and that he would need $4000 a month, paid to him at the end of each month, to last until he turned 90. How much money would he need to have accumulated at age 40 (to the nearest thousand) if he were going to retire and no longer earn any money?

A) $1 050 000 B) $2 980 000 C) $1 500 000 D) $2 400 000 Answer: A Diff: 3 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 34) Mortgages are annuities in that a fixed monthly payment is made to the lender (assume end of month payments and an interest rate that compounds semi-annually). Sara is planning to take on a mortgage of $100 000 and believes she can afford monthly payments up to $700. How much interest would she save if she decided to pay off her mortgage over 20 years, rather than over 25 years? Her mortgage is at five percent interest calculated semi-annually.

A) $42 000 B) $18 120 C) $34 896 D) $16 776 Answer: D Diff: 3 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied 35) Alexis wants to have saved $600 000 by the time she retires at age 60. She is turning 46 in the next week and has accumulated in her RRSP accounts. Assuming she can continue to get a 6% annual return on her RRSP investments, how much does she need to keep saving at the end of each month to reach her goal?

A) $2262 B) $1467 C) $2102 D) $396 Answer: D Diff: 3 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied

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36) The most important thing to note about an annuity is A) that the payment must not change over time.

B) that the payment increases according to the discount rate.

C) it reflects the growth of a single lump sum.

D) that it reflects the power of simple interest.

Answer: A Diff: 1 Type: MC Categories: Future Value of an Annuity Financial Type: Qualitative Skill Type: Recall 37) Naldo is considering selling a painting he inherited from his grandparents and which cost $200 when purchased 72 years ago. He accepted an offer for for it recently. What is the approximate annualized rate of return on this painting?

A) 1.12% B) 2.75% C) 11.7% D) 6.75 % Answer: D Diff: 3 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 38) Tracey is buying a condo and will have a mortgage of $180 000 which she plans to pay off in 25 years. The interest rate is 5% compounded semi-annually. Her payments would be $1046 at the end of every month. She has heard she can reduce the time it would take to pay off her mortgage if she pays $523 every two weeks instead. How many years it would take her to pay off her mortgage if she chooses the second option.

A) 10.2 years B) 21.7 years C) 25.0 years D) 21.5 years Answer: D Diff: 3 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied

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39) If your credit card says 28% interest compounded daily, what is the effective interest rate?

A) 32.3% B) 29.8% C) 31.9% D) 28.9% Answer: A Diff: 2 Type: MC Categories: Interest Rate Conversion Financial Type: Quantitative Skill Type: Applied 40) In which situation is simple interest the most appropriate interest calculation to use?

A) When there is one compounding period B) Never C) Always D) When there are two or less compounding periods Answer: A Diff: 2 Type: MC Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Applied 41) Joe and Bill are the same age and starting their careers. Each plans to retire at age 65 and each wants to have in his RRSP account by then. If they both get seven percent annual return on their RRSP savings, which one will be closer to reaching his goal?

A) Bill if he starts saving $800 a month when he is 45 years old B) Joe if he starts saving $200 a month when he is 25 years old C) Bill if he starts saving $1000 a month when he is 45 years old D) Joe if he starts saving $150 a month when he is 20 years old Answer: D Diff: 2 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied 42) What is the effective interest rate for a car loan advertised at five percent compounded monthly?

A) 5.1% B) 5.2% C) 5.3% D) 5.4% Answer: A Diff: 2 Type: MC Categories: Interest Rate Conversion Financial Type: Quantitative Skill Type: Applied 18 © 2019 Pearson Canada Inc.

43) If Jenn could get a 10 percent annual return on her investment holdings, how long would it take for her to double her money?

A) 7.3 years B) 6.9 years C) 10.0 years D) 83.5 years Answer: A Diff: 2 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied 44) Selena wants to have enough funds to cover $13 000 per year for four years of her daughter's university expenses and will need the money at the beginning of each year. If her funds get an annual return of 4.3 percent, how much would she need to have in the account when her daughter starts university?

A) $48 764 B) $46 857 C) $52 000 D) $48 872 Answer: D Diff: 2 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 45) Ruby is expecting her first child next month and would like to have saved for university education when the child turns 17. If Ruby can get a 6.6 percent annual return on the education savings for her child, approximately how much does she need to start saving at the end of each month once the baby is born?

A) $2688 B) $392 C) $224 D) $218 Answer: D Diff: 2 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied

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46) Ralph wants to know what he should be able to save in his child's RESP account if he contributes $2,500 per year and also gets the CES grant of $500 each year. He wants to assume a conservative investment return of four percent annual return and that he will only contribute until the child is 15 (assume 15 years of $3000 deposits made at the end of the year).

A) $46 500 B) $52 200 C) $65 500 D) $60 700 Answer: D Diff: 2 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied 47) Sally will not be making any investments for five years as she is paying off student loans. In five years, she will make regular monthly investments, at the beginning of every month, in the amount of $350. She will make these investments for 25 years. What is the present value of her investment account assuming she can earn an annual return of 8.5%?

A) $229,725 B) $345,428 C) $519,405 D) $313,250 Answer: A Diff: 3 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 48) Reza is trying to decide between to investment alternatives. Invest A allows her to invest $100 at the beginning of every month for 15 years at an interest of 9.0% per year. Investment B allows her to invest $1,350 at the end of every year for 15 years at 8.7% interest. Which of the following is true regarding these two alternatives?

A) Investment A will grow by $1,787 more than Investment B .

B) Investment B will grow by $1,787 less than Investment A. C) Both Investment A and Investment B grow to exactly the same amount.

D) Investment A will always be better because it always better to invest small amounts monthly rather than one amount at the end of the year.

Answer: A Diff: 3 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied

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49) Which of the following is a true statement regarding the future value of an annuity due?

A) All else being equal, an annuity due will always generate a higher future value than an ordinary annuity.

B) All else being equal, an annuity due will never generate a higher future value than an ordinary annuity.

C) All else being equal, an annuity due will sometimes generate a higher future value than an ordinary annuity.

D) All else being equal, an annuity due will generate a higher future value than an ordinary annuity only if interest is compounded monthly.

Answer: A Diff: 1 Type: MC Categories: Future Value of an Annuity Financial Type: Qualitative Skill Type: Recall 50) If you could choose any of the following interest rates for your investment which would you choose to give you the highest return?

A) 15% compounded annually B) 14% compounded semi-annually C) 14% compounded quarterly D) 14% compounded monthly Answer: A Diff: 2 Type: MC Categories: Interest Rate Conversion Financial Type: Quantitative Skill Type: Applied

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Essay 1) Assuming a discount rate of 14 percent per year, Peter wants to know the market value of his investment today based on the following cash flows. Explain your reasoning.

Year Cash flows 1 to 5 $20 000 per year, at the end of the year 6 to 10 $35 000 per year, at the end of the year Answer: Present value of years 1 - 5 This first part a five year annuity P/Y is 1, C/Y is 1 FV = 0 I/Y = 14 N=5 PMT = -20 000 CPT PV = 68 661.62 The second part is another five year annuity, the rest of which need to be discounted again to the present time to determine current market value.

FV = 0 I/Y = 14 N=5 PMT = -35 000 PV yr 5 = $120 157.83 Then to PV it to now, FV = 120 157 I/Y = 14 N=5 PMT = 0 PV yr 5 = $62 406.21 So based on the discount factor of 14%, the market value today would be $131 067 Diff: 3 Type: ES Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied

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2) Develop an example to illustrate the power of compound interest. Be sure to illustrate your points using numbers and calculations.

Answer: There are many possibilities.

Comparing a simple interest example versus compound interest over many years.

Illustrating that saving $200 per month for 40 years at 7% return is more than saving $800 a month for 20 years with the same return.

Example: Saving $200 per month from age 25 to 65 at 7% return would give a future value of $494 308 I/Y 7, N 40 × 12, PMT -200, PV 0 and CPT FV And $96 000 was actually saved - $200 × 12 × 40 Compare with the future value of saving $800 per month for 20 years at 7% return.

I/Y 7, N 20 × 12, PMT - 800, PV 0 and CPT FV $406 029 And $192 000 was actually saved - $800 × 12 × 20 Diff: 3 Type: ES Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 3) Use an illustration to show the difference between annual, semi-annual, monthly and daily compounding. Give examples and illustrations using numbers from real life for each one.

Answer: Annual interest: Means the interest is charged or paid once per year - for example, on some GICs, Canada Savings Bonds. Example: $1000 at 4% interest would give you $1040 at the end of the year.

Semi-annual interest: This means the interest is calculated half at the middle of the year and then half at the end of the year. This applies to most bonds and mortgages.

Example: A $10 000 bond paying 6% interest pays $300 interest at the middle of the year and $300 at the end of the year. When you assume that you would have interest growing on the first $300, you realized that you would have more than $600 interest at the end of the year.

Monthly interest: Example: A line of credit or car loan would normally have interest calculated monthly. Again this will end up being a higher actual or effective rate, than if it were compounded annually.

Daily interest: Example: Most credit cards charge interest daily.

For example, a credit card charging 21% but calculated daily would give an effective rate of 23.36%.

Diff: 3 Type: ES Categories: Interest Rate Conversion Financial Type: Qualitative Skill Type: Applied 23 © 2019 Pearson Canada Inc.

4) Review all the considerations in a decision to take either a lump sum payment of $600 000 from a pension plan at retirement (age 65) versus a guaranteed monthly payment for life of $3000 (a life annuity). Assume the tax implications are neutral. Use calculations to illustrate your points and indicate what assumptions you use. Give your opinion on the best option.

Answer: Pros of the annuity: Life expectancy - the risk of living past expectation, say 25, 30 or 35 years and being impoverished in extreme old age.

Consider that a 3% return and life expectance of 20 years (to age 85) would produce $3300 per month, so it seems you are not getting a good deal with $3000 a month. But if you feel you may live to age 100, then it is a great deal. (I/Y 3, N 20 × 12, PV $600 000, FV 0) CPT PMT $3300 If you assume would get paid until age 85, you would be getting an effective interest rate of 1.9% which is not very high. (N 20 × 12, PV 600 000, PMT $3000, FV 0) CPT I/Y 1.9% However, with the annuity you get the security of a guaranteed income for life.

This gives safety, security and peace of mind.

Ability to plan your lifestyle and monthly cash flow expenditures.

Pros of the lump sum: More flexibility with what you can do with your money.

More control over your money.

More control over what you pass on to your heirs.

If you had taken the annuity and then died at age 75, the value to you would only have been $327 892 (I/Y 1.97, N 10 × 12, PMT $3000, FV 0) which is much less than $600 000 It would then be much better for your heirs if you happen to die early, to have the lump sum.

Hopefully you can get better than a 3% return, so would be better off.

But what if you live a long time? If you could get a 4% annual return and lived until age 95, $600 000 would be sufficient to provide only $2630 a month, so you would have run out of money if you were spending $3000 a month.

(I/Y 4, N 40 × 12, PV $600 000, FV 0) CPT PMT $2630 Your opinion...

Diff: 3 Type: ES Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 24 © 2019 Pearson Canada Inc.

Personal Finance, Canadian Ed., 4e (Madura) Part 1 Tools for Financial Planning - Planning with Personal Financial Statements True/False 1) Salary or wages are the main source of income for most working people.

Answer: TRUE Diff: 1 Type: TF Categories: Personal Cash Flow Statement Financial Type: Qualitative Skill Type: Recall 2) Cash outflows represent your liabilities, such as the pay-off value on your car or home.

Answer: FALSE Diff: 3 Type: TF Categories: Personal Cash Flow Statement Financial Type: Qualitative Skill Type: Applied 3) A negative cash flow means net worth will decrease.

Answer: TRUE Diff: 3 Type: TF Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Applied 4) Individuals who switch from a low-demand industry to a high-demand industry may earn higher incomes.

Answer: TRUE Diff: 1 Type: TF Categories: Factors That Affect Cash Flows Financial Type: Qualitative Skill Type: Recall 5) During the final stage in the life cycle, retirement, people generally experience higher incomes.

Answer: FALSE Diff: 1 Type: TF Categories: Factors That Affect Cash Flows Financial Type: Qualitative Skill Type: Recall

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6) People who have very high incomes are much better savers than those with moderate incomes.

Answer: FALSE Diff: 2 Type: TF Categories: Factors That Affect Cash Flows Financial Type: Qualitative Skill Type: Recall 7) A personal cash flow statement is usually the starting point for an individual's or family's budget.

Answer: TRUE Diff: 2 Type: TF Categories: Personal Cash Flow Statement Financial Type: Qualitative Skill Type: Recall 8) One advantage of budgeting several months in advance is that you will be warned of potential deficiencies and can determine how to cover them.

Answer: TRUE Diff: 1 Type: TF Categories: Creating a Budget Financial Type: Qualitative Skill Type: Recall 9) One of the problems in making a monthly budget is that some expenses fluctuate quite a bit from month to month.

Answer: TRUE Diff: 1 Type: TF Categories: Creating a Budget Financial Type: Qualitative Skill Type: Applied 10) Getting financial help from family and friends should be your first options in case of emergencies.

Answer: FALSE Diff: 2 Type: TF Categories: Creating a Budget Financial Type: Qualitative Skill Type: Applied 11) In order to have a successful budget experience, you must use both the envelope and the pay yourself first methods.

Answer: FALSE Diff: 1 Type: TF Categories: Creating a Budget Financial Type: Qualitative Skill Type: Recall 2 © 2019 Pearson Canada Inc.

12) Stocks are considered a short-term liquid investment.

Answer: FALSE Diff: 2 Type: TF Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall 13) Long-term liabilities are debts that will be paid off at least three years into the future.

Answer: FALSE Diff: 1 Type: TF Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall 14) A high debt-to-asset ratio indicates an excessive amount of debt and should be reduced over time to avoid any debt repayment problems.

Answer: TRUE Diff: 2 Type: TF Categories: Financial Ratio Calculations Financial Type: Qualitative Skill Type: Recall 15) Your net worth can change even if your net cash flows are zero.

Answer: TRUE Diff: 3 Type: TF Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Applied 16) Budgeting is the forecasting of future income, expenses, and savings.

Answer: TRUE Diff: 1 Type: TF Categories: Creating a Budget Financial Type: Qualitative Skill Type: Recall 17) Paying $2000 to reduce your car loan to $5000 would increase your debt-to-asset ratio (all else being equal).

Answer: FALSE Diff: 1 Type: TF Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied

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18) Someone with a monthly income of $5000, $5000 in their checking account and monthly expenses of $5000 would have Liquidity Ratio of 2.

Answer: FALSE Diff: 2 Type: TF Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 19) A debt-to-asset ratio above 1 is more important than a liquidity ratio above 1.

Answer: FALSE Diff: 2 Type: TF Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 20) If JT's gross income is $50 000, disposable income is $36 000, and he saves $5000 annually, his savings ratio is 10%.

Answer: FALSE Diff: 2 Type: TF Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 21) It is possible to budget for irregular expenses paid infrequently.

Answer: TRUE Diff: 2 Type: TF Categories: Creating a Budget Financial Type: Qualitative Skill Type: Recall 22) If your net cash flow is $1000, the total value of your assets is $14 000, and your total debts are $4000, then your net worth is $11 000.

Answer: FALSE Diff: 2 Type: TF Categories: Personal Balance Sheet Financial Type: Quantitative Skill Type: Applied 23) A net worth statement can be used to monitor the changes in your wealth over time.

Answer: TRUE Diff: 2 Type: TF Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall

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24) Students with a negative net worth are essentially bankrupt.

Answer: FALSE Diff: 2 Type: TF Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall 25) Net worth always increases when you increase the value of your assets.

Answer: FALSE Diff: 3 Type: TF Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Applied 26) Assets valued at $400 000 with liabilities of $300 000 means a liquidity ratio of 3 to 1.

Answer: FALSE Diff: 3 Type: TF Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 27) Assets valued at $400 000 with liabilities of $300 000 means a debt-to-asset ratio of 0.75.

Answer: TRUE Diff: 3 Type: TF Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 28) A liquidity ratio between 1 and 2 is ideal.

Answer: FALSE Diff: 2 Type: TF Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 29) A high debt-to-asset level is common during the early- to mid-earning life stages.

Answer: TRUE Diff: 2 Type: TF Categories: Financial Ratio Calculations Financial Type: Qualitative Skill Type: Recall

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30) If you feel your debt-to-asset ratio is low, you should review your cash flows to maximize your income and minimize expenses.

Answer: FALSE Diff: 3 Type: TF Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 31) Income of $2760 monthly with expenditures of $2880 monthly will result in a negative cash flow of $120.

Answer: TRUE Diff: 1 Type: TF Categories: Personal Cash Flow Statement Financial Type: Quantitative Skill Type: Applied 32) Mutual funds are portfolio investments that require investors to make individual stock or bond investment decisions themselves.

Answer: FALSE Diff: 1 Type: TF Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall 33) Household assets include jewelry and furniture and should be valued at their original cost.

Answer: FALSE Diff: 2 Type: TF Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Applied 34) Raymond has a $5000 bank loan due in nine months, $3000 in credit card liabilities due in 1.5 months, and another $4000 loan due in 1.5 years. In this case, Raymond has total long-term liabilities of $4000.

Answer: TRUE Diff: 2 Type: TF Categories: Personal Balance Sheet Financial Type: Quantitative Skill Type: Applied 35) If you have an increase in monthly disposable income from $4000 to $4500 and an increase in spending of $650 per month, your net cash flow is reduced by $150 per month.

Answer: TRUE Diff: 2 Type: TF Categories: Factors That Affect Cash Flows Financial Type: Quantitative Skill Type: Applied 6 © 2019 Pearson Canada Inc.

Multiple Choice 1) What is the purpose of creating your personal cash flow statement?

A) To develop your budget B) To create your balance sheet C) To track your net worth D) For your annual tax return records Answer: A Diff: 2 Type: MC Categories: Personal Cash Flow Statement Financial Type: Qualitative Skill Type: Applied 2) This month Jill received $1000 income from her job and $200 in stock dividends. Her expenses were rent and utilities of $300 and $300 on groceries and $200 on clothing. Which of the following is true?

A) Jill has a net cash flow of $400.

B) Jill has net expenses of $400.

C) Jill has a net cash flow of $200.

D) Jill has net income of $400.

Answer: A Diff: 2 Type: MC Categories: Personal Cash Flow Statement Financial Type: Quantitative Skill Type: Applied 3) Which of the following is required in creating a cash flow statement?

A) The values of all assets B) Value of all liabilities C) Amounts used for expenses D) The ideal emergency fund amount Answer: C Diff: 1 Type: MC Categories: Personal Cash Flow Statement Financial Type: Qualitative Skill Type: Recall

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4) Which of the following is not a cash inflow?

A) Interest received B) Dividend income C) Car payment D) Salary Answer: C Diff: 1 Type: MC Categories: Personal Cash Flow Statement Financial Type: Qualitative Skill Type: Recall 5) What are net cash flows?

A) All assets minus liabilities B) All incomes minus living expenses C) Current assets minus current liabilities D) After-tax income minus expenses Answer: D Diff: 2 Type: MC Categories: Personal Cash Flow Statement Financial Type: Qualitative Skill Type: Recall 6) This month Joshua has $2000 income from his job and $100 interest income. His expenses are rent $500, food and entertainment $400 and car expenses $600. He has $40 000 held in bonds and a car loan of $10 000. What is his cash flow this month?

A) $600 B) $500 C) -$9400 D) $30 600 Answer: A Diff: 2 Type: MC Categories: Personal Cash Flow Statement Financial Type: Quantitative Skill Type: Applied 7) This month Joshua has $2000 income from his job and $100 interest income. His expenses are rent $500, food and entertainment $400, car expenses $600. He has $40 000 held in bonds and a car loan of . What is his net worth?

A) $30 000 B) $32 100 C) $30 600 D) $30 500 Answer: A Diff: 2 Type: MC Categories: Personal Balance Sheet Financial Type: Quantitative Skill Type: Applied 8 © 2019 Pearson Canada Inc.

8) Net cash flows is defined as which of the following?

A) After tax income minus expenses and saving for an emergency fund, investments and major asset purchases B) After tax income minus expenses and saving for an emergency fund and investments C) After tax income minus expenses and saving for an emergency fund D) After tax income minus expenses Answer: D Diff: 2 Type: MC Categories: Personal Cash Flow Statement Financial Type: Qualitative Skill Type: Recall 9) Jeff has a $1000 salary and $100 dividend income this month. This month Jeff has rent and utilities of $600 and he spent $200 on groceries and $100 on clothing. What is his net cash flow this month?

A) $500 B) $100 C) $200 D) $1100 Answer: C Diff: 1 Type: MC Categories: Personal Cash Flow Statement Financial Type: Quantitative Skill Type: Applied 10) What error do many individuals make in budgeting?

A) Overestimate expenses and underestimate income B) Overestimate income and underestimate expenses C) Overestimate income and expenses D) Underestimate income and expenses Answer: B Diff: 2 Type: MC Categories: Personal Cash Flow Statement Financial Type: Qualitative Skill Type: Recall 11) Which cash inflow will probably be discontinued after retirement?

A) Dividend and interest received from investments B) Pension payments C) Salary D) Social assistance benefits Answer: C Diff: 1 Type: MC Categories: Personal Cash Flow Statement Financial Type: Qualitative Skill Type: Recall 9 © 2019 Pearson Canada Inc.

12) Which of the following usually affects cash inflows the most?

A) The education and income of your parents B) Your job skills C) Your personal consumption behaviour D) The size of your family Answer: B Diff: 2 Type: MC Categories: Factors That Affect Cash Flows Financial Type: Qualitative Skill Type: Recall 13) All of the following affect cash outflows except A) the size of the family.

B) your age.

C) your education level.

D) your personal consumption behaviour.

Answer: C Diff: 2 Type: MC Categories: Factors That Affect Cash Flows Financial Type: Qualitative Skill Type: Recall 14) What tends to be the case for the retirement life stage?

A) Lower debt levels than in early-earning and mid-earning life stages B) Managing expenses for new hobbies becomes challenging.

C) Managing RRSP investments becomes paramount.

D) Increase in taxes due to income on retirement funds Answer: A Diff: 2 Type: MC Categories: Financial Ratio Calculations Financial Type: Qualitative Skill Type: Recall 15) If both a husband and a wife are employed full time, their consumption behaviour A) is usually higher.

B) tends to decrease.

C) will decrease as they age.

D) is similar to all mid earning life stage people.

Answer: A Diff: 2 Type: MC Categories: Factors That Affect Cash Flows Financial Type: Qualitative Skill Type: Recall

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16) A cash flow statement is A) an accurate recording of recent actual expenses and incomes.

B) a forecast of cash inflows and outflows.

C) only concerned with regular sources of income and expenses.

D) a summary of monthly cash surpluses or deficits.

Answer: A Diff: 2 Type: MC Categories: Personal Cash Flow Statement Financial Type: Qualitative Skill Type: Recall 17) If you do not budget for unexpected expenses, you will likely experience A) cash shortages.

B) an increase in your emergency fund.

C) an increase in assets.

D) chronic stress-related issues.

Answer: A Diff: 1 Type: MC Categories: Creating a Budget Financial Type: Qualitative Skill Type: Recall 18) What is a practical way to make sure you stay within your budget and achieve your savings goals?

A) Use the pay yourself first method.

B) Use a credit card for all expenses.

C) Reduce your spending.

D) Get a second job.

Answer: A Diff: 2 Type: MC Categories: Creating a Budget Financial Type: Qualitative Skill Type: Recall 19) A budget is A) the same thing as a cash flow statement.

B) a method to measure net worth and monitor wealth.

C) an historical record of income and expenses.

D) a forecast of all items on the cash flow statement.

Answer: D Diff: 1 Type: MC Categories: Creating a Budget Financial Type: Qualitative Skill Type: Recall

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20) Which of the following is the worst approach to solving the problem of an annual budget deficit?

A) Liquidate enough savings or investments to make up the deficit.

B) Get an additional credit card and cover the deficit with that.

C) Renegotiate debt to longer term, lower interest options.

D) Increase income by getting an additional part-time job.

Answer: B Diff: 3 Type: MC Categories: Creating a Budget Financial Type: Qualitative Skill Type: Applied 21) Which one of the following is a liquid asset?

A) Money in a savings account B) A car C) Cash in an RRSP D) Stock held in an investment account Answer: A Diff: 1 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Applied 22) Which of the following would increase your liquid assets?

A) Paying off a loan B) Depositing funds to a savings account C) Buying rental property D) Contributing to an RRSP Answer: B Diff: 2 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall 23) Which of the following is not a liquid asset?

A) Cash in your pocket B) Money in a savings account C) Access to your credit card D) Money in your chequing account Answer: C Diff: 1 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall

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24) Which of the following is not considered an asset for a family?

A) Cash in a chequing account B) A mortgaged home C) Access to a line of credit D) Furniture Answer: C Diff: 2 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall 25) Property such as a person's home, car, and furniture is called A) personal assets.

B) household assets.

C) major property assets.

D) long-term assets.

Answer: B Diff: 1 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall 26) When a person owns corporate stocks, government or corporate bonds, or mutual funds, these are called A) liquid assets.

B) long-term assets.

C) investment assets.

D) retirement assets.

Answer: C Diff: 1 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall 27) Which of the following is a true statement about mutual funds?

A) You get to choose what stocks the mutual fund invests your money in.

B) A minimum investment is required.

C) They are only invested in stocks.

D) The value of shares are not reported in The Globe and Mail or on various websites.

Answer: B Diff: 2 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall

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28) Balance sheet assets should be valued at A) original purchase price.

B) replacement value.

C) insured value.

D) fair market value.

Answer: D Diff: 2 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall 29) If your budget forecasts a future shortfall in cash flow, the best way to use your budget is to A) eliminate all entertainment expenses for that period.

B) build an emergency fund to prepare for the shortfall.

C) increase cash flows from all sources.

D) obtain credit in advance of the predicted shortfall.

Answer: B Diff: 3 Type: MC Categories: Creating a Budget Financial Type: Qualitative Skill Type: Recall 30) Bills that are to be paid off within a year are called A) short-term liabilities.

B) one-year liabilities.

C) current liabilities.

D) insignificant bills.

Answer: C Diff: 2 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall 31) Which is an example of a possible unanticipated cash flow shortage?

A) Your car gets damaged in an accident.

B) Your annual life insurance payment comes due.

C) Your property tax bill is overdue.

D) Your car loan payment falls due.

Answer: A Diff: 1 Type: MC Categories: Creating a Budget Financial Type: Qualitative Skill Type: Applied

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32) A major part of the budgeting process to ensure overall financial success is A) reducing credit limits on credit cards.

B) limiting entertainment expenses.

C) establishing an emergency fund.

D) planning an overdraft for your chequing account.

Answer: C Diff: 2 Type: MC Categories: Creating a Budget Financial Type: Qualitative Skill Type: Recall 33) Liabilities can be calculated by A) adding assets plus net worth.

B) subtracting net worth from assets.

C) adding assets plus income.

D) subtracting expenses from assets.

Answer: B Diff: 3 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Applied 34) Which of the following has the best debt-to-asset ratio?

A) John has total assets of $600 000 and total debt of .

B) Fred has total assets of $36 000 and total debt of .

C) Maria has a monthly gross income of $8000 and expenses of $6000.

D) Cassandra has a gross monthly income of $2000 and expenses of $1200.

Answer: B Diff: 2 Type: MC Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 35) Current liabilities include all of the following except A) this year's monthly car payments on a three-year loan.

B) the total mortgage on a home.

C) the amount due on a credit card.

D) next month's payment on a student loan.

Answer: B Diff: 2 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall

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36) Student loans, car loans, and mortgages are likely examples of A) long-term liabilities.

B) current liabilities.

C) short-term debts.

D) household liabilities.

Answer: A Diff: 1 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall 37) A personal balance sheet summarizes A) income, expenses and net worth.

B) cash inflows, outflows and net worth.

C) assets, net worth, and income.

D) assets, liabilities, and net worth.

Answer: D Diff: 2 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall 38) Jennifer has assets of $100 000 and debts of $10 000. 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) establish an emergency fund of $10 000 in order to qualify for a loan.

Answer: A Diff: 2 Type: MC Categories: Personal Balance Sheet Financial Type: Quantitative Skill Type: Applied 39) Which of the following actions will decrease your net worth?

A) Fitness club dues paid monthly B) Contributions to a mutual fund paid monthly C) Student loan payments paid monthly D) Home mortgage payments paid monthly Answer: A Diff: 3 Type: MC Categories: Financial Ratio Calculations Financial Type: Qualitative Skill Type: Applied

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40) Which of the following would increase your net worth (all else the same)?

A) Your home increasing in value B) Getting a salary increase C) Selling your condo D) Paying down your mortgage with excess cash flow Answer: A Diff: 3 Type: MC Categories: Personal Balance Sheet Financial Type: Quantitative Skill Type: Applied 41) If your net worth is not improving over time, you can use your budget to A) make yourself take a more disciplined approach.

B) add part-time income you had not previously included in your budget.

C) identify the components in the budget you can change.

D) improve your rate of return on investments by raising the risk level.

Answer: C Diff: 3 Type: MC Categories: Creating a Budget Financial Type: Qualitative Skill Type: Applied 42) The current financial position of an individual or family is best presented with the use of a A) net worth statement.

B) cash flow statement.

C) balance sheet.

D) bank statement.

Answer: C Diff: 2 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall 43) If you sell stock from your portfolio to pay off your car loan, your debt ratio of 0.5 will A) improve (increase).

B) improve (decrease).

C) remain unchanged.

D) decrease (unfavourably).

Answer: B Diff: 3 Type: MC Categories: Relation Between Cash Flows and Wealth Financial Type: Quantitative Skill Type: Applied

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44) Nancy has a gross income of $47 000, disposable income of and saves $8000 a year. Her savings rate is A) 10 percent.

B) 15 percent.

C) 17 percent.

D) 20 percent.

Answer: D Diff: 2 Type: MC Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied

, a net worth of $80000

45) If Jo Ann had $4000 in liquid assets and $1000 in current liabilities, she would have a current ratio of A) 0.25.

B) 4.0.

C) 1000.

D) 4000.

Answer: B Diff: 2 Type: MC Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 46) A low liquidity ratio means that A) you have very few debts.

B) you will not likely have trouble paying your monthly bills.

C) you probably will have trouble paying your monthly bills.

D) you have many liquid assets.

Answer: C Diff: 2 Type: MC Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 47) Paying off a credit card with savings will have what effect on net worth?

A) Increase B) Decrease C) No effect D) Insufficient data Answer: C Diff: 2 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall

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48) If your debt-to-asset ratio is less than 1, which of the following will improve it?

A) Taking out a line of credit B) Buying a car with cash C) Paying off a student loan D) Buying stock with cash Answer: C Diff: 3 Type: MC Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 49) Credit cards are A) a good source of short term funds to be used in a period of negative cash flow.

B) used to spend excessively by some because it avoids using up available cash.

C) a great way to discipline yourself to delay gratification to the future.

D) an interest free source of credit as long as the balanced is paid of every other month.

Answer: B Diff: 2 Type: MC Categories: Personal Balance Sheet Financial Type: Quantitative Skill Type: Applied 50) George has total debts of $10 000, liquid assets of $8000 and current liabilities of $5000. His current ratio is A) 0.8.

B) 0.63.

C) 6.3.

D) 1.6.

Answer: D Diff: 3 Type: MC Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 51) Paradis has total assets of $360 000, current assets of $35 000, current liabilities of $22 000, and total liabilities of $195 000. His debt-to-asset ratio is A) 1.59.

B) 0.63.

C) .54.

D) 1.85.

Answer: C Diff: 3 Type: MC Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied

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52) Should Shane be concerned about his liquidity ratio of 80 percent?

A) No, he is in good position regarding liquidity.

B) No, this indicates a healthy cash flow.

C) Yes, he may have problems covering upcoming payments.

D) Yes, he may decrease his net worth with too many investments.

Answer: C Diff: 2 Type: MC Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 53) Ben's salary is $3000 per month, taxes are $500, fixed expenses are $1500 and savings are $500. His disposable income is A) $1500.

B) $3000.

C) $2500.

D) $500.

Answer: C Diff: 2 Type: MC Categories: Creating a Budget Financial Type: Quantitative Skill Type: Applied 54) Kim has a net worth of -$20 000 and a debt-to-asset ratio of three. Which of the following do you know is true?

A) Kim has a major liquidity problem.

B) Kim is on the verge of bankruptcy.

C) Kim has assets of $10 000.

D) Kim has liabilities of $20 000.

Answer: C Diff: 3 Type: MC Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 55) Over time the balance sheet will show that your budgeting process is successful if A) there is a constant positive cash flow.

B) you have controlled all spending habits.

C) your budget is continually accurate.

D) your net worth increases each year.

Answer: D Diff: 3 Type: MC Categories: Personal Balance Sheet Financial Type: Qualitative Skill Type: Recall

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56) Jerry has assets of $200 000, net worth of $150 000, gross income of $60 000 and disposable income of . What are Jerry's liabilities?

A) $110 000 B) $50 000 C) $100 000 D) $0 Answer: B Diff: 3 Type: MC Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 57) Last year John purchased a car for $45 000, a desktop computer for $4000, and a camera for $2500. At present, John has $1000 in credit card debt and a $1800 bank loan. With reasonable estimate of market values, John's car is worth $40 000, computer is worth $2000, and camera is worth $3000. What is John's net worth today?

A) $37 200 B) $48 700 C) $42 200 D) $39 200 Answer: C Diff: 3 Type: MC Categories: Personal Balance Sheet Financial Type: Quantitative Skill Type: Applied 58) Raymond feels that he is wealthy because he has cash in the bank, two expensive cars worth about , and a house worth $1 million. However, he also carries a credit card liability and has a bank loan due within six months. What financial problem does Raymond have?

A) Fixed assets are too high.

B) Total net worth is too low.

C) Current ratio is too low.

D) Liquidity ratio is too low.

Answer: C Diff: 3 Type: MC Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied

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59) Mary earns $3500 per month. After payroll deductions from the government, Mary takes home 85 percent of her salary. Mary wants to use a pay yourself first method and puts $330 into her savings account before spending anything and pays $200 towards her student loans. What is Mary's saving rate?

A) 9.4 percent B) 11.1 percent C) 15.1 percent D) 17.8 percent Answer: B Diff: 3 Type: MC Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied 60) Robert feels his personal finance is not so healthy in terms of managing debt. He has a credit card liability, a car loan, and a $300 000 mortgage liability. Robert possesses a car worth and a house worth . What is Robert's debt-to-asset ratio?

A) 80.5 percent B) 77.3 percent C) 83.3 percent D) Insufficient information to calculate Answer: A Diff: 3 Type: MC Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied

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Essay 1) Use an example with numbers to illustrate how someone's net worth could increase over a year while their cash flow was negative.

Answer: There are many possibilities, here is one illustration.

The balance sheet includes assets, liabilities, and net worth. With assets growing in value by 2% and the liability is being systematically paid down, the overall net worth could increase even if cash flow is negative for a year and for example there is a $5000 credit card debt at the end of the year.

If the balance sheet beginning of year has assets that are growing by 2% such as: Investments: 200 000 after a year 204 000 House: 600 000 after a year 612 000 Liability: Mortgage: 300 000 (assume pay $1000 a month principal) 288 000 Credit card 0 5000 Net worth: 500 000 523 000 The income statement includes income and expenses Salary 50 000 Taxes 10 000 Expenses 45 000 Cash flow - 5000 over the year and could be a balance on a credit card or line of credit.

Diff: 3 Type: ES Categories: Personal Balance Sheet Financial Type: Quantitative Skill Type: Applied

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2) Use an example with numbers to illustrate financial ratios are important when considering someone's balance sheet.

Answer: There are unlimited what to illustrate this but a simple way is to illustrate two balance sheets with the same net worth, but drastically different ratios and the risks that implies.

The balance sheet includes assets, liabilities, and net worth.

Bill: Assets: House: Investments: Total assets:

Sarah: 2 100 000 0 2 100 000

Condo: 170 000 TFSA: 30 000 200 000

Liabilities: Line of credit: 75 000 Mortgage: 1 900 000 Credit card 25 000 Total liabilities: 2 000 000

0 100 000 0 100 000

Net worth: 100 000 Debt-to -asset ratio .95 Current ratio: 0/25 000 = 0

100 000 .5 30 000/2000?

These financial ratios tell a big story of one person in a very stable financial situation and one with a house of cards.

Diff: 3 Type: ES Categories: Financial Ratio Calculations Financial Type: Quantitative Skill Type: Applied

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3) George has a very low debt to asset ratio because he has paid off his mortgage on his house and has very little other debt. Recently, he quit his high-stress job and has taken a much more enjoyable lower-paying position. Consequently, he also now has a low liquidity ratio. He used up all of his emergency fund while looking for the new job and he is having difficulty continuing to save for his retirement. Comment on his situation and make suggestions to help him with his retirement budgeting.

Answer: George is asset rich but cash flow poor due to his recent circumstances. His first course of action should be to do a new personal cash flow statement to identify areas where he can reduce expenses and adjust his behaviour to his new status in life.

It may be necessary for him to re-evaluate his goals. Once satisfied he can comfortably adjust to his new goals he should prepare a new budget.

First, he should emphasize the replacement of an emergency fund and then the funding of his retirement plan.

A balance sheet would provide valuable information regarding his opportunities to borrow.

George, in his current position, has fortunately demonstrated a healthy respect for debt and might consider borrowing money against his assets to put in his retirement fund if he still cannot budget for it out of his cash flow.

Alternatively, George could consider selling assets to raise the cash required after he has considered exactly what changes he will make to his new lifestyle.

Diff: 3 Type: ES Categories: Creating a Budget Financial Type: Qualitative Skill Type: Applied 4) Marta has been keen on following her budget for some time, but unexpected expenses such as car repairs or broken appliances always seem to force her to cancel her vacation each year.

Suggest what course of action Marta should follow.

Answer: Marta has not likely budgeted for an emergency fund and this is the reason her plan is not working.

She should re-do her personal cash flow statement, making sure that she has accounted for unusual and unexpected expenses and allocate funds to build her emergency fund to three times her monthly expenses.

Since she has followed a budget in the past this should be an easier process as she goes through her records. Reassessing her goals may be necessary to ensure that there are enough funds to meet her vacation needs.

During this process she should review opportunities to raise cash flow and areas where expenses can be reduced.

Diff: 2 Type: ES Categories: Creating a Budget Financial Type: Qualitative Skill Type: Applied 25 © 2019 Pearson Canada Inc.

5) Jason is a stockbroker who is on variable compensation. In good years he receives a healthy bonus that might triple his base salary. During these times he is accustomed to a lavish lifestyle, driving expensive cars and taking exotic vacations. He knows it is important to save for retirement but he makes RRSP contributions only in years in which he receives good bonus cheques. In poor years he will receive only a base salary. During these poor years he finds himself scrambling to pay off debts and meet monthly expenses.

He always seems to have more unexpected expenses during these times, too. He always has at least $1000 cash in his wallet and tries to avoid the use of credit cards as much as possible. Jason is funding all short-term goals with current earnings and hasn't set any mid- or long-term goals.

He is frustrated by his wildly fluctuating income and his constant concern about his potential earnings at the beginning of each year. How can you assist Jason?

Answer: First, Jason needs to set realistic short-, medium-, and long-term goals.

Then Jason needs to create a personal cash flow statement, budget, balance sheet, and net worth statements as well as a complete review of spending habits to establish an emergency fund. In his circumstances, he needs a much larger emergency fund than many people because his income varies significantly.

One positive is that he has not abused credit and has some RRSP savings so he is not beyond redemption. People in this stage of life have huge potential but it will take some sacrifices to live within a budget. He needs to control consumption and change personal habits drastically.

Establishing order in his life with a budget and setting future goals may be a welcome change.

For starters, the cash must stay out of his wallet and he should control and record his expenses with the use of a debit card.

Once enough information has been gathered, he needs to make some decisions about spending patterns and implement a cash outflow tailored to essential expenses. To adhere to the budget, initially it should include a liberal entertainment expenses that can be altered over time to condition him to a new and disciplined lifestyle.

The budget should be sufficient to cover all of the expected expenses incurred during his lowerearning years.

Diff: 3 Type: ES Categories: Factors That Affect Cash Flows Financial Type: Qualitative Skill Type: Applied

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6) Describe why some people may need alternative budget strategies? Give an example to illustrate why someone might need the envelope method while someone else needs the pay yourself first method.

Answer: If someone has good intentions but is still unable to anticipate cash shortages or is unable to consistently apply the budget method, then he or she may need alternative budgeting strategies.

Envelope method: To force you to stick to a cash-only budget for some of your expense categories. Putting $100 cash in an envelope labelled "Entertainment" to set a maximum of $100 spending on entertainment is an example. If someone is extremely impulsive and for example cannot resist buying the great sale deals on their credit card, they may need to get rid of the card and use the envelope method.

Pay yourself first method: To control the amount of money going out of your bank account after each pay cheque comes in. For instance, you transfer $200 from your chequing account to your savings account after the direct deposit of salary to stop yourself from spending $200 in your chequing account. For many people this method ensures that the critical savings get done first, while all other expenses are clearly documented on the credit card or bank statement to track monthly cash flow.

Diff: 2 Type: ES Categories: Factors That Affect Cash Flows Financial Type: Qualitative Skill Type: Applied

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Personal Finance, Canadian Ed., 4e (Madura) Part 1 Tools for Financial Planning - Using Tax Concepts for Planning True/False 1) Knowledge of individual income taxes is somewhat relevant to financial planning.

Answer: FALSE Diff: 1 Type: TF Categories: Background on Taxes Financial Type: Qualitative Skill Type: Applied 2) Income from outside of Canada is not subject to Canadian income tax.

Answer: FALSE Diff: 3 Type: TF Categories: Background on Taxes Financial Type: Qualitative Skill Type: Recall 3) There is a required repayment of certain social benefit payments if your net income is above a certain level.

Answer: TRUE Diff: 2 Type: TF Categories: Background on Taxes Financial Type: Qualitative Skill Type: Recall 4) Canada's tax system is called "progressive," which means the higher someone's income, the higher the percentage of income paid in taxes.

Answer: TRUE Diff: 2 Type: TF Categories: Completing a Tax Return Financial Type: Qualitative Skill Type: Recall 5) The combined Federal and Provincial tax rates vary a lot from province to province.

Answer: TRUE Diff: 2 Type: TF Categories: Calculate Total Tax Payable Financial Type: Qualitative Skill Type: Applied

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6) Provincial governments collect property taxes.

Answer: FALSE Diff: 2 Type: TF Categories: Background on Taxes Financial Type: Qualitative Skill Type: Applied 7) The T4 slip provided by your employer shows all your earnings and deductions for the year.

Answer: FALSE Diff: 3 Type: TF Categories: Tax Deductions Financial Type: Qualitative Skill Type: Applied 8) You have to file a personal tax return by April 30 each year only if the Canada Revenue Agency sent you a request to file.

Answer: FALSE Diff: 2 Type: TF Categories: Do You Have to File a Return?

Financial Type: Qualitative Skill Type: Recall 9) Self-employed taxpayers must have paid all taxes owing by April 30th of the following year.

Answer: TRUE Diff: 2 Type: TF Categories: Do You Have to File a Return?

Financial Type: Qualitative Skill Type: Applied 10) Students should not file income tax returns if their income is below the basic personal amount.

Answer: FALSE Diff: 3 Type: TF Categories: Background on Taxes Financial Type: Qualitative Skill Type: Applied 11) All interest and dividends received by an individual taxpayer (outside of an RRSP or TFSA) are taxable.

Answer: TRUE Diff: 1 Type: TF Categories: Calculate Total Income Financial Type: Qualitative Skill Type: Recall

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12) A capital gain results from profit on the sale of capital assets.

Answer: TRUE Diff: 1 Type: TF Categories: Calculate Total Income Financial Type: Qualitative Skill Type: Recall 13) If Jack has total RPP and RRSP contributions of $9000, he can deduct that amount from his total income to calculate his taxable income.

Answer: TRUE Diff: 3 Type: TF Categories: Subtract Deductions Financial Type: Qualitative Skill Type: Applied 14) Filing an income tax return, even when you have no tax to pay, may increase the amount of RRSP contributions you are allowed in later years.

Answer: TRUE Diff: 2 Type: TF Categories: How Tax Planning Fits a Financial Plan Financial Type: Qualitative Skill Type: Applied 15) Deductions and tax credits both benefit high-income individuals more than moderate earners.

Answer: FALSE Diff: 3 Type: TF Categories: Tax Credits Financial Type: Qualitative Skill Type: Applied 16) Union dues and spousal support payments can be deducted in the calculation of taxable income.

Answer: TRUE Diff: 1 Type: TF Categories: Subtract Deductions Financial Type: Qualitative Skill Type: Recall 17) The Canada Eduction Savings grant is taxable to the beneficiary when paid from a Registered Education Savings Plan (RESP).

Answer: TRUE Diff: 1 Type: TF Categories: Tax Deductions Financial Type: Qualitative Skill Type: Recall

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18) Interest expense paid on home loans and car loans is deductible from your income tax.

Answer: FALSE Diff: 1 Type: TF Categories: Subtract Deductions Financial Type: Qualitative Skill Type: Recall 19) RRSP rules limit a taxpayer's contributions to the higher of 18 percent of total income to a maximum amount of $25 000.

Answer: FALSE Diff: 2 Type: TF Categories: Subtract Deductions Financial Type: Qualitative Skill Type: Recall 20) The Basic Personal Amount is a non-refundable tax credit that reduces ones taxes by $11 635 in 2017.

Answer: FALSE Diff: 3 Type: TF Categories: Tax Credits Financial Type: Qualitative Skill Type: Applied 21) Jessie is 65 and has taxable income of $66 000. She would have her age amount credit fully clawed back.

Answer: FALSE Diff: 3 Type: TF Categories: Tax Credits Financial Type: Qualitative Skill Type: Applied 22) Organizing your records to take advantage of tax credits and deductions and investing in tax sheltered accounts like RRSPs and TFSAs are the best ways to avoid taxes.

Answer: TRUE Diff: 3 Type: TF Categories: How Tax Planning Fits a Financial Plan Financial Type: Qualitative Skill Type: Applied 23) The spousal/common law tax credit is available to those supporting a spouse who had earnings under $11 635 in 2017.

Answer: TRUE Diff: 2 Type: TF Categories: Tax Credits Financial Type: Qualitative Skill Type: Applied 4 © 2019 Pearson Canada Inc.

24) The basic personal amount is a non-refundable tax credit that can reduce tax payable to zero for people with income under $11 000.

Answer: TRUE Diff: 2 Type: TF Categories: Tax Credits Financial Type: Qualitative Skill Type: Applied 25) The maximum medical expenses credit cannot exceed three percent of total income.

Answer: FALSE Diff: 2 Type: TF Categories: Tax Credits Financial Type: Qualitative Skill Type: Recall 26) Interest paid on a qualified student loan can be used to reduce tax owing through a tax credit.

Answer: TRUE Diff: 1 Type: TF Categories: Tax Credits Financial Type: Qualitative Skill Type: Recall 27) Tuition, pension, and age amount credits can be transferred to your spouse if you have no tax to pay.

Answer: TRUE Diff: 2 Type: TF Categories: Tax Credits Financial Type: Qualitative Skill Type: Recall 28) Tuition and charitable donations can be carried forward to reduce taxes in future years.

Answer: TRUE Diff: 2 Type: TF Categories: Tax Credits Financial Type: Qualitative Skill Type: Recall 29) Tax planning is best done at the same time you file your tax return.

Answer: FALSE Diff: 1 Type: TF Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Recall

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30) Tax avoidance may be subject to both criminal and civil prosecution.

Answer: FALSE Diff: 2 Type: TF Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Recall 31) Tax evasion occurs when taxpayers attempt to deceive the Canada Revenue Agency by knowingly reporting less tax payable than what the law requires them to pay.

Answer: TRUE Diff: 2 Type: TF Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Recall 32) An investor who receives $10 000 interest will pay higher taxes than one who receives $10 000 from eligible dividends.

Answer: TRUE Diff: 2 Type: TF Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Applied 33) Every individual that earns employment income is required to file a personal income tax return.

Answer: FALSE Diff: 1 Type: TF Categories: Do You Have to File a Return?

Financial Type: Qualitative Skill Type: Recall Multiple Choice 1) By what date must self-employed individuals file their income tax returns?

A) December 31 B) April 30 C) June 15 D) 90 days after their fiscal year-end Answer: C Diff: 1 Type: MC Categories: Do You Have to File a Return?

Financial Type: Qualitative Skill Type: Recall

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2) You have a salary of $30 000, an RPP deduction of $2 000, paid $1 000 interest on your mortgage and paid union dues of $800. If the basic personal amount is $11 635 and the federal tax rate is 15 percent, what federal tax do you owe?

A) $4200 B) $2259 C) $2829 D) $2335 Answer: D Diff: 3 Type: MC Categories: Completing a Tax Return Financial Type: Quantitative Skill Type: Applied 3) Canada's taxation rules are called "progressive." This means A) taxes are deducted from your income and withheld at the source.

B) that Canada's tax system supports progressive social programs.

C) the higher your income, the higher your tax rate.

D) government benefits are clawed back when someone's income exceeds a certain threshold.

Answer: C Diff: 3 Type: MC Categories: Background on Taxes Financial Type: Qualitative Skill Type: Recall 4) Tax credits are used to reduce tax A) when calculating total income.

B) after total taxes payable are calculated.

C) before you subtract all deductions.

D) by deducting them from total income.

Answer: B Diff: 3 Type: MC Categories: Tax Credits Financial Type: Qualitative Skill Type: Recall 5) Even if you haven't paid any tax during the year (i.e. through withholdings or directly), it is beneficial to file a tax return because A) you can carry forward all non-refundable tax credits to future years.

B) you can get a tax refund for your RRSP contributions.

C) you may be eligible for a tax-free refundable GST/HST credit.

D) it is required by law, if you are over 18.

Answer: C Diff: 2 Type: MC Categories: Do You Have to File a Return?

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6) If you are supporting a spouse who attended school and had $3000 in taxable income A) you can claim their tuition tax credit.

B) all of their non-refundable tax credits can be used to reduce your tax.

C) you are entitled to a caregiver tax credit.

D) you can deduct their personal basic amount.

Answer: A Diff: 3 Type: MC Categories: Tax Credits Financial Type: Qualitative Skill Type: Applied 7) If you are a married taxpayer supporting a spouse who has less than A) you must be the one to claim all tax credits.

B) you are entitled to a spousal or common-law partner tax credit.

C) you are entitled to a dependant partner tax deduction.

D) your spouse will not be able to apply for the GST/HST refund.

Answer: B Diff: 2 Type: MC Categories: Tax Credits Financial Type: Qualitative Skill Type: Recall

in taxable income,

8) Jerome is recently divorced and has two children that live with his ex-wife. What deductions should Jerome claim on his tax return?

A) Child support payments B) Spousal support payments C) Caregiver deduction D) Child care expenses Answer: B Diff: 2 Type: MC Categories: Subtract Deductions Financial Type: Qualitative Skill Type: Recall 9) Fred's income this past year included salary of $70 000, $3 000 in interest income, a $4 000 capital gain from selling some stock and a $5000 inheritance. For tax purposes, what is his total income this year?

A) $80 000 B) $82 000 C) $75 000 D) $77 000 Answer: C Diff: 3 Type: MC Categories: Calculate Total Income Financial Type: Quantitative Skill Type: Applied 8 © 2019 Pearson Canada Inc.

10) Which of the following income is taxable income?

A) Insurance benefits B) Inheritances C) Scholarship income D) Tips received Answer: D Diff: 2 Type: MC Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Recall 11) Which of the following income is taxed at the lowest rate?

A) Salary B) Interest C) Capital gains D) Tips Answer: C Diff: 2 Type: MC Categories: Calculate Taxable Income Financial Type: Qualitative Skill Type: Recall 12) Which of the following is not taxable income?

A) EI payments B) Life insurance benefits C) Rental income D) The use of a company car Answer: B Diff: 2 Type: MC Categories: Calculate Taxable Income Financial Type: Qualitative Skill Type: Recall 13) Interest income would come from earnings on A) stocks.

B) term deposits.

C) RESPs. D) the sale of mutual funds.

Answer: B Diff: 1 Type: MC Categories: Calculate Total Income Financial Type: Qualitative Skill Type: Recall

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14) Income earned from the sale of an asset for more than you paid for it is classified as A) dividend income.

B) business income.

C) a capital gain.

D) a windfall.

Answer: C Diff: 1 Type: MC Categories: Calculate Total Income Financial Type: Qualitative Skill Type: Recall 15) If a stock was purchased in January 2004 for $1000 and sold in December 2005 for $3000, what is the taxable result?

A) Taxable capital gain of $2000 B) Taxable capital gain of $1000 C) Income of $2000 D) Annual taxable gain of $500 Answer: B Diff: 2 Type: MC Categories: Calculate Total Income Financial Type: Quantitative Skill Type: Applied 16) If a stock was purchased for $3000 in January 2003 and is sold in June 2003 for $4000, what is the taxable result?

A) Capital gain of $1000 and taxable income of $500 B) Business income of $1000 and taxable amount of $1000 C) Capital gain of $1000 and taxable income of $1000 D) Taxable capital gain of $1000 Answer: A Diff: 2 Type: MC Categories: Calculate Total Income Financial Type: Quantitative Skill Type: Applied 17) Jake invested $800 in an RRSP. If he is in the 30 percent marginal tax bracket, he will A) pay $800 less in taxes.

B) pay $240 less in taxes.

C) receive an $800 tax credit.

D) receive a $400 tax deduction.

Answer: B Diff: 2 Type: MC Categories: Calculate Total Tax Payable Financial Type: Quantitative Skill Type: Applied

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18) For qualified individuals, a contribution to a registered retirement savings plan (RRSP) will be A) a tax credit.

B) a deduction from total income.

C) eligible to be transferred to a spouse D) a deduction from federal tax payable.

Answer: B Diff: 2 Type: MC Categories: Subtract Deductions Financial Type: Qualitative Skill Type: Recall 19) The Federal Government's use of net income versus taxable income ensures A) a progressive tax system.

B) lower income individuals benefit the most.

C) single parents benefit more.

D) all taxpayers are treated equitably.

Answer: D Diff: 2 Type: MC Categories: Background on Taxes Financial Type: Qualitative Skill Type: Recall 20) Which of the following is not typically a legitimate tax deduction in Canada?

A) Mortgage interest on your home B) Union dues C) RRSP contributions D) The cost of some investment advice Answer: A Diff: 2 Type: MC Categories: Subtract Deductions Financial Type: Qualitative Skill Type: Recall 21) Which would reduce taxes the most for a high income earner (income over A) $4800 interest on a student loan B) $4800 RRSP contribution C) $4800 medical expenses D) These would have the same effect.

Answer: B Diff: 3 Type: MC Categories: Tax Credits Financial Type: Quantitative Skill Type: Applied

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)?

22) Which of the following can be used to reduce your federal income taxes?

A) Child support payments for a six year old B) Real estate taxes C) Provincial income taxes D) Student loan interest Answer: D Diff: 2 Type: MC Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Recall 23) When taxable income on a progressive basis exceeds certain thresholds A) a higher rate of tax is charged on all income.

B) tax credits become more important.

C) deductions reach a maximum allowable amount.

D) the tax rate is increased on the next dollars of income until a new income level is reached.

Answer: D Diff: 3 Type: MC Categories: Completing a Tax Return Financial Type: Qualitative Skill Type: Applied 24) Which of the following best summarizes the correct process?

A) Calculate total income, subtract tax credits and deductions, determine refund or balance owing.

B) Add all deductions and subtract the credits from total income, determine refund or balance owing.

C) Calculate total income, deduct RRSP contribution, apply tax credits and deductions, determine refund or balance owing.

D) Calculate total income, subtract deductions, calculate taxable income, apply tax credits, determine refund or balance owing.

Answer: D Diff: 3 Type: MC Categories: Completing a Tax Return Financial Type: Qualitative Skill Type: Applied

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25) John has been told that he should not take any overtime because it will push him into the next tax bracket. Which of the following is true?

A) Moving into the next marginal tax bracket could reduce John's net income overall.

B) The marginal tax brackets apply to tax credits and deductions and will not make a direct difference to John's net income.

C) Moving into the next tax bracket will give John a larger refund on his RRSP contribution.

D) Moving into the next tax brackets will give John a larger refund from his tax credits.

Answer: C Diff: 3 Type: MC Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Applied 26) For people in the highest marginal tax bracket, which would save them the largest financial benefit?

A) A $10 000 RRSP contribution B) A $10 000 RESP contribution.

C) A $10 000 TFSA contribution.

D) These would all be the same.

Answer: A Diff: 3 Type: MC Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Applied 27) If George is 65 and in a combined marginal tax bracket of 42 percent, then A) he can save $840 on his taxes if he applies his son's $2000 of tuition amount.

B) he can save $840 on his taxes from his $2000 RRSP contribution.

C) he can save $840 on his taxes from his $2000 medical expenses.

D) All of the above are correct.

Answer: B Diff: 3 Type: MC Categories: Completing a Tax Return Financial Type: Quantitative Skill Type: Applied 28) Which of the following items is affected by the taxpayer's income level?

A) The amounts deducted for employment expenses B) The amounts that can be deducted for charitable contributions C) The amount of clawback on social assistance payments D) Basic personal exemptions Answer: C Diff: 2 Type: MC Categories: Tax Credits Financial Type: Qualitative Skill Type: Recall 13 © 2019 Pearson Canada Inc.

29) Which of the following is an acceptable method of reducing your tax bill for the current year?

A) Making large payments on your outstanding mortgage B) Increasing your contributions to your tax free savings account C) Earning income outside of Canada D) Deducting employment expenses you weren't reimbursed for Answer: D Diff: 2 Type: MC Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Applied 30) The T4 slip provided by your employer shows all your A) income earned and tax deducted for the year.

B) income, professional dues, and taxes for the year.

C) income earned and deductions for the year.

D) income and deductions made by that employer for the year.

Answer: D Diff: 2 Type: MC Categories: Completing a Tax Return Financial Type: Qualitative Skill Type: Recall 31) Your earnings for last year were $42 000. How much of an RRSP contribution can you make this year (if you have no other RRSP room)?

A) $5670 B) $4200 C) $7560 D) Insufficient information Answer: C Diff: 2 Type: MC Categories: Subtract Deductions Financial Type: Quantitative Skill Type: Applied 32) Your earnings in 2017 were $120 000, which is the 40 percent marginal tax bracket and 30 percent average tax bracket, in your province. How much would your taxes be reduced if you made the full RRSP contribution for this year (and had no additional RRSP room)?

A) $7803 B) $10 404 C) $26 010 D) $12 000 Answer: B Diff: 3 Type: MC Categories: Subtract Deductions Financial Type: Quantitative Skill Type: Applied 14 © 2019 Pearson Canada Inc.

33) Melanie, a homeowner, has mortgage interest of $3000, RRSP contributions of $1500, and charitable contributions of $500. According to her filing status, a basic personal amount of $11 635 is allowed. How much should Melanie deduct on her tax return?

A) Her only deduction is the $1500 RRSP contribution.

B) She can deduct $13 135, her basic personal amount and her RRSP contribution.

C) She can deduct $13 635, her basic personal amount, charitable donation and her RRSP contribution.

D) She has deductions of $2000 for her RRSP and charitable donation.

Answer: A Diff: 3 Type: MC Categories: Subtract Deductions Financial Type: Quantitative Skill Type: Applied 34) Sally's total income is $38 000 and she divorced last year. She does not own a home, but has charitable contributions of $1500 and interest on her car of $2100. This year she also paid spousal support of $2000, child support of $5000, and tuition of $2600. Her basic personal amount is $11 138. What is Sally's taxable income?

A) $34 500 B) $31 900 C) $36 000 D) $20 762 Answer: C Diff: 3 Type: MC Categories: Subtract Deductions Financial Type: Quantitative Skill Type: Applied 35) Ralph has total income of $53 000. He has business expenses of , made a $5000 RRSP contribution and incurred $4000 in tuition expenses for his daughter, who did not work and is a freshman at a local community college. Personal basic exemptions of $11 138 and a marginal tax rate of 26 percent apply. Compute Ralph's taxable income for the current year.

A) $18 862 B) $26 000 C) $30 000 D) $14 862 Answer: C Diff: 3 Type: MC Categories: Tax Deductions Financial Type: Quantitative Skill Type: Applied

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36) Meg makes RRSP contributions resulting in a tax rebate of $1200 each year. She is in a 30 percent tax bracket. What was the amount of her contribution?

A) $3000 B) $4000 C) $22 222 D) Unknown Answer: B Diff: 2 Type: MC Categories: Background on Taxes Financial Type: Quantitative Skill Type: Applied 37) Which taxpayers among the following can deduct some of his or her medical expenses?

A) Jane, who has an income of $40 000 and medical expenses of $1100 B) Claude, who has an income of $60 000 and medical expenses of $2100 C) Peter, who has an income of $65 000 and medical expenses of $2375 D) Paula, who has an income of $26 000 and medical expenses of $700 Answer: C Diff: 3 Type: MC Categories: Tax Credits Financial Type: Quantitative Skill Type: Applied 38) Reginald is thinking about asking his employer to defer a $5000 bonus to next year's income because he would have to pay $2050 in tax if he received it this year. What should he do?

A) If his marginal tax rate next year will be less than 41 percent he should consider deferring it.

B) He should take the bonus now because of the opportunity cost.

C) If his marginal tax rate next year will be less than 45 percent, he should defer it to next year.

D) If his marginal tax rate next year will be less than 35 percent, he should defer it to next year.

Answer: A Diff: 2 Type: MC Categories: How Tax Planning Fits a Financial Plan Financial Type: Quantitative Skill Type: Applied

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39) Roan is a student in Ontario who travelled to BC for his summer job. When in BC he worked in mining camps and his residence was over 40 km from his actual place of employment. He spent $2000 moving to BC and back to Ontario and earned $22 000. During the remaining eight months he went to school full time. Which of the following describes his tax situation best?

A) He will be able to claim full tax credits for moving expenses, tuition, and the personal amount.

B) He will be able to deduct half the $2000 moving expenses because he lived more than 40 km from his work, and can claim tax credits for tuition and the basic personal amount.

C) He will be able to deduct $2000 for moving expenses and claim tax credits for tuition and the basic personal amount.

D) He will not be able to deduct moving expenses as he lived more than 40 km from his work, but he can claim tax credits for tuition and the basic personal amount.

Answer: C Diff: 3 Type: MC Categories: Tax Credits Financial Type: Qualitative Skill Type: Applied 40) If you are working as a Certified Financial Planner and you pay $500 to your association every year for membership, you can deduct $500 on your personal tax return as A) union/professional dues as long as you receive a tax receipt.

B) an eligible tax credit as long as you do not get reimbursed for the amount.

C) an employment expense as long as you receive a tax receipt.

D) union/professional dues as long as you do not get reimbursed for the amount.

Answer: D Diff: 2 Type: MC Categories: Subtract Deductions Financial Type: Qualitative Skill Type: Applied 41) Which of the following would produce the largest financial benefit to a tax payer who earns and is in the forty percent marginal tax bracket and the twenty five percent average tax bracket? Assume that all items are options of equal importance.

A) A $5000 contribution to his/her child's RESP B) A $5000 medical expense amount for orthodontics C) A $5000 contribution to his/her TFSA D) A $5000 contribution to his/her RRSP Answer: D Diff: 3 Type: MC Categories: Tax Planning Strategies Financial Type: Quantitative Skill Type: Applied

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42) Robert is 66 and so qualifies for the age amount. His taxable income for 2017 was .

The threshold income for the age amount is $36 430 and the maximum age amount is $7225.

What age amount will he qualify for?

A) $4285 B) $2940 C) $7225 D) Zero Answer: B Diff: 3 Type: MC Categories: Tax Credits Financial Type: Quantitative Skill Type: Applied 43) Marta received an inheritance of $20 000 and wants to allocate it towards her six-year-old son's education in the most effective manner. Which of the following considerations will have the greatest financial impact?

A) Contributing to an RESP in such a way as to collect the maximum Canada Education Savings Grant B) Benefiting from the tax deferral in an RESP account as quickly as possible C) Applying for the Canada Learning Bond as soon as possible D) Collecting the maximum Educational Assistance Payments in the RESP account Answer: A Diff: 2 Type: MC Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Applied 44) When considering allocating funds to a TFSA account versus an RRSP account, which of the following is least critical?

A) Avoiding taxation on the investment funds B) The intended purpose for the investment funds C) The marginal tax bracket of the individual D) The financial goals of the individual Answer: A Diff: 2 Type: MC Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Applied

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45) Which of the following is not a feature of a registered education savings plan (RESP)?

A) The Educational Assistance Payments B) The tax deduction for the contributions C) The Canada Education Savings Grant from the government D) The Canada Learning Bond for modest income families Answer: B Diff: 2 Type: MC Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Recall 46) Fillipe is in the forty percent marginal tax bracket and has a variety of income sources.

Which of the following will he owe the least tax for?

A) $1000 interest income B) $1000 dividend income C) $1000 award from his company D) $2000 capital gain Answer: B Diff: 2 Type: MC Categories: Background on Taxes Financial Type: Quantitative Skill Type: Applied 47) Which of the following is true for a Registered Disability Savings Plan (RDSP)?

A) Contributions made to the plan are tax deductible.

B) The annual maximum contribution is $17 750.

C) Contributions can be made until the end of the year in which the beneficiary turns 59.

D) All withdrawals made from the RDSP are tax free as long as the beneficiary receives the income.

Answer: C Diff: 3 Type: MC Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Recall 48) Samantha filed her tax return on August 1st and paid her $4000 balance owing. If the prescribed interest rate is 5%, how much did she owe in total?

A) $4050 B) $4320 C) $4000 D) $4370 Answer: D Diff: 3 Type: MC Categories: Background on Taxes Financial Type: Qualitative Skill Type: Applied 19 © 2019 Pearson Canada Inc.

49) In which general category of tax should a homeowner earning over $250 000 in salary per year be expected to pay the most?

A) Personal income tax B) Consumer tax (GST/HST) C) Property tax D) Excise tax Answer: A Diff: 3 Type: MC Categories: Background on Taxes Financial Type: Qualitative Skill Type: Applied 50) Under which of the following conditions must you file a personal income tax return?

A) You acquired capital property during the calendar year.

B) You have to contribute to the Canada Pension Plan.

C) You will receive an income tax refund.

D) You got married, separated, or divorced during the calendar year.

Answer: B Diff: 2 Type: MC Categories: Do You Have to File a Return?

Financial Type: Qualitative Skill Type: Recall Essay 1) List your total income, deductions, taxable income, number of deductions, and tax credits to arrive at taxable income and taxes payable. Make up an example if you don't want to supply your own figures. Explain the overall process.

Answer: Total income includes all sources of taxable income (salary, investment income, capital gains (or losses) on capital assets you have sold, but not inheritances and bursaries etc.)

Then you subtract deductions, such as RRSP contributions to get taxable income.

Basic personal amounts and refundable and non-refundable tax credits are used to calculate total taxes owing.

You may have over or underpaid your taxes via monthly or quarterly remittances and that will determine whether you get a refund, or owe taxes before the April 30 deadline. You may have been able to transfer credits to a relative or use some of their unused tax credits that are refundable to you.

Diff: 3 Type: ES Categories: Completing a Tax Return Financial Type: Qualitative Skill Type: Applied

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2) Miranda is 35 and her tax planning creates opportunities to receive a $1800 tax refund each year. If she allocates this to her RRSP each year and earns a 7 percent annual return, how much extra retirement savings will she have at age 65? If she allocated this $1800 each year to a regular investment account which also earned a 7 percent annual return, how much money would she have there? Explain the tax implications and assumptions you need to make for this comparison.

Answer: RRSP P/Y 1 and C/Y 1.

PV = 0; PMT = $1800; %I = 7; N = 30; CPT FV = $170 029.

For the regular investment account there are two major considerations.

There are many assumptions that could be used, but both the following need to be addressed.

1. The investment return of 7 percent will be subject to taxation each year and the rate will depend on whether the gains are interest, dividends or capital gains, and will also depend on the marginal tax bracket of the individual. Conservatively we could assume 25 percent of the 7 percent return is allocated to taxation, so Miranda's investment return would really be 5.25 percent in the regular investment account.

2. For the RRSP contribution of $1800, Miranda will also get the RRSP deduction. The amount of that benefit will also depend on her marginal tax bracket. If we assume she is in a 32 percent combined marginal tax bracket, then the $1800 contribution to her RRSP will return $576 to her, which would not happen in the regular investment account.

Diff: 3 Type: ES Categories: How Tax Planning Fits a Financial Plan Financial Type: Quantitative Skill Type: Applied 3) If Helen earns $105 000 taxable income in 2017, how much federal income tax does she have to pay according to the brackets and rates in the textbook. What is Helen's average tax rate for federal tax? Show your calculations. What is Helen's average tax rate using the combined rates in the textbook for your province? Show your calculations.

Answer: = (45 282 × 15%) + (90 563 - 45 282) × 20.5% + (105 000 - 90 563) × 26% = 6792 +9283 + 3754 = 19 829 Average federal tax rate for Helen = 19 829/105 000 = 18.9% This will vary by province.

Example for Alberta: 45 916 × .25 + 45 915 × 30.5 +13 169 × .36 = 11 479 +14 004 +4 741 = percent Diff: 3 Type: ES Categories: Calculate Net Federal Tax Payable Financial Type: Quantitative Skill Type: Applied

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= 28.8

4) Comment on receiving 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? If you received a large refund, what would you use it for?

Answer: This is really a psychology question and relates to a 'pay yourself first' kind of strategy except that the government benefits for a year on holding you money, when you could be benefiting.

A large refund is not a prudent use of funds since the government does not pay you interest.

Your employer can assist you in adjusting the appropriate amount to deduct. Some people have more tax deducted as a forced savings method. Will you use the large refund wisely?

Diff: 2 Type: ES Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Applied 5) You are being paid on a base pay, commission, and bonus incentive compensation package.

The economy can have a lot to do with how much you earn in a year as well as your personal efforts to improve sales and increase your customer base. Your employer is very flexible as to when and how it makes incentive payments to you. For instance, it can have a profit sharing plan which involves stock options and is flexible on when it will distribute profits and bonuses.

Recent forecasts indicate that the economy will slow down next year and you have a sizable commission cheque and bonus payments owed to you this year. Under these circumstances, what would be your tax planning tactics to reduce taxes?

Answer: Bonuses could be deferred to next year when it will likely be a low tax liability year.

Purchasing stock in the company will create dividend income more favourably taxed.

Company shares may afford you a capital gains tax preferred income.

Personal RRSP contributions will reduce tax this year, so best to maximize what you can use now.

Carry forward all deductions from previous years for charitable contributions and unused RRSP contributions.

Ensure that all tax deductions for employment expenses are used for this type of job.

Finally, always remember that trying to predict the future of the economy is impossible, so systematic savings is always a good bet.

Diff: 3 Type: ES Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Applied

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6) Describe and compare tax planning and tax avoidance. Use the web to research and give an example of each.

Answer: Tax planning involves activities and transactions that reduce or eliminate tax through deductions and credits in a legal manner, while tax avoidance occurs for taxpayers who legally apply tax laws but in a way that the Canada Revenue Agency may determine contravenes the intentions of the Act and so may disallow.

There are many possible examples. Most students would have to look up avoidance items on the web. Good examples of tax planning are carefully considering how much to allocate to RRSPs versus TFSAs versus RESPs (if you have children). There are many cases where tax avoidance items have been addressed and changed explicitly by the government. The kiddie tax rules are one example and closing the doors on investment trusts for regular corporations is another.

Diff: 3 Type: ES Categories: Tax Planning Strategies Financial Type: Qualitative Skill Type: Applied

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Personal Finance, Canadian Ed., 4e (Madura) Part 4 Personal Investing - Investing in Mutual Funds True/False 1) A mutual fund is a diversified portfolio of stocks and/or bonds, depending on the investment objective of the fund.

Answer: TRUE Diff: 1 Type: TF Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall 2) Three advantages of investing in mutual funds are diversification, marketability and economies of scale.

Answer: TRUE Diff: 1 Type: TF Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall 3) The net asset value (NAV) per share of a mutual fund is determined by the market value of securities owned minus liabilities divided by the number of mutual fund units outstanding.

Answer: TRUE Diff: 1 Type: TF Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall 4) Open-end mutual fund companies sell directly to investors and repurchase units whenever investors wish to sell them.

Answer: TRUE Diff: 1 Type: TF Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall 5) Closed-end mutual fund shares trade on stock exchanges and can sell at a premium or discount to their NAVPS. Answer: TRUE Diff: 2 Type: TF Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall

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6) If you bought a back-end load mutual fund which had a six-year declining redemption schedule, and held the fund for seven years, you would pay only a minimal load fee.

Answer: FALSE Diff: 2 Type: TF Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Applied 7) In most cases, the fees charged by load funds have no impact on the overall return of your investment.

Answer: FALSE Diff: 2 Type: TF Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall 8) Studies on mutual funds have found that the management expense ratio (MER) has no relationship to overall fund performance.

Answer: FALSE Diff: 3 Type: TF Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall 9) Trailing commissions, management expenses and marketing expenses are all part of the MER of a mutual fund.

Answer: TRUE Diff: 2 Type: TF Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Applied 10) MERs can be high due to high sales and marketing expenses or due to research costs such as for researching international companies.

Answer: TRUE Diff: 2 Type: TF Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Applied 11) While not all mutual funds have loads or commissions, they all have management fees and expenses that are charged to the mutual fund shareholders.

Answer: TRUE Diff: 1 Type: TF Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall 2 © 2019 Pearson Canada Inc.

12) A stock mutual fund that pays higher-than-normal dividends is called a growth fund.

Answer: FALSE Diff: 1 Type: TF Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall 13) When comparing the MERs and performance of various mutual funds it is important to include only ones with similar objectives.

Answer: TRUE Diff: 2 Type: TF Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall 14) A mutual fund that buys only the stocks of the TSX is a good example of a sector fund.

Answer: FALSE Diff: 2 Type: TF Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Applied 15) Index stock funds contain every company's stock that make up the particular index.

Answer: FALSE Diff: 2 Type: TF Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall 16) Investors in mutual funds may receive capital gains without redeeming any shares.

Answer: TRUE Diff: 2 Type: TF Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Applied 17) There are three ways that taxable income can be generated for investors in mutual funds without the investor actually receiving any income.

Answer: TRUE Diff: 3 Type: TF Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Applied

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18) Through research you can find the best professional fund managers and eliminate market risk from your stock mutual funds.

Answer: FALSE Diff: 3 Type: TF Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Applied 19) Hedge funds use risky strategies to successfully earn high returns for wealthy investors.

Answer: FALSE Diff: 3 Type: TF Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Applied 20) Most mutual funds are conservative investments.

Answer: FALSE Diff: 2 Type: TF Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Recall 21) The most important considerations in choosing a mutual fund is your investment objectives and comparing fees and expenses charged.

Answer: TRUE Diff: 1 Type: TF Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Recall 22) If you own seven mutual funds further diversification is not recommended.

Answer: FALSE Diff: 2 Type: TF Categories: Deciding Among Mutual Funds Financial Type: Qualitative Skill Type: Applied 23) A fund with a favourable historical track record is likely to continue to outperform funds with similar objectives in the future.

Answer: FALSE Diff: 2 Type: TF Categories: Deciding Among Mutual Funds Financial Type: Qualitative Skill Type: Applied

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24) Segregated funds are insurance products, but are similar to mutual funds as they offer a guarantee of as much as 100 percent of the funds invested upon maturity or the death of the owner.

Answer: FALSE Diff: 2 Type: TF Categories: Segregated Funds Financial Type: Qualitative Skill Type: Recall 25) Both segregated funds and mutual funds generally offer creditor protection in the event of bankruptcy.

Answer: FALSE Diff: 1 Type: TF Categories: Segregated Funds Financial Type: Qualitative Skill Type: Recall 26) Global bond funds potentially offer higher yields than Canadian bond funds, but have higher MERs and more risk.

Answer: TRUE Diff: 2 Type: TF Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall 27) Exchange-traded funds (ETFs) are similar to index mutual funds but have lower MERs and are traded like stocks, so have brokerage commission charges when buying and selling them.

Answer: TRUE Diff: 2 Type: TF Categories: Exchange Traded Funds Financial Type: Qualitative Skill Type: Recall 28) A conservative investor should only invest in a variety of bond mutual funds.

Answer: FALSE Diff: 3 Type: TF Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Applied 29) Because exchange-traded funds (ETFs) are passively managed, they are a good choice for an investor who is looking for tax efficiency.

Answer: TRUE Diff: 3 Type: TF Categories: Exchange Traded Funds Financial Type: Qualitative Skill Type: Applied 5 © 2019 Pearson Canada Inc.

30) The tracking error on an index mutual fund refers to how closely an index fund mirrors the movements of the index it represents.

Answer: TRUE Diff: 1 Type: TF Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall Multiple Choice 1) Advantages of investing in mutual funds include all of the following except A) diversification of your investment.

B) professional management.

C) meeting specific investment goals.

D) eliminating systematic risk.

Answer: D Diff: 1 Type: MC Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall 2) For mutual funds, the net asset value (NAV) is reported A) on an hourly basis.

B) on a daily basis.

C) monthly on the close of the last Friday.

D) weekly on Fridays just after market close.

Answer: B Diff: 2 Type: MC Categories: Quotations of Mutual Funds Financial Type: Qualitative Skill Type: Recall 3) Which of the following is true about MERs? A) MERs only include manager and sales expenses.

B) Mutual funds with lower MERs tend to outperform those with higher.

C) All types of mutual funds have similar MERs. D) You need to subtract the MER from the posted return to figure out performance.

Answer: B Diff: 3 Type: MC Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall

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4) Mutual funds, which sell units directly to investors and repurchase units from investors who want to sell, are called A) open-market funds.

B) open-end funds.

C) closed-end funds.

D) fair value funds.

Answer: B Diff: 2 Type: MC Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall 5) A family of mutual funds is A) where all of the funds have the same objective such as bond funds.

B) a number of funds with different objectives operated by one investment company.

C) where a number of competing investment companies pool their resources.

D) quite rare in the mutual fund industry.

Answer: B Diff: 2 Type: MC Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall 6) Which of the following characteristics is true of closed-end funds?

A) They are not regulated.

B) They repurchase units from investors.

C) They are bought and sold through a mutual fund dealer.

D) They may sell above or below NAV. Answer: D Diff: 2 Type: MC Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall 7) Regarding load and no-load mutual funds A) load funds have outperformed no-load funds on average.

B) no-load funds have outperformed load funds on average.

C) they tend to perform about the same when the commission is included.

D) load funds require a broker, whereas no-load funds must be purchased directly.

Answer: B Diff: 3 Type: MC Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall

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8) Which of the following is true about mutual fund expenses?

A) International equity funds often have higher MERs. B) The MERS of all kinds of funds are roughly the same.

C) Management fees include all sales and administration expenses.

D) The funds with higher MERs pay the sales people the most.

Answer: A Diff: 2 Type: MC Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Recall 9) You are considering investing in a no-load mutual fund that focuses on growth stocks or in an index fund based on the TSX. The growth stocks fund had a five year average annual return of 11 percent with MER of 2.6 percent. The index fund had a five year average annual return of 11 percent with MER of 1.1 percent. Assuming equal risk, you should buy A) the index fund because it has a lower MER. B) the growth fund because its portfolio performed better.

C) some of both, for diversification, as they performed equally.

D) neither, because the expenses are too high for funds of this type.

Answer: C Diff: 3 Type: MC Categories: Return and Risk of a Mutual Fund Financial Type: Quantitative Skill Type: Applied 10) Which of the following is a stock mutual fund?

A) Asset allocation fund B) Balanced growth and income C) Mid-cap fund D) Money market fund Answer: C Diff: 2 Type: MC Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall 11) Which of the following stock funds would probably have the lowest risk and return?

A) TSX Index B) Capital appreciation C) Dividend D) Technology Sector Answer: C Diff: 2 Type: MC Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Applied 8 © 2019 Pearson Canada Inc.

12) Investing in which of the following funds will typically give you the least diversification?

A) Growth funds B) Large-Cap funds C) Equity income funds D) Sector funds Answer: D Diff: 2 Type: MC Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Applied 13) The return on an index fund may be less than the return on the index it represents because of A) tracking errors and costs.

B) management fees.

C) load fees.

D) dividends and taxation.

Answer: A Diff: 3 Type: MC Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall 14) Funds that attempt to mirror the movements of existing broad market indicators are called A) class funds.

B) stock funds.

C) index funds.

D) ETFs. Answer: C Diff: 1 Type: MC Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall 15) Index funds offer tax advantages because A) they trade frequently, generating frequent capital gains.

B) they generate less capital gains through trades.

C) they have higher MERs which reduces taxable distributions.

D) they do not receive dividends or interest.

Answer: B Diff: 2 Type: MC Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall

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16) The difference between an international fund and a global fund is that A) global funds invest in Canadian firms and those of other countries too.

B) international funds invest in Canadian firms and those of other countries too.

C) international funds invest in specified countries while global funds have no restrictions.

D) there is no difference except in name.

Answer: A Diff: 2 Type: MC Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall 17) Global bond funds A) are issued by Canadian firms or governments.

B) are always higher yielding than Canadian bond funds.

C) are subject to interest and exchange rate risk.

D) cannot include Canadian bonds.

Answer: C Diff: 2 Type: MC Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Recall 18) In non-registered accounts, investors in high marginal tax brackets will normally prefer mutual funds that generate A) dividends.

B) long-term capital gains.

C) long-term stock dividends.

D) short-term capital gains.

Answer: B Diff: 3 Type: MC Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Applied 19) Which of the following can be a source of taxation even if not paid out to owners of a Canadian bond mutual fund?

A) Interest, dividends and capital gains B) Interest and capital gains C) Interest and dividends D) Interest income only Answer: B Diff: 2 Type: MC Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Applied

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20) The possibility that the Bank of Canada may raise the prime rate is an example of A) political risk.

B) exchange rate risk.

C) interest rate risk.

D) monetary risk.

Answer: C Diff: 2 Type: MC Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Applied 21) Money market mutual funds are A) high risk and not very liquid.

B) high risk and very liquid.

C) low risk and not very liquid.

D) low risk and very liquid.

Answer: D Diff: 2 Type: MC Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Recall 22) Which of the following bond mutual funds have both the highest default risk and interest rate risk?

A) Long-term AAA corporate bonds B) Short-term BBB corporate bonds C) Short-term high-yield corporate bonds D) High-yield long-term corporate bonds Answer: D Diff: 2 Type: MC Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Applied 23) In order to select appropriate mutual funds for yourself, you should determine your investment objectives, evaluate your risk tolerance, and the final step is to A) review and compare key information from the relevant Fund Facts documents.

B) review and compare key information from the simplified prospectuses.

C) open an account with a broker.

D) consult a certified financial planner.

Answer: A Diff: 2 Type: MC Categories: Deciding Among Mutual Funds Financial Type: Qualitative Skill Type: Applied

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24) The most important expense statistic mentioned in the Fund Facts is the A) gross expense ratio.

B) management expense ratio.

C) total expense ratio.

D) trading expense ratio.

Answer: B Diff: 2 Type: MC Categories: Deciding Among Mutual Funds Financial Type: Qualitative Skill Type: Recall 25) Which of the following applies to global bond funds in comparison to Canadian bond funds?

A) They are a safe way to ensure higher yields.

B) They have less interest rate risk, but more exchange rate risk.

C) The currency rate risk is offset by the diversification benefits.

D) They have potential for higher yields and have higher risk.

Answer: D Diff: 3 Type: MC Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Applied 26) In evaluating the performance of your Canadian equity mutual fund, the most appropriate comparison would be its performance relative to the A) cost of living (CPI) index.

B) S&P 500 index.

C) Dow Jones index.

D) TSX index.

Answer: D Diff: 3 Type: MC Categories: Quotations of Mutual Funds Financial Type: Qualitative Skill Type: Applied 27) A mutual fund with investments in bonds, stock, and preferred shares would best be described as A) a balanced fund.

B) a three sector fund.

C) a diversified fund.

D) a balanced growth and income fund.

Answer: A Diff: 1 Type: MC Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall

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28) A mutual fund that invests only in shares of gold mining companies would be called a A) growth fund.

B) small-cap fund.

C) Canadian equity fund.

D) sector fund.

Answer: D Diff: 2 Type: MC Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall 29) You own 500 units of a fund that now has a NAV of $12.30. What is your total investment worth?

A) $6150 B) $61 500 C) $6150, minus the load fee D) $6150, plus the load fee Answer: A Diff: 2 Type: MC Categories: Background on Mutual Funds Financial Type: Quantitative Skill Type: Applied 30) If you had $12 000 to invest in mutual funds which had a 2 percent front end load fee and NAVPS of $15, how many units could you buy?

A) 784 B) 800 C) 816 D) Unknown Answer: A Diff: 2 Type: MC Categories: Background on Mutual Funds Financial Type: Quantitative Skill Type: Applied

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31) Three and a half years ago you purchased 1200 units of a fund with a NAV of $16.75. The NAV is now $34.50 and the fund had a 6 percent redemption fee declining at 1 percent per year and based on the value of the holdings at the time of the transaction. What will be the proceeds if you sell it today?

A) $38 744 B) $41 400 C) $40 158 D) $40 797 Answer: C Diff: 3 Type: MC Categories: Background on Mutual Funds Financial Type: Quantitative Skill Type: Applied 32) You own 600 units of a fund with a current NAV of $14.36. Your portion of the fund distributions is $718.00 of dividends, capital gains, and interest earnings. What will be your total units now?

A) 600 units B) 605 units C) 550 units D) 650 units Answer: D Diff: 3 Type: MC Categories: Return and Risk of a Mutual Fund Financial Type: Quantitative Skill Type: Applied 33) What is an important difference between an index mutual fund and an exchange traded fund (ETF)?

A) ETFs are better managed.

B) ETFs trade like stocks.

C) There are more types of ETFs. D) ETFs have higher MERs. Answer: B Diff: 2 Type: MC Categories: Types of Mutual Funds Financial Type: Quantitative Skill Type: Applied

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34) One advantage that segregated funds have over mutual funds is A) the beneficiary designation.

B) no loads.

C) lower MERs. D) higher MERs. Answer: A Diff: 2 Type: MC Categories: Segregated Funds Financial Type: Qualitative Skill Type: Recall 35) For whom would purchasing segregated funds would be most appropriate?

A) A young married couple looking for a high risk long-term growth portfolio B) A business owner who deals with creditors on a regular basis C) An investor seeking low management fees and low MERs D) An investor seeking special diversification in sector funds Answer: B Diff: 3 Type: MC Categories: Segregated Funds Financial Type: Qualitative Skill Type: Applied 36) Studies show that segregated funds A) consistently outperform stock markets because of their guarantee.

B) consistently outperform mutual funds because of the probate fees.

C) consistently underperform mutual funds because of their higher expenses.

D) consistently outperform mutual funds because of the important insurance option.

Answer: C Diff: 2 Type: MC Categories: Segregated Funds Financial Type: Qualitative Skill Type: Recall 37) Which of the following uses the most risky strategies?

A) Sector funds B) Hedge funds C) Segregated funds D) Small-Cap funds Answer: B Diff: 2 Type: MC Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Recall

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38) The units of a segregated fund differ from the units of a mutual fund in that A) a segregated fund does not report a NAV. B) the units of the segregated fund are owned by the unit holder.

C) each unit is insured from the date of purchase.

D) the units of the segregated fund are owned by the insurance company.

Answer: D Diff: 3 Type: MC Categories: Segregated Funds Financial Type: Qualitative Skill Type: Recall 39) At 55 years of age you may want to reduce risk by switching from very aggressive funds to balanced funds. If your portfolio is worth $498 000 and your family fund company charges you a 2 percent switch fee and 3 percent redemption fee, what will it cost to change funds?

A) $4980 B) $9960 C) $24 900 D) $14 940 Answer: B Diff: 2 Type: MC Categories: Deciding Among Mutual Funds Financial Type: Quantitative Skill Type: Applied 40) If Raymond does not want to pay any fees to invest in mutual funds, he should pick A) no-load mutual funds.

B) front-end load mutual funds.

C) back-end load mutual funds.

D) zero-fee mutual funds.

Answer: A Diff: 1 Type: MC Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Applied 41) If Rebecca's mutual fund has a sales charge schedule saying that if the fund is sold within the first year, the sales charge is 6 percent and if it is sold in the third year, the sales charge becomes 4.5 percent, Rebecca's mutual fund has a A) low load.

B) discount-fee.

C) broker commission.

D) declining redemption schedule.

Answer: D Diff: 1 Type: MC Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Applied 16 © 2019 Pearson Canada Inc.

42) What is the biggest advantage of an ETF over other funds?

A) Better management B) Lower MERs C) Economies of scale D) Diversification Answer: B Diff: 2 Type: MC Categories: Quotations of Mutual Funds Financial Type: Qualitative Skill Type: Applied 43) If Betty has inherited significant wealth but has very limited investment knowledge, which of the following funds would be least appropriate for her?

A) Segregated funds B) Dividend funds C) Hedge funds D) Balanced funds Answer: C Diff: 3 Type: MC Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Applied 44) If Becky is going to retire soon, which of the following funds is most appropriate for her?

A) Income funds B) Growth funds C) Hedge funds D) Small-cap funds Answer: A Diff: 2 Type: MC Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Applied 45) Which of the following bond mutual funds likely has highest risk?

A) High-yield bond funds B) Canadian bond funds C) Canadian corporate bond index fund D) Canadian long-term bond index fund Answer: A Diff: 2 Type: MC Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall

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46) Which of the following applies to hedge funds?

A) They are regulated similarly to mutual funds.

B) They are appropriate for business owners who could benefit from creditor protection.

C) They are not regulated by a securities commission.

D) They use leverage and hedging to guarantee above average returns.

Answer: C Diff: 3 Type: MC Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall 47) Which of the following must be considered before assessing the skills of equity fund managers?

A) The industry sectors held in the funds B) The interest yield curve C) The P/E ratios of key market sectors D) The average dividend payout ratios Answer: A Diff: 3 Type: MC Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Applied 48) Which is the best reason for investing in funds?

A) Management expense ratios B) Portfolio managers' performance C) Sector investment goals D) Diversification Answer: D Diff: 1 Type: MC Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall 49) Which of the following statements is generally true when comparing mutual funds to exchange traded funds?

A) Exchange traded funds are more tax efficient than mutual funds.

B) Mutual funds are more efficient than exchange traded funds.

C) Exchange traded funds and mutual funds are equally tax efficient.

D) In order to know which is more tax efficient we must first know what type of investments are held in the respective funds.

Answer: A Diff: 2 Type: MC Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall 18 © 2019 Pearson Canada Inc.

50) If an investor was concerned about the tax efficiency of their mutual fund, which type of mutual funds should they buy?

A) Open-end mutual funds B) Close-end mutual funds C) Front-end load mutual funds D) Back-end load mutual funds Answer: A Diff: 2 Type: MC Categories: Background on Mutual Funds Financial Type: Qualitative Skill Type: Recall Essay 1) List ten types of bond mutual funds in order of least risk to highest, considering multiple risk factors and indicate which ones are most crucial for each type.

Answer: Various ones could be indicated, among the following T-bills or Money Market, practically speaking T-Bills have no risk.

Short-term federal government bonds, low interest rate risk and reinvestment risk Short-term provincial bonds, very low default risk, low interest rate risk and reinvestment risk Short-term corporate, some default risk depending on the grades, low interest rate risk and reinvestment risk Intermediate federal, provincial and corporate bond funds: similar to short term, but with higher interest rate risk Long-term federal, provincial and corporate bond funds: similar to intermediate term, but with higher interest rate risk Global bond funds, same as for long-term corporate bonds, with currency risk added which is very significant, and potentially more default risk depending on the countries invested in.

High-yield corporate bonds, significant default risk, as well the higher interest rate risk applied to long-term corporate bonds.

Diff: 3 Type: ES Categories: Return and Risk of a Mutual Fund Financial Type: Qualitative Skill Type: Applied

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2) List considerations you should take into account when purchasing a mutual fund.

Answer: Your personal risk tolerance and goals for the funds.

Closely review the Fund Fact information sheets to determine which best match with your objectives.

Investment objective - does that fit with your needs?

Return history compared with its peers, just to make sure not a bottom performer Expense ratio (MER) compared with its peers Load structure to make sure it fits your needs Minimum investment and monthly amount requirements Risk profile of the fund compared with peers Holdings in the fund, types of stocks or bonds in the portfolio Assets under management, performance of the managers... the company Diff: 3 Type: ES Categories: Deciding Among Mutual Funds Financial Type: Qualitative Skill Type: Applied 3) A mutual fund has a beginning balance of $100 million, earns interest of $10 million, receives dividends of $15 million, and has expenses of $5 million. If 10 million shares are outstanding, what is the NAVPS? Answer: ($100 million + $10 million + $15 million - $5 million)/10 million shares = $12 Diff: 3 Type: ES Categories: Background on Mutual Funds Financial Type: Quantitative Skill Type: Applied 4) Compare three factors (such as level of diversification, MERs, management and/or performance) between segregated funds, ETFs and mutual funds. Provide your own opinion as to the advantages or disadvantages.

Answer: Students could select different variables: Diversification: all diversified, but depends on which index, or fund objective. Sector funds and certain indexes are not very well diversified and can be much higher risk than a broad market index.

MERs: highest for segregated funds, lowest for ETFs Management styles: ETFs - passive, segregated funds and mutual funds - active Security: Only segregated funds offer any kind of maturity or death benefit guarantee.

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5) What would be the return on a $1000 investment in a mutual fund whose NAV is $20? The fund has a 3 percent front-end load and, during the holding period, $400 of fund distributions are reinvested at a NAV of $25 (no load applied to reinvestment). The fund is ultimately sold at a NAV of $24. (Round to the nearest tenth of a percent.)

Answer: Answer is: ($1000 - $30 load)/$20 = 48.5 shares (initial purchase) $400/$25 = 16 shares (reinvested distributions) 64.5 shares × $24 $1548 (proceeds from sale) (1548 - 1400)/1000 = 14.8 percent Diff: 3 Type: ES Categories: Return and Risk of a Mutual Fund Financial Type: Quantitative Skill Type: Applied

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Personal Finance, Canadian Ed., 4e (Madura) Part 5 Retirement and Estate Planning - Retirement Planning True/False 1) The combination of Old Age Security and the Canada Pension plan provide sufficient income to support the retirement lifestyle of most individuals.

Answer: FALSE Diff: 1 Type: TF Categories: Canada Pension Plan Financial Type: Qualitative Skill Type: Recall 2) To be eligible for Old Age Security retirement benefits, you will need to have worked in Canada for at least 10 years since turning 18.

Answer: FALSE Diff: 2 Type: TF Categories: Old Age Security Financial Type: Qualitative Skill Type: Recall 3) Old Age Security is funded by general tax revenues.

Answer: TRUE Diff: 2 Type: TF Categories: Old Age Security Financial Type: Qualitative Skill Type: Recall 4) Old Age Security can be deferred for five years, which would increase ones benefit by an additional 36 percent.

Answer: TRUE Diff: 2 Type: TF Categories: Old Age Security Financial Type: Qualitative Skill Type: Recall 5) Pending rule changes from the government will require you to be 67 years old (instead of 65) before you can begin collecting Old Age Security retirement benefits.

Answer: FALSE Diff: 2 Type: TF Categories: Old Age Security Financial Type: Qualitative Skill Type: Applied

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6) If you had lived in Canada for 30 years, had $50 000 income from various pensions and were old enough to receive Old Age Security benefits, you would qualify for seventy five percent of the maximum OAS benefit.

Answer: TRUE Diff: 3 Type: TF Categories: Old Age Security Financial Type: Qualitative Skill Type: Applied 7) The Old Age Security system allows you to receive reduced benefits if you retire up to five years early.

Answer: FALSE Diff: 2 Type: TF Categories: Old Age Security Financial Type: Qualitative Skill Type: Recall 8) A pensioner who only receives Old Age Security income will also receive the maximum Guaranteed Income Supplement.

Answer: TRUE Diff: 2 Type: TF Categories: Old Age Security Financial Type: Qualitative Skill Type: Recall 9) If you earn the maximum pensionable earnings (YMPE) amount in a given year, you and your employer will have funded the maximum amount to the Canada Pension Plan for that year.

Answer: TRUE Diff: 2 Type: TF Categories: Canada Pension Plan Financial Type: Qualitative Skill Type: Applied 10) If you are age 65 and were in a defined-benefit pension plan for 22 years which was based on earning a benefit of 1.8 percent of your best three years earnings, you would receive around 39.6 percent of your salary from your pension.

Answer: TRUE Diff: 2 Type: TF Categories: Employment Sponsored Retirement Plans Financial Type: Quantitative Skill Type: Applied

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11) Once you are 'vested' in your company's pension plan, you can cash in the funds in if you decide to leave the company.

Answer: FALSE Diff: 3 Type: TF Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Applied 12) In the past 10 years or so, many employers have shifted from defined-benefit to definedcontribution retirement plans to reduce their financial risk in funding employees' retirements.

Answer: TRUE Diff: 2 Type: TF Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Recall 13) If your employer offers a pension plan, that should be the first plan you consider because your employer will at least match your contributions to the plan.

Answer: TRUE Diff: 2 Type: TF Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Applied 14) On average, a final average earnings plan and a career average plan will generate the same level of pension income.

Answer: FALSE Diff: 2 Type: TF Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Recall 15) If you earned $66 000 in the previous year and received a pension adjustment of $8200, then you would have $3680 RRSP room left for that year.

Answer: TRUE Diff: 3 Type: TF Categories: Employment Sponsored Retirement Plans Financial Type: Quantitative Skill Type: Applied

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16) Once you leave a job with an employer, you will probably have to forfeit your pension plan unless you have been with the company for five or more years.

Answer: FALSE Diff: 1 Type: TF Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Recall 17) An RRSP allows tax-deductible contributions of up to 18 percent of gross income regardless of whether you are enrolled in a pension plan at work.

Answer: FALSE Diff: 1 Type: TF Categories: Individual Retirement Savings Plans Financial Type: Qualitative Skill Type: Recall 18) Sally can use the Home Buyers Plan (HBP) to withdraw $50 000 from her RRSP for a down payment on a home as long as it is her first home and she can pay it back in ten years.

Answer: FALSE Diff: 2 Type: TF Categories: Individual Retirement Savings Plans Financial Type: Qualitative Skill Type: Applied 19) All of your contributions to RPPs and RRSPs are tax deductible dollar for dollar against gross earned income.

Answer: TRUE Diff: 2 Type: TF Categories: Individual Retirement Savings Plans Financial Type: Qualitative Skill Type: Recall 20) Saving $2000 per year from age 25 to 35 will give you more money at age 65 than saving $4000 per year from age 40 to 50, if all your funds grow at five percent.

Answer: TRUE Diff: 3 Type: TF Categories: Estimating Your Future Retirement Savings Financial Type: Quantitative Skill Type: Applied 21) The Lifelong Learning Plan (LLP) allows full-time students to withdraw $20 000 per year for two years from their RRSPs to finance their educations.

Answer: FALSE Diff: 3 Type: TF Categories: Your Retirement Planning Decisions Financial Type: Qualitative Skill Type: Recall 4 © 2019 Pearson Canada Inc.

22) A registered life annuity has an advantage over a RRIF because you will no longer be exposed to the risk that your funds could run out before your death.

Answer: TRUE Diff: 1 Type: TF Categories: Your Retirement Planning Decisions Financial Type: Qualitative Skill Type: Applied 23) A TFSA is not as good for retirement funding as an RRSP. Answer: FALSE Diff: 2 Type: TF Categories: Your Retirement Planning Decisions Financial Type: Qualitative Skill Type: Applied 24) According to a 2007 study, two thirds of Canadians who are expecting to retire in in 2030 are not saving enough to cover necessary living expenses.

Answer: TRUE Diff: 1 Type: TF Categories: Your Retirement Planning Decisions Financial Type: Qualitative Skill Type: Recall 25) Both OAS and CPP require pensioners to apply for the benefits.

Answer: TRUE Diff: 1 Type: TF Categories: Canada Pension Plan Financial Type: Qualitative Skill Type: Recall 26) Defined contribution pension plans are not worth taking advantage of because they are essentially the same as an RRSP. Answer: FALSE Diff: 2 Type: TF Categories: Canada Pension Plan Financial Type: Qualitative Skill Type: Applied 27) A pension assignment is when a married or common-law couple decides to share their CPP retirement pensions in order to reduce their income taxes.

Answer: TRUE Diff: 1 Type: TF Categories: Canada Pension Plan Financial Type: Qualitative Skill Type: Recall 5 © 2019 Pearson Canada Inc.

28) Once a pensioner reaches age 71, she is able begin withdrawing money from her RRSP tax free.

Answer: FALSE Diff: 2 Type: TF Categories: Old Age Security Financial Type: Qualitative Skill Type: Applied 29) LIRAs and locked-in RRSPs are a lot less flexible than RRSPs because they convert to LIFs and LRIFs and have limits on the amounts that can be withdrawn each year.

Answer: TRUE Diff: 3 Type: TF Categories: Retirement Income Conversion Options Financial Type: Qualitative Skill Type: Applied 30) Saving $100 per month from age 20 to age 70 with an eight percent return (compounded monthly) will give you over three quarters of a million dollars.

Answer: TRUE Diff: 3 Type: TF Categories: Old Age Security Financial Type: Quantitative Skill Type: Applied Multiple Choice 1) Payments made to you by Old Age Security are based on A) your residency in Canada between ages 16 and 65.

B) the length of time you worked in Canada prior to age 65.

C) your average YMPE earnings between ages 18 and 65.

D) your adult residency in Canada between 10 and 40 years.

Answer: D Diff: 2 Type: MC Categories: Old Age Security Financial Type: Qualitative Skill Type: Recall

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2) In 2017, if you were a resident of Canada from age 24 to 65, the monthly OAS benefit payment you would have received would have been approximately A) $590.

B) $680.

C) $780.

D) $880.

Answer: A Diff: 2 Type: MC Categories: Old Age Security Financial Type: Qualitative Skill Type: Applied 3) Old Age Security benefits A) can be deferred five years which would increase your benefit by 36%.

B) begins to be clawed back for people whose income reaches $50,000.

C) can be claimed at age 60, but at a reduced amount.

D) are a nontaxable benefit.

Answer: A Diff: 2 Type: MC Categories: Old Age Security Financial Type: Qualitative Skill Type: Recall 4) Which of the following applies to the CPP? A) You will collect more total CPP if you claim it at age 60.

B) The amount you qualify for can be increased by up to 42% if you defer claiming it.

C) Most Canadians qualify for the maximum CPP retirement income.

D) It is a tax-free benefit that provides an income of roughly $16 000 per year.

Answer: B Diff: 2 Type: MC Categories: Canada Pension Plan Financial Type: Qualitative Skill Type: Recall 5) If you were 28 years old when you moved to Canada and became a resident, at age 65 you would be entitled to A) a full OAS pension if your income is below $74 000.

B) an OAS pension of 27/30 if your income is below approximately $115 000.

C) an OAS pension depending on your life time YMPE earnings.

D) an OAS pension of 37/40 if your income is below approximately $74 000.

Answer: D Diff: 3 Type: MC Categories: Old Age Security Financial Type: Qualitative Skill Type: Applied

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6) What was the approximate maximum annual CPP when applying at retirement age in 2017?

A) $13 400 B) $10 000 C) $16 000 D) $18 000 Answer: A Diff: 2 Type: MC Categories: Canada Pension Plan Financial Type: Qualitative Skill Type: Recall 7) If, at regular retirement age, you would have qualified for $1000 CPP income and $500 OAS income, what monthly income would you receive if you deferred them both by five years?

A) $1950 B) $2100 C) $2130 D) $2040 Answer: B Diff: 3 Type: MC Categories: Canada Pension Plan Financial Type: Quantitative Skill Type: Applied 8) For each resident of Canada, their CPP entitlement is calculated based on their A) number of years as working adult resident of Canada with income under .

B) income earned each year between the YBE and YMPE. C) number of years up to age 65 as an adult resident of Canada.

D) income earned above the YMPE each year.

Answer: B Diff: 2 Type: MC Categories: Canada Pension Plan Financial Type: Qualitative Skill Type: Recall 9) The year's maximum pensionable earnings (YMPE) will A) change each year based on a calculation of average incomes in Canada.

B) change each year based on inflation as measured by the CPI. C) be adjusted periodically based on government fiscal policy.

D) be adjusted every few years based on average Canadian incomes and CPI. Answer: A Diff: 2 Type: MC Categories: Canada Pension Plan Financial Type: Qualitative Skill Type: Recall

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10) For retirees, the most important difference between CPP and OAS is that A) Only OAS can be taken early at a reduced amount.

B) Only OAS is based on income earned each year relative to the YMPE. C) Only CPP can be taken early at a reduced amount.

D) Only CPP can be deferred to receive an increased monthly amount.

Answer: C Diff: 2 Type: MC Categories: Canada Pension Plan Financial Type: Qualitative Skill Type: Applied 11) If Ramzi earned $46 000 from employment, approximately how much will his employer deduct for his CPP contribution? (YMPE $52 500; YBE $3500) A) $207.

B) $1912 C) $3825 D) $4140 Answer: B Diff: 3 Type: MC Categories: Canada Pension Plan Financial Type: Quantitative Skill Type: Applied 12) CPP offers A) a full survivor benefit to the spouse of a recipient who was receiving CPP on death.

B) the option of collecting it up to five years early with a reduced benefit.

C) an exclusions of 30 percent of your lowest earning years in the calculation of your CPP entitlement.

D) the GIS benefit for low income seniors.

Answer: B Diff: 2 Type: MC Categories: Canada Pension Plan Financial Type: Qualitative Skill Type: Recall 13) Which of the following is a tax-free benefit?

A) OAS B) CPP C) GIS D) YBE Answer: C Diff: 2 Type: MC Categories: Old Age Security Financial Type: Qualitative Skill Type: Recall

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14) Allred Corporation's retirement plan will pay $250 a month for each year worked for the company commencing on the employee's 65th birthday. People must work for the company for 10 years to qualify for the pension. This plan is a A) flat benefit defined-benefit plan.

B) defined-contribution plan.

C) LIRA. D) unit benefit defined benefit plan.

Answer: A Diff: 2 Type: MC Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Applied 15) In the last 10 years many employers have shifted from A) defined-contribution to defined-benefit pension plans.

B) defined-benefit to defined-contribution pension plans.

C) group RRSPs to pension plans.

D) registered retirement income funds to defined-contribution pension plans.

Answer: B Diff: 1 Type: MC Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Recall 16) If you have been in an employer-sponsored pension plan for three years and you leave your employer well before retirement A) you are not entitled to the employer's contribution to your plan.

B) you can transfer the funds to a RRIF. C) you can transfer the plan to your new employer has a plan the permits the transfer.

D) you can withdraw the funds tax-free within 30 days of departure, if the amount is under .

Answer: C Diff: 2 Type: MC Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Recall

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17) You are a member of a defined-benefit plan that pays a two percent benefit for each year of service based on your best five year's earnings. If you qualify for an unreduced pension and have worked for the company for 30 years, your pension will be approximately A) The answer is unknown because the benefit must be calculated by an actuary.

B) 60 percent of the average of your best five years' earnings.

C) 50 percent of the average of your best five years' earnings.

D) 60 percent of the average of your last five years' earnings.

Answer: B Diff: 2 Type: MC Categories: Employment Sponsored Retirement Plans Financial Type: Quantitative Skill Type: Applied 18) With which of the following plans will you be able to most accurately predict your retirement income in advance?

A) Defined-contribution plan B) RRSP C) Traditional LIRA D) Defined-benefit plan Answer: D Diff: 1 Type: MC Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Recall 19) Most defined-contribution plans allow some investment flexibility including the option to choose A) individual mortgages.

B) commodity futures.

C) real estate building rental.

D) large-cap mutual fund units.

Answer: D Diff: 2 Type: MC Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Recall

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20) The retirement benefit you receive from a money purchase defined-contribution plan will be based on A) a certain percentage of your income in the later years of employment.

B) a formula that guarantees a set amount to support a modest retirement lifestyle.

C) the performance of the funds contributed on your behalf.

D) the performance of your company's shares.

Answer: C Diff: 2 Type: MC Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Recall 21) How much you can contribute to your RRSP depends on your A) earned income from the current year.

B) tax bracket and previous contributions.

C) accumulated room and the performance of your RRSP holdings.

D) earned income and pension adjustments from previous years.

Answer: D Diff: 1 Type: MC Categories: Individual Retirement Savings Plans Financial Type: Qualitative Skill Type: Applied 22) You have earned income of $56 000 for last year. You have a defined-contribution plan to which your employer contributes 50 percent. The employer contributed $3500. How much of an RRSP contribution can you make this year, assuming you have no accumulated RRSP room?

A) $3500 B) $10 080 C) $3080 D) $6580 Answer: C Diff: 2 Type: MC Categories: Individual Retirement Savings Plans Financial Type: Quantitative Skill Type: Applied 23) Even though you expect to receive OAS and CPP, a common rule of thumb is in order to be able to retire comfortably is A) to save an additional 10 percent of gross earnings in a variety of pension investments.

B) to save at least 10 percent of after-tax earnings in retirement accounts.

C) to make sure you are in a long-term pension plan.

D) to maximize OAS and CPP and GIS. Answer: B Diff: 2 Type: MC Categories: Your Retirement Planning Decisions Financial Type: Qualitative Skill Type: Recall 12 © 2019 Pearson Canada Inc.

24) In an employer-sponsored retirement plan, you should contribute at least A) the amount that maximizes what the employer contributes.

B) three percent of your gross income in middle age.

C) one percent of your net income in your early working years.

D) nine percent of your gross income.

Answer: A Diff: 2 Type: MC Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Applied 25) If you are far from retirement age and wish to maximize your income in retirement, you should consider investing in A) government bonds or bond funds.

B) guaranteed investment certificates.

C) mutual funds with high-growth stocks.

D) corporate bonds.

Answer: C Diff: 1 Type: MC Categories: Your Retirement Planning Decisions Financial Type: Qualitative Skill Type: Recall 26) Which of the following is an important factor to consider in deciding between saving in a TFSA account or an RRSP account?

A) Your tax bracket B) The appropriate risk level C) Tax sheltering of investment income D) The types of investment vehicles Answer: A Diff: 2 Type: MC Categories: Your Retirement Planning Decisions Financial Type: Qualitative Skill Type: Applied 27) Which of the following is true about RRSPs? A) You can withdraw funds tax free once you are over age 71.

B) There is no limit on the dollar amount you can contribute.

C) Your investment income is tax-sheltered in the plan.

D) You can transfer the funds to your children tax-sheltered.

Answer: C Diff: 2 Type: MC Categories: Individual Retirement Savings Plans Financial Type: Qualitative Skill Type: Recall 13 © 2019 Pearson Canada Inc.

28) Which of the following is true regarding pension plans?

A) A defined contribution pension plan is the same as an RRSP. B) Once you are vested in a pension plan, you can transfer the assets to your RRSP if you leave.

C) Defined-benefit pension plans are always advantageous, but not defined-contribution plans.

D) You should take advantage of them because the employer must contribute at least half the funding.

Answer: D Diff: 2 Type: MC Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Applied 29) When you are young you should likely invest in investments that have A) lower risk and thus have higher growth potential.

B) higher risk and thus have lower growth potential.

C) lower risk and thus have lower growth potential.

D) higher risk and thus have higher growth potential.

Answer: D Diff: 2 Type: MC Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Recall 30) A financial contract that provides guaranteed payments until one's death is A) a life pension.

B) a life annuity.

C) a guaranteed RRIF. D) a life GIC. Answer: B Diff: 1 Type: MC Categories: Retirement Income Conversion Options Financial Type: Qualitative Skill Type: Recall 31) Pension splitting for couples over age 65 A) is only possible by equalizing RRSP plans.

B) requires the couple to do a CPP pension assignment first.

C) is only possible with employer pension and CPP income.

D) can be applied to pension, CPP and RRIF income.

Answer: D Diff: 3 Type: MC Categories: Employment Sponsored Retirement Plans Financial Type: Qualitative Skill Type: Recall

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32) If you invested $10 000 in an RRSP 30 years ago and it has a value today of amount will you pay tax on when you withdraw it during your retirement years?

A) Only on the initial $10 000 B) Only on the $90 000 growth C) On all $100 000 as it is withdrawn D) There is no tax to be paid in retirement.

Answer: C Diff: 2 Type: MC Categories: Estimating Your Future Retirement Savings Financial Type: Quantitative Skill Type: Applied

, what

33) RRSP contribution room A) can be carried forward until age 71.

B) is eliminated each year if it is not used.

C) can be carried forward until age 65.

D) can be used until age 75 as long as you have earned income.

Answer: A Diff: 2 Type: MC Categories: Individual Retirement Savings Plans Financial Type: Qualitative Skill Type: Applied 34) Tax-free withdrawals can be made from an RRSP under which of the following circumstances?

A) Each spouse can withdraw $40 000 tax-free for the purchase of a house.

B) You can withdraw $10 000 under the Lifelong Learning Plan to educate your children.

C) You can withdraw any amount necessary to pay off your mortgage if over 55 years of age.

D) You can withdraw $10 000 for two years for your spouse to be a full time student.

Answer: D Diff: 2 Type: MC Categories: Individual Retirement Savings Plans Financial Type: Qualitative Skill Type: Applied 35) Tax-free withdrawals from an RRSP for the HBP or LLP A) represent lost contribution room in the future.

B) must be paid back on schedule or added to your taxable income.

C) do not affect the compounding of your investments inside the RRSP. D) can be paid back to a spousal account instead of the account they were withdrawn from.

Answer: B Diff: 2 Type: MC Categories: Individual Retirement Savings Plans Financial Type: Qualitative Skill Type: Recall

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36) Before the end of the year in which you have your 71st birthday A) you must transfer your RRSP assets to a RRIF. B) the assets inside your RRSP must be converted to cash and placed in a RRIF. C) you must pay tax on the profits sheltered in your RRSP. D) you must start annual withdrawals of 18 percent of the value of your RRIF. Answer: A Diff: 2 Type: MC Categories: Retirement Income Conversion Options Financial Type: Qualitative Skill Type: Recall 37) Which of the following is true regarding LIRA and locked-in RRSP accounts at age 71?

A) LRIFs and LIFs can be cashed in but will be fully taxed.

B) Some provinces have LIFs and some have LRIFs. C) At age 80, LRIF funds must be used to purchase a life annuity.

D) LRIFs and LIFs have the same withdrawal schedule throughout the retirement years.

Answer: B Diff: 3 Type: MC Categories: Retirement Income Conversion Options Financial Type: Qualitative Skill Type: Recall 38) You want to save $400 000 to supplement your pension income to retire early at age 60. You have 26 years to accomplish this and already have saved. Assuming an eight percent annual return, how much should you set aside each month to reach this goal?

A) $311 B) $267 C) $1072 D) $994 Answer: B Diff: 3 Type: MC Categories: Estimating Your Future Retirement Savings Financial Type: Quantitative Skill Type: Applied

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39) What does Shelley need to save monthly to make sure she is on track to reach her retirement goal of having saved by the time she reaches age 65? She is 48 years old, has been contributing $400 per month and has in her RRSP. Assume she will make an annual return of seven percent.

A) $1275 B) $336 C) $1133 D) $681 Answer: B Diff: 3 Type: MC Categories: Estimating Your Future Retirement Savings Financial Type: Quantitative Skill Type: Applied 40) Phil has a defined-benefit plan that pays him a pension of two percent of his average best three years' earnings. His earnings are as follows: 2008, ; 2009, ; 2010, ; 2011, ; 2012, ; 2013, ; 2014, $75 000. What will be his annual pension benefit if he was with Plastis Co. for 22 years?

A) $16 224 B) $28 789 C) $31 240 D) $30 360 Answer: C Diff: 3 Type: MC Categories: Employment Sponsored Retirement Plans Financial Type: Quantitative Skill Type: Applied 41) You are retiring and the balance of your RRSP is $203 126. What amount of monthly income could this provide you for 20 years if you can get a four percent annual return?

A) $1223 B) $846 C) $880 D) $1782 Answer: A Diff: 3 Type: MC Categories: Estimating Your Future Retirement Savings Financial Type: Quantitative Skill Type: Applied

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42) What rate of return (compounded monthly) will you need, to reach a lump-sum total of in 20 years if you contribute $500 per month?

A) 12.1 percent B) 8.9 percent C) 13.2 percent D) 7.31 percent Answer: A Diff: 3 Type: MC Categories: Estimating Your Future Retirement Savings Financial Type: Quantitative Skill Type: Applied 43) Arnie is 21 years old and earning $35 000 annually. If inflation averages three percent annually over his career, what will he have to earn at age 60 to equal his current pay?

A) $105 500 B) $114 171 C) $128 500 D) $110 846 Answer: D Diff: 3 Type: MC Categories: Estimating Your Future Retirement Savings Financial Type: Quantitative Skill Type: Applied 44) If you want to save $1 000 000 for retirement with $200 monthly deposits at eight percent interest compounded monthly, how long will it take?

A) 50 years, 1 month B) 43 years, 3 months C) 44 years, 4 months D) 44 years, 1 month Answer: C Diff: 3 Type: MC Categories: Estimating Your Future Retirement Savings Financial Type: Quantitative Skill Type: Applied

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45) Danielle is 40 years old and has saved $150 000 in her RRSP. Her goal was to reach by the time she turns 60. How much more will she have to save each year if she maintains a nine percent annual return on her investments?

A) $3115 B) $31 150 C) $15 280 D) $6230 Answer: A Diff: 3 Type: MC Categories: Estimating Your Future Retirement Savings Financial Type: Quantitative Skill Type: Applied 46) Which is a key difference between RRSPs and TFSAs? A) TFSA withdrawals are taxed.

B) RRSPs' contribution limit accumulates.

C) TFSAs give tax deductions on contributions.

D) RRSP withdrawals are taxed.

Answer: D Diff: 3 Type: MC Categories: Your Retirement Planning Decisions Financial Type: Qualitative Skill Type: Recall 47) If you qualify, the maximum withdrawal allowed under the Home Buyers' Plan (HBP) is A) $20 000 per person.

B) $25 000 per person.

C) $25 000 per couple.

D) $40 000 per couple.

Answer: B Diff: 1 Type: MC Categories: Your Retirement Planning Decisions Financial Type: Qualitative Skill Type: Recall 48) According to Statistics Canada, for many Canadians, the most important source of retirement income will be A) the OAS benefits.

B) the investments in their RRSPs. C) the equity they have in their homes.

D) their pension plans.

Answer: C Diff: 2 Type: MC Categories: Your Retirement Planning Decisions Financial Type: Qualitative Skill Type: Recall 19 © 2019 Pearson Canada Inc.

49) Income from which of the following sources would have no impact on OAS clawback?

A) Tax free savings account (TFSA) B) Locked-in retirement account (LIRA) C) Canada Pension Plan D) Spousal RRSP Answer: A Diff: 2 Type: MC Categories: Old Age Security Financial Type: Qualitative Skill Type: Applied 50) The Guaranteed Income Supplement (GIS) benefit will be subject to clawback if A) the pensioner has liquid savings of at least $10,000.

B) the pensioner has total investments of at least $10,000.

C) the pensioner receives any income other than OAS. D) the pensioner is under the age of 65.

Answer: C Diff: 2 Type: MC Categories: Old Age Security Financial Type: Qualitative Skill Type: Recall Essay 1) List four sources of income you may be drawing on when you retire and rough estimates for how much you anticipate having from each source in today's dollars.

Answer: Many possible suggestions but should be in reasonable ranges: Old Age Security, full about $7000 per year CPP, full about $13 000 per year RRSPs, roughly $400 000 to produce $20 000 income Company pensions, TFSAs Real estate, net rental income Other investments are possible answers.

Diff: 3 Type: ES Categories: Your Retirement Planning Decisions Financial Type: Qualitative Skill Type: Applied

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2) Alonzo is 35 years old and earning $57 000 annually. He has a two percent defined-benefit plan based on the average of his last five years of income. He just started saving $2500 per year in an RRSP and expects to earn seven percent annually. Assume that the average of his last five years of employment earnings is $65 000. How much annual income will he have if he decides to retire at age 65 and expects to live to age 85?

Answer: At age 65 the RRSP will be worth a lump sum of $236 152.

Withdrawing this annually from an RRIF with the same rate of return (7%) for 20 years will provide him with an annual income of $22 291.

The defined benefit plan will provide him with 60 percent (30 years × 2 percent) × $65 000 = CPP assume he will get the maximum of $13 000 a year OAS, assume some claw back as his total income will be too high, from OAS. His total annual retirement income until age 85 will be approximately Diff: 3 Type: ES Categories: Estimating Your Future Retirement Savings Financial Type: Quantitative Skill Type: Applied

so estimate $6000

.

3) Paul starts saving $1000 per year from age 25, while Harper starts saving $5000 per year at age 45. At a moderate rate of return of 7 percent, how much will each have at age 65?

Answer: Paul C/Y 1, P/Y 1, N 40, I 7, PV 0, PMT -1000, CPT FV $199 635 Harper C/Y 1, P/Y 1, N 20, I 7, PV 0, PMT -5000, CPT FV $204 977 Paul will have $199 635. Harper will have $204 977, about the same.

Diff: 3 Type: ES Categories: Estimating Your Future Retirement Savings Financial Type: Quantitative Skill Type: Applied

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4) Identify the similarities and differences between RRSP and TFSA accounts and indicate implications.

Answer: There are many possibilities: Contribution room: Both accumulate year after year, however, the RRSP room is based on previous year's earned income (minus pension contributions) to a maximum of around , so a lot more room for high income individuals. The TFSA is currently $5500 per year for everyone and will likely increase in steps along with inflation.

Withdrawals: Taxed for RRSPS as income, not for TFSAs. With the RRSP you lose the room for ever unless using the HBP or LLP, but for TFSAs you can replace funds the next year. This makes the TFSA much more flexible for various financial planning goals and shorter term goals than retiring. It also makes the TFSA important in retirement as income from it will not be included in taxable income and limit OAS etc.

Tax deduction for contributions: Yes for RRSPs so attractive to those in higher tax bracket. No deduction for TFSAs. Tax sheltering: investment growth is tax sheltered in both accounts, but for RRSPs all funds withdrawn as fully taxed as income, but not for TFSAs Investment options: Similar variety available for both.

Diff: 2 Type: ES Categories: Your Retirement Planning Decisions Financial Type: Qualitative Skill Type: Applied

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Personal Finance, Canadian Ed., 4e (Madura) Part 5 Retirement and Estate Planning - Estate Planning True/False 1) Two key goals of estate planning are to ensure that your assets pass to your chosen beneficiaries and to minimize taxes to be paid.

Answer: TRUE Diff: 1 Type: TF Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall 2) If an administrator is appointed to settle an estate, this can cause delays, additional expenses and decisions the testator would not have wished.

Answer: TRUE Diff: 3 Type: TF Categories: Background on Wills Financial Type: Qualitative Skill Type: Applied 3) If you die intestate, your surviving spouse, or if you do not have a spouse, then your child, if over the age of 19, will become executor of your estate.

Answer: FALSE Diff: 2 Type: TF Categories: Background on Wills Financial Type: Qualitative Skill Type: Applied 4) If a spouse dies intestate all their assets will transfer to the surviving spouse.

Answer: FALSE Diff: 1 Type: TF Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall 5) A will, while nice to have, isn't particularly important in estate planning because each province has laws to determine the distribution of assets when a will was not created.

Answer: FALSE Diff: 1 Type: TF Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall

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6) To create a will, a person must be of legal age, be mentally competent, and not be subject to undue influence or threats by others.

Answer: FALSE Diff: 1 Type: TF Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall 7) English form wills must be dated, signed, and witnessed and are the most common in Canada.

Answer: TRUE Diff: 2 Type: TF Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 8) As long as a holograph is in the handwriting of the testator, it is valid in Canada.

Answer: FALSE Diff: 1 Type: TF Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 9) With samples of valid wills being available on websites and in bookstores, it is not recommended that a person incur the additional expense of hiring a lawyer to write a will.

Answer: FALSE Diff: 2 Type: TF Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 10) A preferential share claimed by a spouse may limit the amount granted to other beneficiaries.

Answer: TRUE Diff: 2 Type: TF Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Applied 11) Even a parent without significant net worth needs a will to appoint a guardian for their children.

Answer: TRUE Diff: 1 Type: TF Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall

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12) The residue of an estate is the amount of assets you own before taxes.

Answer: FALSE Diff: 2 Type: TF Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 13) If you get married, your will is cancelled in some provinces but not in others.

Answer: TRUE Diff: 2 Type: TF Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 14) If you are involved in a common-law relationship, it is the same as being married regarding preferential share entitlement.

Answer: FALSE Diff: 2 Type: TF Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Applied 15) The document that describes funeral preferences and indicates where key financial records are kept is called the letter of last rites.

Answer: FALSE Diff: 2 Type: TF Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 16) Minor changes to a will can be made with a simple document called a codicil.

Answer: TRUE Diff: 1 Type: TF Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 17) Probate is the legal process that ensures orderly distribution of assets and guardians of children are appointed as the testator wished.

Answer: TRUE Diff: 2 Type: TF Categories: Probate Fees and Taxes at Death Financial Type: Qualitative Skill Type: Recall

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18) On death the executor must sell all assets, thereby triggering taxes.

Answer: FALSE Diff: 3 Type: TF Categories: Probate Fees and Taxes at Death Financial Type: Qualitative Skill Type: Applied 19) There will be no tax on capital property held jointly with a surviving spouse.

Answer: FALSE Diff: 2 Type: TF Categories: Probate Fees and Taxes at Death Financial Type: Qualitative Skill Type: Recall 20) The final tax return is normally filed within 12 months of the date of death, or on April 30th of the following year, whichever is later.

Answer: FALSE Diff: 2 Type: TF Categories: Probate Fees and Taxes at Death Financial Type: Qualitative Skill Type: Applied 21) RRSPs can be rolled over to certain beneficiaries without being subject to tax.

Answer: TRUE Diff: 2 Type: TF Categories: Probate Fees and Taxes at Death Financial Type: Qualitative Skill Type: Recall 22) Estate planning commonly involves trusts, gifts, and charitable contributions for the purpose of avoiding taxes.

Answer: TRUE Diff: 1 Type: TF Categories: Estate Planning Strategies Financial Type: Qualitative Skill Type: Recall 23) A trust involves the transfer of assets to a third party who manages these assets for a beneficiary.

Answer: TRUE Diff: 2 Type: TF Categories: Estate Planning Strategies Financial Type: Qualitative Skill Type: Recall

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24) A testamentary trust comes into force upon death.

Answer: TRUE Diff: 2 Type: TF Categories: Estate Planning Strategies Financial Type: Qualitative Skill Type: Recall 25) A living will is a simple legal document in which individuals specify their preferences if they become mentally or physically disabled.

Answer: TRUE Diff: 1 Type: TF Categories: Other Aspects of Estate Planning Financial Type: Qualitative Skill Type: Recall 26) Enduring powers of attorney must only be granted to people of utmost trustworthiness because of their power.

Answer: TRUE Diff: 2 Type: TF Categories: Other Aspects of Estate Planning Financial Type: Qualitative Skill Type: Applied 27) Granting a durable power of attorney gives the authorized individual power to make decisions about your medical treatment, rather than leaving it to the health care professionals.

Answer: TRUE Diff: 2 Type: TF Categories: Other Aspects of Estate Planning Financial Type: Qualitative Skill Type: Recall 28) A handwritten will is called a notarial will.

Answer: FALSE Diff: 1 Type: TF Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall 29) In many cases, the executor and the trustee is the same individual.

Answer: TRUE Diff: 1 Type: TF Categories: Estate Planning Financial Type: Qualitative Skill Type: Recall

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30) A living will is a health care directive for individuals to specify their preferences if they become mentally or physically disabled.

Answer: TRUE Diff: 2 Type: TF Categories: Estate Planning Financial Type: Qualitative Skill Type: Recall Multiple Choice 1) Which of the following is not a good reason to have a will?

A) To distribute your assets as you wish B) To appoint an attorney to make specific health care decisions for you C) To reduce the costs being imposed on the estate D) To appoint a legal guardian for children Answer: B Diff: 2 Type: MC Categories: Other Aspects of Estate Planning Financial Type: Qualitative Skill Type: Recall 2) Which of the following is necessary for an English form will to be valid?

A) It must be written in the testator's handwriting.

B) It must be dated within ten years of death.

C) It must be signed by the testator and two witnesses.

D) The person writing the will must be over age 21 at the time the will is written.

Answer: C Diff: 2 Type: MC Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall 3) A holograph will A) is the most common will in Quebec.

B) remains in effect after a new marriage.

C) does not require the signatures of witnesses.

D) must be witnessed by a notary or lawyer.

Answer: C Diff: 2 Type: MC Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall

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4) The first clause in a will A) appoints the executor.

B) identifies the beneficiaries.

C) appoints the administrator.

D) identifies the deceased.

Answer: D Diff: 2 Type: MC Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 5) If a person dies and two wills are discovered in the safety deposit box A) there is a complicated legal process to determine the valid will.

B) the will with the most recent date will be the valid will.

C) the earliest dated will is valid.

D) the courts will determine the valid will.

Answer: B Diff: 2 Type: MC Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 6) There may be a need to distribute half of the estate to the spouse and the other half to any other beneficiaries due to A) intestacy law.

B) the wills variation Act. C) the preferential marital share.

D) consanguinity.

Answer: C Diff: 1 Type: MC Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall 7) The primary purpose of a preferential share is to A) give each former spouse a share of the assets in the case of multiple marriages.

B) provide for the appropriate distribution of matrimonial property.

C) ensure dependants are looked after.

D) divide assets fairly between the spouse and progeny.

Answer: B Diff: 2 Type: MC Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall

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8) If you die without a will, the court will appoint A) a grantor.

B) an attorney.

C) an administrator.

D) a settlor.

Answer: C Diff: 1 Type: MC Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 9) An executor may A) account for newborn children if not included as beneficiaries.

B) adjust the preferential share.

C) be a beneficiary of the will.

D) determine the value for the assets.

Answer: C Diff: 2 Type: MC Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 10) In choosing a guardian for your children, you should A) ensure he or she is also prepared to be the custodian.

B) be sure to include this in the last letter of instruction.

C) ensure that the person you select is willing to serve in this capacity.

D) authorize this in a power of attorney.

Answer: C Diff: 1 Type: MC Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 11) If you wish to be cremated when you die, this request should be included in a A) durable power of attorney.

B) letter of last instruction.

C) codicil.

D) letter of last rites.

Answer: B Diff: 2 Type: MC Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall

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12) You are recently divorced and have relocated to another province, you should A) prepare a new letter of last instruction.

B) prepare a codicil.

C) prepare a new will.

D) have your existing will notarized in the new province.

Answer: C Diff: 2 Type: MC Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Applied 13) A document that specifies changes to an existing will is A) a letter of instruction.

B) a codicil.

C) an amendment.

D) an addendum.

Answer: B Diff: 1 Type: MC Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 14) You may want to execute a codicil to your existing will A) to add alternate executors.

B) if you remarry.

C) if you move to a different province.

D) if you give birth to a child.

Answer: A Diff: 2 Type: MC Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Applied 15) The purpose of probate is to ensure A) the will is valid to and for orderly distribution of assets.

B) payment of liabilities are prioritized accurately.

C) provinces collect the requisite probate fees.

D) fair jurisprudence of all financial matters.

Answer: A Diff: 2 Type: MC Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall

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16) Which of the following is the start of the probate process?

A) Payment of claims against the estate B) The validation of the will C) Determination of legal heirs D) Filing the will and probate form with the court Answer: D Diff: 2 Type: MC Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 17) If no named executor is able to perform the appointed tasks A) the surviving spouse would become the executor.

B) the courts would appoint an administrator.

C) the next of kin becomes the executor.

D) the will becomes invalid.

Answer: B Diff: 2 Type: MC Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Recall 18) The value of the estate is calculated using A) cost.

B) fair market value.

C) cost plus inflation.

D) the consumer price index.

Answer: B Diff: 2 Type: MC Categories: Probate Fees and Taxes at Death Financial Type: Qualitative Skill Type: Recall 19) Which of the following is true regarding probate and probate fees?

A) Each province charges a different amount for probate fees.

B) All registered assets must be sold and deregistered.

C) Taxation is based on the total value of all assets owned or controlled by the deceased at the moment of death.

D) The value of your primary residence is never included in probate.

Answer: A Diff: 3 Type: MC Categories: Probate Fees and Taxes at Death Financial Type: Qualitative Skill Type: Applied

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20) If your spouse has predeceased you, RRSPs A) can pass to registered charities with no tax liability.

B) are fully taxable.

C) can pass to a dependant child with no tax liability.

D) are taxed as capital gains.

Answer: C Diff: 2 Type: MC Categories: Probate Fees and Taxes at Death Financial Type: Qualitative Skill Type: Applied 21) When a testator dies in December, the tax return must be filed A) three months after the estate is settled.

B) by December 31st in the year after death.

C) by June 30th of the following year.

D) by April 30th of the following year.

Answer: C Diff: 3 Type: MC Categories: Probate Fees and Taxes at Death Financial Type: Qualitative Skill Type: Applied 22) An executor may be able to file more than one tax return for the deceased A) when the first return was not filed on time.

B) when a business was sold just prior to death.

C) if the estate received a life insurance policy.

D) when rights or things are still owed to the deceased at death.

Answer: D Diff: 3 Type: MC Categories: Probate Fees and Taxes at Death Financial Type: Qualitative Skill Type: Recall 23) A type of trust that is created by a will is called a(n) A) alter ego trust.

B) testamentary trust.

C) beneficial trust.

D) inter vivos trust.

Answer: B Diff: 2 Type: MC Categories: Estate Planning Strategies Financial Type: Qualitative Skill Type: Recall

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24) The person who establishes and funds a trust is the A) trustee.

B) administrator.

C) settlor.

D) testator.

Answer: C Diff: 2 Type: MC Categories: Estate Planning Strategies Financial Type: Qualitative Skill Type: Recall 25) Which kind of trust allows assets to transfer into it on a tax deferred basis?

A) Alter ego trust B) Testamentary trust C) Charitable trust D) Inter vivos trust Answer: A Diff: 2 Type: MC Categories: Estate Planning Strategies Financial Type: Qualitative Skill Type: Recall 26) Inter vivos trusts A) are formed to protect assets for a dependant child.

B) may not be used for fixed assets such as a cottage.

C) are continually and actively managed by the settlor.

D) pay taxes on earnings at the highest marginal rate.

Answer: D Diff: 3 Type: MC Categories: Estate Planning Strategies Financial Type: Qualitative Skill Type: Recall 27) Inter vivos trusts usually A) form part of your assets upon death and need to be probated.

B) are challenged through the court system when made public at death.

C) result in arguments about who owns the assets upon death.

D) distribute all income to beneficiaries annually to avoid high tax rates.

Answer: D Diff: 3 Type: MC Categories: Estate Planning Strategies Financial Type: Qualitative Skill Type: Recall

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28) In the year of death, contributions to registered charitable organizations through your will A) can be made to a family member.

B) are restricted to 75 percent of gross income.

C) can be 100 percent of net income and that of the preceding year.

D) is capped at $75 000.

Answer: C Diff: 2 Type: MC Categories: Estate Planning Strategies Financial Type: Qualitative Skill Type: Recall 29) When considering holding assets as joint ownership with rights of survivorship for estate planning purposes, it is important to understand A) that capital gains taxes will be deferred on this transaction until the survivor passes.

B) how the spousal roll-over rules will impact capital gains taxation.

C) the implications of giving up your decision making power over the asset.

D) that naming a child as a joint owner of your principal residence will trigger capital gains taxes.

Answer: C Diff: 3 Type: MC Categories: Other Aspects of Estate Planning Financial Type: Qualitative Skill Type: Applied 30) A legal document in which individuals specify their preferences in the event that they become mentally or physically disabled is called a(n) A) enduring power of attorney.

B) living will.

C) durable power of attorney.

D) letter of wishes.

Answer: B Diff: 2 Type: MC Categories: Other Aspects of Estate Planning Financial Type: Qualitative Skill Type: Recall 31) A legal document granting a person the power to make specific decisions for you in the event that you become incapacitated is called a(n) A) durable power of attorney.

B) enduring power of attorney.

C) living will.

D) general power of attorney.

Answer: B Diff: 2 Type: MC Categories: Other Aspects of Estate Planning Financial Type: Qualitative Skill Type: Recall 13 © 2019 Pearson Canada Inc.

32) A limited power of attorney for finances for a specific time while you are travelling outside the country can give someone you designate the power to make which of the following decisions?

A) Sell stock in your portfolio B) Make a new power of attorney for you C) Decide which assets should be sold if you pass away before returning D) Decide which care home you can afford if you become incapacitated during the trip Answer: A Diff: 2 Type: MC Categories: Other Aspects of Estate Planning Financial Type: Qualitative Skill Type: Applied 33) A power of attorney for health care can give someone you designate the power to make which of the following decisions?

A) Pay your bills while you are in the hospital B) Decide on funeral arrangements C) Make decisions for you about specific treatment options D) Distribute assets while you are in a nursing home Answer: C Diff: 3 Type: MC Categories: Other Aspects of Estate Planning Financial Type: Qualitative Skill Type: Applied 34) A legal document granting a person the power to make specific health care decisions for you in the event that you become incapacitated is called a(n) A) enduring power of attorney for health care.

B) general health care power of attorney.

C) durable power of attorney for health care.

D) health care directive.

Answer: C Diff: 2 Type: MC Categories: Other Aspects of Estate Planning Financial Type: Qualitative Skill Type: Recall

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35) A general power of attorney A) enables the attorney to make a new will for you.

B) terminates automatically when assets run out.

C) does not provide immediate authority until someone becomes ill.

D) terminates if the attorney dies.

Answer: D Diff: 2 Type: MC Categories: Other Aspects of Estate Planning Financial Type: Qualitative Skill Type: Recall 36) A non-continuing power of attorney with a specified task A) becomes enforceable as a will if the grantor dies.

B) becomes transferable if the attorney is incapacitated.

C) expires when the task or event has been completed.

D) has all-encompassing power if the grantor becomes incapacitated.

Answer: C Diff: 1 Type: MC Categories: Other Aspects of Estate Planning Financial Type: Qualitative Skill Type: Recall 37) If Mary is not sure her primary beneficiary will survive her, she should A) name a contingent beneficiary.

B) name joint beneficiaries.

C) change her beneficiary.

D) name her estate as beneficiary.

Answer: A Diff: 2 Type: MC Categories: Estate Planning Financial Type: Qualitative Skill Type: Applied 38) If John is going to have his first child, which of the following should he do for his estate planning?

A) Add a codicil to his will B) Review his will C) Update his will D) Review his power of attorney Answer: C Diff: 2 Type: MC Categories: Estate Planning Financial Type: Qualitative Skill Type: Applied

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39) For which of the following events is a review of your will most essential?

A) Moving to a new province B) Changing to a new job C) Getting engaged D) Getting a large salary bonus Answer: A Diff: 2 Type: MC Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Applied 40) A trustee is an individual or organization that is responsible for A) carrying out the administration involved in settling an estate.

B) selling the assets to one or more of the beneficiaries of a will.

C) distributing the assets to one or more of the beneficiaries of a will.

D) managing the assets held in trust while the estate is settled.

Answer: D Diff: 2 Type: MC Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall 41) What is the primary problem with dying intestate?

A) An administrator will be appointed to distribute the estate according to law.

B) Any children will become wards of the state.

C) Medical personnel will be responsible for decisions about your care.

D) Your estate will flow to the government.

Answer: A Diff: 2 Type: MC Categories: Background on Wills Financial Type: Qualitative Skill Type: Applied 42) To create a valid will, an individual must be A) financially viable.

B) mentally competent.

C) physically competent.

D) visually competent.

Answer: B Diff: 2 Type: MC Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall

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43) An English form will requires the signatures of the A) lawyer and two witnesses.

B) executor and one witness.

C) testator and two witnesses.

D) testator and two beneficiaries.

Answer: C Diff: 2 Type: MC Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall 44) The initial part of the will is A) disposition of estate.

B) appointment of trustee.

C) testator identification.

D) appointment of guardian.

Answer: C Diff: 2 Type: MC Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall 45) A notarial will is a formal type of will that is A) most commonly used in Quebec.

B) the most common form across Canada.

C) not valid in a number of provinces.

D) written fully in the handwriting of the testator.

Answer: A Diff: 2 Type: MC Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall 46) In which province is the preferential share most generous to the surviving spouse?

A) British Columbia B) Newfoundland C) Ontario D) Quebec Answer: A Diff: 2 Type: MC Categories: Background on Wills Financial Type: Qualitative Skill Type: Recall

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47) What is the maximum number of bequests that can be made in a standard holographic will?

A) 15 B) 50 C) 100 D) Unlimited Answer: D Diff: 1 Type: MC Categories: Investment Return and Risk Financial Type: Qualitative Skill Type: Recall 48) The liability clause in a will serves what purpose?

A) It holds the executor legally liable for any mistakes made in the administration of the will.

B) It absolves the executor of legal liability for any mistakes made in the administration of the will.

C) It holds the executor legally liable for any mistakes made in the administration of the will on in the case of gross negligence.

D) It absolves the executor of legal liability for any mistakes made in the administration of the will if the executor acted in good faith.

Answer: D Diff: 2 Type: MC Categories: Investment Return and Risk Financial Type: Qualitative Skill Type: Recall 49) For tax purposes, a deceased taxpayer is considered to have sold all of their assets on the date of their death. This is called the A) deemed disposition.

B) disposal at death.

C) liquidation principle.

D) final settlement.

Answer: A Diff: 2 Type: MC Categories: Present Value of an Annuity Financial Type: Qualitative Skill Type: Recall 50) Which of the following type of income can be filed on a "rights or things" tax return?

A) The deceased taxpayer's share of business income from a partnership B) Income owed to the deceased taxpayer that was not paid by the time of death C) The deceased taxpayer's business income from a sole proprietorship D) The income received by the deceased taxpayer from a testamentary trust Answer: B Diff: 2 Type: MC Categories: Present Value of an Annuity Financial Type: Qualitative Skill Type: Recall 18 © 2019 Pearson Canada Inc.

Essay 1) Indicate five personal situations where having a will and estate plan is most essential and two where having a will would not be as important.

Answer: These answers will vary a lot, but important to think about: Critical need for a will: Time when intestacy laws would be most problematic Common law relationships Children out of marriage Second or more marriages Single parents Great wealth Assets in more than one jurisdiction Moving between provinces Divorce Marriage Not as high need for a will: Single person with no dependants If intestacy laws match with wishes No assets Diff: 3 Type: ES Categories: Key Components of a Will Financial Type: Qualitative Skill Type: Applied 2) Discuss the characteristics and expertise you would look for in the person you want to appoint as your executor or attorney.

Answer: Students should demonstrate that they understand the importance of appointing financially astute individuals to handle complex personal affairs that can be diverse. This requires personal experience, certain levels of education, skill in managing financial assets and trustworthiness.

Executor: Skills, trustworthiness to manage and dispose of assets at reasonable values, complete all tax returns etc., minimize taxes where possible. This could more easily be done by a professional with limited personal relationship to the testator.

Attorney: For enduring and durable powers of attorney, utmost personal connection and trustworthiness are essential as well as competence.

Diff: 3 Type: ES Categories: Other Aspects of Estate Planning Financial Type: Qualitative Skill Type: Recall

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3) Explain the differences between and the importance of using continuing and non-continuing forms of a power of attorney in estate planning.

Answer: Non-continuing powers of attorney have an expiry date, which may depend on several important events. As an example, you may grant powers to a relative while on extended rehabilitation in hospital that expires when you return home, or powers to manage specific transactions while you are travelling out of country.

Continuing or enduring power of attorney. Students should demonstrate the importance of the grantor assigning such all-encompassing powers to those of utmost trustworthiness.

Diff: 3 Type: ES Categories: Other Aspects of Estate Planning Financial Type: Qualitative Skill Type: Applied 4) Name and explain the different features of three types of trusts and give circumstance where they would be applicable.

Answer: Inter Vivos (revocable and non-revocable), Alter Ego and Testamentary are possible answers.

Testamentary trusts: Could be used for transferring assets to children but keeping the isolated from marriage assets. Does not avoid probate fees.

Inter vivos trusts: Keep assets out of estate, avoids probate fees, and direct to special purposes.

Taxed at highest rate, but direct your assets while still alive.

Alter Ego or Joint partner trust: Settlor must be over age 65 and assets avoid probate fees and deemed disposition at settlor's death. Could be used in late second marriages to allocate income to a new partner, but transfer assets eventually to children.

Diff: 3 Type: ES Categories: Estate Planning Strategies Financial Type: Qualitative Skill Type: Applied

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Personal Finance, Canadian Ed., 4e (Madura) Part 6 Synthesis of Financial Planning - Integrating the Components of a Financial Plan True/False 1) Budgeting allows you to forecast how much money you will have at the end of each month so you can determine how much you will be able to invest in assets.

Answer: TRUE Diff: 1 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 2) Budgeting decisions involve a trade-off between spending today and allocating funds for the future.

Answer: TRUE Diff: 1 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 3) You should maintain just enough money in liquid assets to satisfy your liquidity needs. Then you can earn a higher return on your other assets.

Answer: TRUE Diff: 1 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 4) Financing may be good for obtaining assets right away but also may end up restricting your cash flow to save for other goals.

Answer: TRUE Diff: 1 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 5) If Jack has a $3000 credit card balance he is paying off, it would be financially advisable to pay it off before starting to save $300 per month in his emergency fund.

Answer: TRUE Diff: 3 Type: TF Categories: Review Components of a Financial Plan Financial Type: Quantitative Skill Type: Applied

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6) You do not need insurance for events which are unlikely to happen.

Answer: FALSE Diff: 3 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 7) Even though insurance costs reduce your cash flow, insurance could have a larger impact on your net worth than its cost.

Answer: TRUE Diff: 3 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 8) Investing in stocks of large, well-known firms typically offer lower return and risk than stocks of growth companies.

Answer: TRUE Diff: 2 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 9) Stocks of small firms are more volatile than those of large firms and might not be liquid.

Answer: TRUE Diff: 1 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 10) You should make investments only after you have sufficient liquidity and sufficient insurance to protect your existing assets.

Answer: TRUE Diff: 2 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 11) It would be advisable to make additional loan payments if the interest rate is eight percent, rather than investing in short-term interest-bearing securities offering four percent.

Answer: TRUE Diff: 2 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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12) If you want to use funds from your RRSP for furthering your education, the Lifelong Learning plan is the only way to get at that money without paying full tax on it.

Answer: TRUE Diff: 1 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 13) There are only three ways to get funds from your RRSP without paying tax on 100 percent of the withdrawal: the HBP, LLP and RRIF. Answer: FALSE Diff: 2 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 14) As time passes, your financial position and goals are likely to change, so you will need to revise your financial plan.

Answer: TRUE Diff: 1 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 15) No financial plan is complete if it does not include a will.

Answer: TRUE Diff: 1 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 16) An important part of financial planning is making trade-offs between various important decisions.

Answer: TRUE Diff: 1 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 17) Maintaining all documents in a safe place and leaving instructions on their location is not necessary in the high-tech age.

Answer: FALSE Diff: 1 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 3 © 2019 Pearson Canada Inc.

18) Debt is dangerous and should be avoided at costs.

Answer: FALSE Diff: 1 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 19) Regularly reviewing your financial plan is the only way to make sure that all of its components are properly integrated to meet your goals.

Answer: TRUE Diff: 2 Type: TF Categories: Integrating the Components Financial Type: Qualitative Skill Type: Applied 20) To budget for savings or retirement, you need positive cash flows.

Answer: TRUE Diff: 2 Type: TF Categories: Integrating the Components Financial Type: Qualitative Skill Type: Applied 21) Paying off loans rather than making additional investments is appropriate when the expected investment return is higher than the interest rates on loans.

Answer: FALSE Diff: 2 Type: TF Categories: Integrating the Components Financial Type: Qualitative Skill Type: Applied 22) Normally, you should use all of your liquid assets to pay off your loan.

Answer: FALSE Diff: 2 Type: TF Categories: Integrating the Components Financial Type: Qualitative Skill Type: Applied 23) Liability insurance provides your beneficiaries with financial support in the event of your death.

Answer: FALSE Diff: 2 Type: TF Categories: Integrating the Components Financial Type: Qualitative Skill Type: Applied

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24) Some large well-known firms pay no dividends, but most do.

Answer: TRUE Diff: 1 Type: TF Categories: Integrating the Components Financial Type: Qualitative Skill Type: Recall 25) If you are looking for fast-growth stocks, you should look for stocks that do not pay dividends.

Answer: TRUE Diff: 1 Type: TF Categories: Integrating the Components Financial Type: Qualitative Skill Type: Applied 26) Once you have enough assets to last you three years of expenses, it is not advisable to pay for disability insurance.

Answer: FALSE Diff: 2 Type: TF Categories: Integrating the Components Financial Type: Qualitative Skill Type: Applied 27) Investing in mutual funds is generally considered to be a conservative investment strategy.

Answer: FALSE Diff: 3 Type: TF Categories: Integrating the Components Financial Type: Qualitative Skill Type: Applied 28) You must have assets to be able to access financing for large purchases.

Answer: FALSE Diff: 3 Type: TF Categories: Integrating the Components Financial Type: Qualitative Skill Type: Recall 29) Retirement and estate planning do not need to be addressed until you are closer to retirement age.

Answer: FALSE Diff: 2 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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30) It is possible to have too much insurance.

Answer: TRUE Diff: 2 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied Multiple Choice 1) The first component in creating a financial plan is A) preparing a budget.

B) setting up a brokerage account.

C) starting an emergency fund.

D) figuring out your goals.

Answer: A Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 2) A budget is not intended to help you determine A) how much money you will have at the end of each month.

B) a plan for spending all of your income on current needs.

C) how much you can allocate for the future.

D) how to prevent excessive spending to achieve financial goals.

Answer: B Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 3) Monitoring liquidity includes tracking your A) RRSP balances.

B) emergency funds.

C) TFSA growth stocks.

D) mortgage balance.

Answer: B Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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4) What is the liquidity trade-off?

A) Determining the best liquid assets B) Having enough liquid assets to cover cash deficiencies one year in advance C) Maintaining adequate liquidity to avoid borrowing every time you need money D) Maintaining enough liquid assets to meet obligations and earning a higher return on other assets Answer: D Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 5) Which of the following assets will increase your liquidity?

A) A higher balance in your chequing account B) Growth in the value of your home C) Cash in your RRSP D) A defined-contribution pension plan Answer: A Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 6) Personal financing A) allows you to make grocery purchases with your credit card.

B) increases your assets overall.

C) achieve your goals.

D) helps increase your ability to save.

Answer: C Diff: 1 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 7) A disadvantage of paying off your mortgage with all your remaining liquid funds is that A) you likely make higher interest with your liquid funds.

B) you could incur an unanticipated expense you cannot pay.

C) you might not be able to qualify for another loan.

D) early repayment could damage your credit rating.

Answer: B Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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8) What is meant by the financing trade-off?

A) Financing is a necessary evil and people today could not live without it.

B) Financing enables people to get what they want faster but encourages greed.

C) Borrowing can slow the growth of your net worth if it is for depreciating assets.

D) Borrowing is an important tool but it can cause budgeting problems.

Answer: D Diff: 3 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 9) Which of the following is true?

A) You should use all your liquid assets to pay off loans when the return on the investments is high.

B) Paying off loans is appropriate when the loan interest rate is high and you have enough liquidity.

C) Paying off loans is wise whenever the loan rate is lower than what you expect to earn on investments.

D) Loan payments will not restrict your cash flow but may prevent you from achieving financial goals.

Answer: B Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 10) The purpose of insurance is to protect your A) liabilities and expenses.

B) assets and liabilities.

C) assets and net worth.

D) income and expenses.

Answer: C Diff: 1 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 11) Which of the following statements about insurance is true?

A) The most important things to insure are your fixed assets.

B) Money used to buy insurance is wasted because you cannot invest it.

C) You cannot have too much insurance.

D) It should be given priority before you start investing.

Answer: D Diff: 3 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 8 © 2019 Pearson Canada Inc.

12) Disability insurance protects your A) lifestyle.

B) income.

C) health.

D) assets.

Answer: B Diff: 1 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 13) Property and casualty insurance protects your A) home and family.

B) car and home.

C) home and health.

D) home and income.

Answer: B Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 14) Which of the following should you do first?

A) Save for retirement B) Pay off loans C) Make a budget D) Purchase insurance Answer: C Diff: 3 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 15) Which of the following investments achieves the greatest diversification?

A) Ten international stocks B) A TSX ETF C) A balanced mutual fund D) A GIC Answer: C Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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16) If you want investment income, which of the following investments should you purchase?

A) Bonds and dividend producing equities B) Stocks with high betas C) Growth mutual funds D) IPOs Answer: A Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 17) Which of the following accounts offers tax deferral, tax sheltering, and tax deduction for contributions?

A) Only TFSA B) RRSP and TFSA C) Only RRSP D) RRSP and RESP Answer: C Diff: 2 Type: MC Categories: Integrating the Components Financial Type: Qualitative Skill Type: Recall 18) Compared to the stocks of larger firms, the stocks of smaller firms are A) less volatile.

B) more volatile.

C) more liquid.

D) safer.

Answer: B Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 19) Which of the following increases your net worth?

A) Experiencing investment growth in your retirement savings B) Starting a pension plan C) Cashing in an investment to pay off a loan D) Purchasing a new car Answer: A Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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20) To increase your net worth, you should A) pay off a loan with cash flow.

B) spend all cash remaining in your budget.

C) invest in household assets.

D) buy a luxury car.

Answer: A Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 21) Which of the following will decrease your net worth?

A) Increase your income B) Decrease your expenses C) Increase your assets D) Increase your liabilities Answer: D Diff: 1 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 22) Which of the following will increase your net worth over time?

A) Leasing a car B) Renting a house C) Buying a house D) Term insurance Answer: C Diff: 1 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 23) You are 25 years old and saving for an early retirement. Assuming that you have a high risk tolerance, which of the following can best help you reach your goal of retiring early?

A) A bond fund B) A money market fund C) A growth fund D) A dividend fund Answer: C Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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24) If you save monthly for retirement, which of the following would be used to determine how much you would ultimately have in your retirement account?

A) Present value of an annuity B) Future value of an annuity C) Present value of $1 D) Future value of a lump sum Answer: B Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 25) Which of the following investments reduces your taxable income?

A) Stock investments B) RRSP contributions C) RESP contributions D) TFSA contributions Answer: B Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 26) In deciding how much to contribute to your retirement savings, which of the following should you ignore?

A) Anticipated inheritances B) Other financial goals C) Liquidity needs D) Current expenses Answer: A Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 27) Even average earners can accumulate wealth by A) spending less than they make.

B) saving more than they make.

C) borrowing to buy what they want.

D) winning the lottery.

Answer: A Diff: 1 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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28) Financial documents should be A) stored on a secure cloud-based Internet site.

B) kept in a safety deposit box or a safe place at your home.

C) kept at your parents' house in their desk.

D) stored on your computer.

Answer: B Diff: 1 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 29) A financial plan should be prepared when you graduate from college or university A) and carefully followed thereafter without changes.

B) and carefully followed until you retire, when you will no longer need one.

C) and reviewed and adjusted periodically as events such as marriage, job changes, birth of children, and retirement necessitate.

D) as a rough outline, as it will change too often to make anything more detailed feasible.

Answer: C Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 30) The purpose of financial planning is to help do all of the following except A) set goals.

B) decrease your food expenses.

C) become financially educated.

D) increase your net worth.

Answer: B Diff: 1 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 31) Key documents for managing personal financing include A) prior year pay statements.

B) stock market forecast reports.

C) personal loans, such as automobile loans.

D) Canada Pension Plan calculations.

Answer: C Diff: 1 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied

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32) Key documents for managing investments include A) defined-benefit plan statements.

B) account balances showing the market values of holdings.

C) insurance policies.

D) health insurance certificates.

Answer: B Diff: 1 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 33) The best schedule for the order of the components of your financial plan would be A) budgeting and tax planning, managing liquidity, financing large purchases, insurance, investing and estate planning.

B) tax planning, managing liquidity, budgeting, financing large purchases, insurance, investing and estate planning.

C) managing liquidity, budgeting and tax planning, financing large purchases, insurance, investing and estate planning.

D) budgeting and tax planning, financing large purchases, managing liquidity, insurance, investing and estate planning.

Answer: A Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 34) When considering the goal of funding retirement the best strategy is to A) rely on getting a job with a good pension plan.

B) ensure that you have enough cash flow to save in an RRSP or TFSA. C) rely on CPP and OAS to look after most of your retirement needs.

D) pay off large purchases before opening an RRSP. Answer: B Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 35) An important consideration regarding applying for a loan is that A) you may not have a good credit rating unless you have borrowed before.

B) it would be better to simply increase your credit card limit than take out a loan.

C) a longer term is preferred because of the smaller payments.

D) it lets you purchase items now, rather than later, without affecting your budget.

Answer: A Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 14 © 2019 Pearson Canada Inc.

36) All components of a financial plan start with A) your financial goals.

B) cost benefit analysis.

C) security planning.

D) budgeting.

Answer: A Diff: 3 Type: MC Categories: Integrating the Components Financial Type: Qualitative Skill Type: Applied 37) You will know your financial plan is working when A) the plan has been revised to increase your risk tolerance for improved investment return.

B) your net worth increases each year in step with your goals.

C) you have sufficient capital to meet all of your established goals.

D) you have reached the highest tax bracket.

Answer: B Diff: 1 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 38) An example of compounding is A) buying stocks that do not pay dividends.

B) buying a strip bond.

C) using dividends to pay your cell phone bill.

D) reinvesting dividends to purchase more units.

Answer: D Diff: 1 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 39) Revising a financial plan A) should only be done in extreme circumstances.

B) may include changing your goals.

C) does not have to be done when you have more cash flow than needed.

D) is not necessary once you retire.

Answer: B Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall

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40) If you do not have a financial plan, you will not likely be able to A) retire.

B) afford a vacation.

C) meet your goals.

D) get married.

Answer: C Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 41) Withdrawals from your RRSP account A) are fully taxed as income.

B) are taxed 20% withholding tax only.

C) are taxed only if withdrawn before age 65.

D) are taxed on the growth of the funds only.

Answer: A Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 42) Withdrawals of interest from a TFSA are A) tax favoured.

B) taxable.

C) tax-deductible.

D) tax-free.

Answer: D Diff: 2 Type: MC Categories: Integrating the Components Financial Type: Qualitative Skill Type: Applied 43) Which of the following cannot be protected by property and casualty insurance?

A) Your car B) Your income C) Your home D) Your furniture Answer: B Diff: 2 Type: MC Categories: Integrating the Components Financial Type: Qualitative Skill Type: Recall

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44) It is easier to cover monthly loan payments if you select financing with A) a relatively long term.

B) a relatively short term.

C) a fixed interest rate.

D) a high interest rate.

Answer: A Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 45) Trust agreements in financial plans are normally are used for A) wills.

B) powers of attorney.

C) financial security.

D) estate planning.

Answer: D Diff: 2 Type: MC Categories: Integrating the Components Financial Type: Qualitative Skill Type: Applied 46) Which of the following statement regarding goals setting is correct?

A) Short term, medium term and long term goals should be established and reviewed regularly.

B) Goals should be set as aggressively as possible and you should push yourself to attain them.

C) If you don't achieve a goal it means it wasn't an appropriate goal in the first place.

D) Short term goals need to be more specific than long term goals.

Answer: A Diff: 2 Type: MC Categories: Return From Investing in Bonds Financial Type: Qualitative Skill Type: Applied 47) Which of the following statements regarding insurance is correct?

A) Life insurance should be acquired when you are young when it is less expensive, even if you don't have any dependants.

B) All individuals, regardless of age and current wealth will require some type of insurance.

C) The risk of loss can be so devastating to your wealth that you cannot ever have too much insurance.

D) Young people without any wealth of dependants have no need for insurance.

Answer: B Diff: 2 Type: MC Categories: Return From Investing in Bonds Financial Type: Qualitative Skill Type: Applied

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48) When market conditions are strong, which of the following type of investment will likely lead to the highest overall return.

A) Small company stocks B) Large company stocks C) High yield bonds D) A balanced mutual fund Answer: A Diff: 1 Type: MC Categories: Return From Investing in Bonds Financial Type: Qualitative Skill Type: Recall 49) Which of the following is true regarding RRSP withdrawals?

A) The tax withheld on your RRSP withdrawal will likely not match the amount of tax you will actually owe on the withdrawal.

B) The tax withheld on your RRSP withdrawal is all the tax that will be owed on the withdrawal.

C) The tax withheld on your RRSP withdrawal is always more than the amount of tax you will actually owe on the withdrawal.

D) There is no tax owing on RRSP withdrawals.

Answer: A Diff: 2 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 50) Which of the following is true when comparing RRSPs and TFSAs? A) An RRSP is generally considered to be a more flexible account than a TFSA. B) A TFSA is generally considered to be a more flexible account than an RRSP. C) TFSAs should be used primarily for short and long term saving needs instead of long term retirement savings.

D) RRSPs should be used primarily for short and long term saving needs instead of long term retirement savings.

Answer: B Diff: 1 Type: MC Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall

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Essay 1) Discuss how financial planning principles will help you solve the following challenges. a) Getting married sooner than expected b) Starting a family c) Having a high-paid job that causes ongoing stress d) Having to change careers Answer: Very broad answers would be expected for this question.

Having sufficient liquidity for short-term changes to cash flow and expenses.

Assets you can liquidate to fund time off from work.

Insurance, such as disability insurance, would help if work stoppage is due to an accident or illness.

A high net worth means you can access wealth to live without work income while you change careers or retrain.

Good financing decisions mean you will not be over-leveraged.

There are many other examples.

Diff: 3 Type: ES Categories: Integrating the Components Financial Type: Qualitative Skill Type: Applied 2) Discuss ten specific measures a risk taker versus risk averse investor may take to protect and maintain their wealth.

Answer: Many possible approaches: Insurance: Home, the risk taker could opt for minimal versus replacement value, broad coverage.

Auto, the risk taker could opt for no collision and comprehensive and minimum third party liability.

Umbrella liability, the risk taker might forego this.

Disability Insurance, The risk taker might only take what his employer provides versus getting addition personal coverage to be fully protected.

Critical Illness, the risk taker might forego this.

Long-Term Care, the risk taker might forego this.

Life Insurance, the risk taker might get limited life insurance coverage.

Investment risk tolerance, the risk taker might have a much higher investment risk tolerance.

Savings level, not necessarily impacted.

Will, not necessarily impacted.

Enduring Power of Attorney, the risk taker might forego this.

Retirement plans, the risk taker might not save enough assuming his high-risk investments will do well.

Trust agreements, the risk taker might forego this Diff: 3 Type: ES Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 19 © 2019 Pearson Canada Inc.

3) List three types of financing you have studied and an important consideration about each one of them Answer: Many considerations could be mentioned and a few are listed.

Credit cards: revolving credit, benefits, grace period, interest rate, points Personal loans: interest rate much lower than for credit cards and term, fixed payments over the term Line of credit/HELOC: revolving credit, interest rate, flexibility for borrowing and payment terms Mortgages: generally lower interest rates, variable rates usually lower than fixed rates, benefits of amortizing over less than 20 years.

Diff: 3 Type: ES Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 4) What are four types of financial investment accounts and indicate the likely purposes they would have in your financial plan?

Answer: They should not list a regular savings or checking account as those are not investment accounts.

Regular investment account. Simple, general purpose for saving and investing, but fully taxable.

RRSP most useful for retirement but also can be useful for saving for a home down payments as can withdraw $25 000 tax free, or 2 × $10 000 from the LLP. TFSA useful for emergency fund, sheltering secure interest bearing securities and for a risky investments to shelter all investment returns from taxation.

RESP only useful for saving for children's postsecondary education. 20% CESG and tax sheltering.

Diff: 3 Type: ES Categories: Integrating the Components Financial Type: Qualitative Skill Type: Applied

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Personal Finance, Canadian Ed., 4e (Madura) Part 2 Managing Your Financial Resources - Banking Services and Managing Your Money True/False 1) Bank fees for using an automatic banking machine (ABM) are not usually a significant consideration in choosing a bank with which to do business.

Answer: FALSE Diff: 1 Type: TF Categories: Selecting a Financial Institution Financial Type: Qualitative Skill Type: Recall 2) Depository institutions are financial institutions that accept deposits (that are insured up to a maximum level) from individuals or firms and provide loans.

Answer: TRUE Diff: 1 Type: TF Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 3) An example of a depository financial institution is an insurance company.

Answer: FALSE Diff: 2 Type: TF Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 4) Deposits in commercial banks that are members of the CDIC are insured up to a maximum of $50 000 per account.

Answer: FALSE Diff: 1 Type: TF Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 5) Credit unions and caisses populaires are non-for-profit depository institutions that offer similar services as chartered banks, but only to members.

Answer: TRUE Diff: 2 Type: TF Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall

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6) Non-depository institutions provide banking services, but their deposits are not CDIC insured.

Answer: FALSE Diff: 2 Type: TF Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 7) Finance companies should be the first place you go to try to get a loan because they specialize in financing.

Answer: FALSE Diff: 3 Type: TF Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Applied 8) Mortgage companies pay more interest on deposits than a chartered bank.

Answer: FALSE Diff: 1 Type: TF Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 9) Because Sam wishes to invest in securities and has only $600 dollars available, a mutual fund would be a good option for him.

Answer: TRUE Diff: 2 Type: TF Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Applied 10) The interest on a Canada Savings Bond is not taxable as long as it is reinvested into the bond.

Answer: FALSE Diff: 2 Type: TF Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied 11) Debit cards and credit cards both offer the benefit of short-term financing.

Answer: FALSE Diff: 2 Type: TF Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied

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12) A total of $80 in charges for writing an NSF cheque is a real possibility.

Answer: TRUE Diff: 2 Type: TF Categories: Banking Services Offered by Financial Institutions Financial Type: Quantitative Skill Type: Applied 13) Katie's overdraft fee is five dollars with a interest rate 21 percent. When she wrote a cheque that put her account in a $5000 overdrawn position for two weeks, she still saved money compared with a $40 NSF fee.

Answer: FALSE Diff: 3 Type: TF Categories: Banking Services Offered by Financial Institutions Financial Type: Quantitative Skill Type: Applied 14) Certified cheques, money orders, and traveller's cheques lower risk for the payee.

Answer: TRUE Diff: 2 Type: TF Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 15) Since rates and fees differ only slightly between all national banks, there is little need to consider these when choosing your financial institution.

Answer: FALSE Diff: 2 Type: TF Categories: Selecting a Financial Institution Financial Type: Qualitative Skill Type: Recall 16) Chartered banks are the only financial institutions which offer insurance on deposits.

Answer: FALSE Diff: 2 Type: TF Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 17) Because they have lower overhead, web-based financial institutions tend to pay higher interest rates on deposits than institutions with physical branches.

Answer: TRUE Diff: 1 Type: TF Categories: Selecting a Financial Institution Financial Type: Qualitative Skill Type: Recall

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18) Guaranteed investment certificates (GICs) with shorter maturity dates tend to pay higher interest rates than those with longer maturity dates.

Answer: FALSE Diff: 1 Type: TF Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 19) A TFSA and a Term Deposit are essentially the same thing.

Answer: FALSE Diff: 1 Type: TF Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 20) Investments with a higher risk of default pay higher rates of interest than those that are less risky.

Answer: TRUE Diff: 1 Type: TF Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 21) Money market funds are insured investments that invest in very safe investments and have a very low risk of default.

Answer: FALSE Diff: 2 Type: TF Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 22) TFSAs allow you to withdraw funds tax free and then replace the funds, whenever you have more savings.

Answer: FALSE Diff: 2 Type: TF Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied 23) A money market fund would be a good place to invest funds set aside for an emergency.

Answer: TRUE Diff: 2 Type: TF Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied

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24) Banks pay more interest on chequing accounts than they do on savings account deposits.

Answer: FALSE Diff: 2 Type: TF Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 25) You are charged by your bank, but not by the institution you wrote the cheque to, for writing an NSF cheque.

Answer: FALSE Diff: 2 Type: TF Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 26) A good investment for Emma's emergency fund might be a five-year cashable term deposit.

Answer: TRUE Diff: 2 Type: TF Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied 27) The difference between a bank and a trust company is that only the trust company can provide estate planning and administrative services.

Answer: TRUE Diff: 2 Type: TF Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 28) Mutual fund investments such as a money market fund are guaranteed by the CDIC. Answer: FALSE Diff: 2 Type: TF Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 29) A Canada Savings Bond is a typical investment in a money market fund.

Answer: FALSE Diff: 2 Type: TF Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall

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30) There is no real difference between a chequing account and a savings account at the same bank.

Answer: FALSE Diff: 2 Type: TF Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 31) Schedule I, II and III banks offer essentially the same services.

Answer: FALSE Diff: 2 Type: TF Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Applied Multiple Choice 1) Financial institutions loan funds at A) lower interest rates than depositors receive.

B) higher interest rates than depositors receive.

C) rates similar to what savers receive.

D) prime plus three percent.

Answer: B Diff: 2 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Applied 2) Which of the following is a depository institution?

A) Manulife Securities B) Bank of Nova Scotia C) Capital One Bank D) RBC Insurance Answer: B Diff: 1 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Applied

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3) Which of the following companies would help to administer your will?

A) RBC Capital Markets B) RBC Estate and Trust C) RBC Insurance D) Ontario Educational Credit Union Answer: B Diff: 2 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Applied 4) Which of the following is a non-depository financial institution?

A) Credit union B) Trust company C) Investment dealer D) Caisse populaire Answer: C Diff: 2 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 5) To join a credit union, you need to A) have a steady job.

B) be a member of a group.

C) have established a good credit rating.

D) All of the above Answer: B Diff: 2 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 6) Which of the following is a not-for-profit depository institution that provides services only to members who have a common affiliation?

A) RBC Financial Group B) Scotiabank C) Finnish Credit Union D) National Mortgage Alliance Answer: C Diff: 2 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Applied

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7) Which of the following financial institutions specialize in making personal loans to people who are perceived to have a higher risk of default?

A) Finance company B) Commercial bank C) Trust company D) Credit union Answer: A Diff: 1 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 8) If you were taking out a personal loan, the highest rate would probably be charged by a A) commercial bank.

B) finance company.

C) caisse populaire.

D) credit union.

Answer: B Diff: 1 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 9) Institutions that facilitate the purchase or sale of securities by firms or individuals by providing investment banking services and brokerage services are called A) finance companies.

B) investment dealers.

C) mutual fund companies.

D) mortgage companies.

Answer: B Diff: 2 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 10) Non-depository institutions that provide insurance to protect individuals or firms against possible adverse events are called A) finance companies.

B) securities firms.

C) insurance companies.

D) investment companies.

Answer: C Diff: 1 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 8 © 2019 Pearson Canada Inc.

11) Which of the following is a Schedule II chartered bank?

A) National Bank B) Citibank C) HSBC D) Scotiabank Answer: C Diff: 2 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 12) Regarding TFSA accounts, which of the following is true?

A) Using your TFSA for tuition savings makes sense as long as the funds are replaced before the next term.

B) If your TFSA investment deposit grows from $5000 to $10 000 you can withdraw only the $5000 deposit tax free.

C) Using a TFSA account for your everyday banking would be a good way to avoid paying tax on the interest from your bank account.

D) Using a TFSA account to hold a cashable GIC for an emergency will mean you do not have to pay tax on the interest earned.

Answer: D Diff: 3 Type: MC Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied 13) If you have $10 000 that you do not expect to need for expenses in the next few years and you wish to put it somewhere so that it will earn a return, which of the following financial institutions would be the best option?

A) A bank B) A mutual fund company C) A credit union D) Any of the above Answer: D Diff: 2 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Applied

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14) You have $5000 saved in case you may need to replace the furnace in your house which has been acting up. Which of the following would be the best place to put the $5000?

A) A one-year fixed-rate GIC earning four percent B) A stock mutual fund which earned nine percent in the past year C) A term deposit earning three percent held in a TFSA D) A high interest savings account earning three percent Answer: C Diff: 3 Type: MC Categories: Selecting a Financial Institution Financial Type: Quantitative Skill Type: Applied 15) The type of financing that allows you to pay for purchases at a later time with no interest charged is A) a credit card.

B) a debit card.

C) an expense account.

D) a line of credit.

Answer: A Diff: 1 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 16) Which of the following is an advantage of using a debit card?

A) Your total banking expenses are likely to be lower.

B) The overdraft protection is less expensive than borrowing from your credit card.

C) They have lower transaction fees than credit cards.

D) You have no risk of being charged for insufficient funds.

Answer: D Diff: 2 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied 17) Which of the following is a disadvantage of using debits cards over credit cards?

A) You will not have a good record of your transactions.

B) They charge higher interest rates than credit cards.

C) You cannot tell if your bank account will become overdrawn.

D) The fees charged to the cardholder can become significant.

Answer: D Diff: 2 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied

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18) Which of the following provides the least guarantee of payment to the payee?

A) Certified cheque B) Money order C) Traveller's cheque D) Personal cheque Answer: D Diff: 2 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 19) If you were accepting $22 000 payment for selling your car to a stranger, which form of payment should you request?

A) Bank draft B) Money order C) Certified cheque D) Any of the above Answer: D Diff: 2 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied 20) Which would be the least effective way to manage expenses when travelling internationally?

A) Credit card B) Money orders C) Traveller's cheques D) Debit card Answer: B Diff: 2 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied 21) A type of cheque that is written on behalf of an individual and will be charged against a large well-known financial institution or credit card sponsor's account, but has no payee designated on the cheque is called a A) cashier's cheque.

B) money order.

C) traveller's cheque.

D) personal cheque.

Answer: C Diff: 1 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 11 © 2019 Pearson Canada Inc.

22) Which of the following will not vary at a chartered bank?

A) Interest rates on similar GICs B) CDIC insurance amounts on accounts C) Interest rates charged on mortgages D) Service fees charged to different customers Answer: B Diff: 1 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 23) Which of the following is true regarding guaranteed investment certificates (GICs)?

A) The longer the term, the lower the interest rate paid, all else equal.

B) All banks offer the same rates on GICs. C) Early withdrawals of money are not subject to a penalty.

D) Much higher interest rates (than competitors) would likely reflect higher risk.

Answer: D Diff: 2 Type: MC Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 24) Rashid's monthly expenses are $4000 and he expects that his cash flow will always be sufficient to cover his expenses. How much should he ideally have in his emergency fund?

A) $12 000 using a combination of liquid investments and access to credit B) $24 000 because it is always best to be safe C) None, but he needs a $24 000 limit on his credit card.

D) $12,000 invested in two- to three-year GICs to earn a higher return Answer: A Diff: 3 Type: MC Categories: Background on Money Management Financial Type: Qualitative Skill Type: Applied 25) Which of the following would normally offer the best rate of return?

A) A three-year GIC for $10 000 B) A money market fund C) A four-year GIC for $1000 D) A four-year term deposit for $10 000 Answer: C Diff: 2 Type: MC Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied

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26) Your chartered bank is offering a one-year GIC with an interest rate of two percent, and a one-year cashable GIC at one and a half percent. Term deposits are paying one percent. You have $10 000 to invest of which you feel $5000 is ample for emergency fund purposes. How should you invest your funds given the scenario above?

A) $5 000 in the one-year GIC and $5 000 in a term deposit B) $5 000 in the one-year GIC and $5 000 in the one-year cashable GIC C) $10,000 in the one-year GIC D) $10,000 in the one-year cashable GIC Answer: B Diff: 2 Type: MC Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Quantitative Skill Type: Applied 27) In planning a money management strategy, which of the following is most important?

A) Select a combination of investments with varying risk and return.

B) Select a combination of investments to achieve both adequate liquidity and return.

C) Ensure all short-term investments are fully liquid.

D) Shop around to find the institution paying the highest interest rates on GICs. Answer: B Diff: 3 Type: MC Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied 28) To get a better rate on an emergency fund investment you should invest in a A) five-year cashable GIC. B) one-year non-cashable GIC. C) money market fund.

D) one-year term deposit Answer: A Diff: 2 Type: MC Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied 29) The Canada Deposit Insurance Corporation insures money on deposit at A) insurance companies.

B) brokerage and securities dealers.

C) chartered banks.

D) all of the above.

Answer: C Diff: 1 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 13 © 2019 Pearson Canada Inc.

30) Which of the following financial institutions are restricted in their ability to accept deposits?

A) Trust Companies B) Schedule I banks C) Schedule II banks D) Schedule III banks Answer: D Diff: 2 Type: MC Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 31) Which of the following is a true statement about overdraft protection?

A) Overdraft protection is an inexpensive form of short-term credit.

B) Your bank may charge you for having overdraft protection even if you don't use it.

C) Overdraft fees are already included in your regular monthly bank fees.

D) Overdraft interest may be as high as 29% compounded daily.

Answer: B Diff: 2 Type: MC Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 32) A 180-day GIC pays annualized interest at six and a half percent. How much interest will you earn on $5000 if you hold it to maturity?

A) $300 B) $160.27 C) $325.00 D) $162.50 Answer: B Diff: 2 Type: MC Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Quantitative Skill Type: Applied 33) Using an ABM from another financial institution other than your own means A) your debit card won't work.

B) you will be charged one ABM fee.

C) you will be charged fees by two ABM sponsors.

D) the branch is the same institution but not your banking branch.

Answer: C Diff: 1 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall

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34) The Canada Deposit Insurance Corporation (CDIC) insures A) bank deposits and GICs to a specified limit.

B) your chequing accounts for a small charge to the depositor.

C) only guaranteed investment certificates.

D) GICs, Canada Savings Bonds, and Canada Premium Bonds.

Answer: A Diff: 1 Type: MC Categories: Selecting a Financial Institution Financial Type: Qualitative Skill Type: Recall 35) Mortgage companies A) take deposits, savings, and term deposits and lend the money to home buyers.

B) act as intermediaries to provide mortgages for home buyers.

C) facilitate the purchase and sale of mortgages.

D) allow individual investors to achieve higher returns by direct investment in mortgages.

Answer: B Diff: 2 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 36) Fred's after tax income is $3600 a month and his expenses are generally $3600 as well. Last month he had a car accident which resulted in a $2000 unexpected expense due to the deductible on his insurance and he covered that expense with his credit card. What is the best way to describe his situation?

A) Fred has a money management problem because he lives beyond his means.

B) Fred has a liquidity crisis because he has no emergency fund.

C) Fred is relying on short-term credit financing which can become very expensive.

D) Fred needs better insurance coverage with a lower deductible.

Answer: C Diff: 3 Type: MC Categories: Background on Money Management Financial Type: Qualitative Skill Type: Applied 37) In general, when an investment is more liquid, the return you receive will be A) lower.

B) higher.

C) less predictable.

D) Liquidity does not affect return.

Answer: A Diff: 1 Type: MC Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 15 © 2019 Pearson Canada Inc.

38) A stop payment on a cheque A) only applies when you write a cheque.

B) can only be accomplished if the payment has not cleared.

C) usually occurs in response to a request by the payee D) is a regular service for most customers.

Answer: B Diff: 2 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 39) Kelly deposits $1000 in a three year GIC with four percent interest compounded annually.

How much interest would she earn by maturity?

A) $124.86 B) $120.00 C) $ 40.00 D) $1124.86 Answer: A Diff: 2 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Quantitative Skill Type: Applied 40) You have $5000 saved which you may need for home repairs at any time in the next few years. If you did need the funds, you would have a weeks' notice to access the funds. Which of the following would likely give you the best return for your $5000?

A) A three-year cashable GIC outside a TFSA B) A three-year cashable GIC in a TFSA account C) A savings account D) A three-year term deposit in a TFSA account Answer: B Diff: 3 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied 41) Which of the following accounts would normally give you higher interest combined with access to your funds with a few days' notice?

A) Money market funds B) Chequing account C) Canada Savings Bond D) Savings account Answer: A Diff: 2 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 16 © 2019 Pearson Canada Inc.

42) John has overdraft protection which has a fee of five dollars per use and a 21 percent annual interest charge. NSF fees at his bank are $35. This month John's unexpected car expense caused his account to become overdrawn by $1200 for 14 days until his pay cheque was deposited.

What was the total expense for John in this circumstance?

A) $35.00 B) $70.00 C) $14.67 D) $9.67 Answer: C Diff: 2 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Quantitative Skill Type: Applied 43) Which of the following is the better banking option for Jane who keeps a minimum bank balance of $1000, needs liquidity and does ten transactions per month?

A) Ace Bank pays no interest, has no ABM fees but charges a $7.00 monthly account fee.

B) Bee Bank charges a $60 annual fee for the account, pays interest at two percent on the average monthly balance, and has $1.00 ABM fees.

C) Sea Bank charges no fees as long as the account balance remains above $1000, pays two percent interest on the average monthly balance, charges $1.00 ABM fees, and requires no minimum balance.

D) Dee Bank requires no minimum balance, pays one percent interest on the average monthly balance, and allows 10 free ABM withdrawals a month, but charges $3 per withdrawal thereafter.

Answer: D Diff: 3 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Quantitative Skill Type: Applied 44) Jack has $2000 that he wishes to invest for the next two years. One-year GICs are currently paying eight percent while two-year GICs are paying 12 percent compounded annually.

Economists are predicting that interest rates will rise by the end of the year. What is the minimum interest rate Jack would need in year two, to make the one-year GIC better than the two-year GIC? A) 14.8 percent B) 16.2 percent C) 16.0 percent D) 16.8 percent Answer: B Diff: 3 Type: MC Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Quantitative Skill Type: Applied 17 © 2019 Pearson Canada Inc.

45) Lorenzo is deciding between two banks for his chequing account. Thrift Bank requires a minimum deposit of $100, charges a monthly fee of eight dollars, plus $0.50 per cheque.

Merchants Bank also requires a minimum deposit of $100, charges no monthly fee, but charges $1.00 per cheque. How many cheques would Lorenzo need to write each month to make Thrift Bank less expensive to use than Merchants Bank?

A) 16 cheques B) 8 cheques C) 24 cheques D) 12 cheques Answer: A Diff: 3 Type: MC Categories: Savings Alternatives Offered by Financial Institutions Financial Type: Quantitative Skill Type: Applied 46) Jeff put $50 into a chequing account with a balance of $600. He then withdrew funds using the ABM machine 14 times that month at a cost of $1.50 per withdrawal and wrote 12 cheques at a cost of $0.50 each. The account also has a monthly charge of five dollars. What are the total bank charges for the month?

A) $5.00 B) $27.00 C) $32.00 D) $33.50 Answer: C Diff: 2 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Quantitative Skill Type: Applied 47) Which short-term investment likely offers the highest return?

A) Savings account B) Chequing account C) GIC D) Term deposit Answer: C Diff: 1 Type: MC Categories: Role of the Provincial and Territorial Governments Financial Type: Qualitative Skill Type: Recall

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48) Foreign banks that have subsidiaries operating in Canada are classified as a A) Schedule III bank.

B) Schedule II bank.

C) Schedule I bank.

D) foreign conglomerate.

Answer: B Diff: 1 Type: MC Categories: Types of Financial Institutions Financial Type: Qualitative Skill Type: Recall 49) Overdraft protection normally is available with A) no fees and no interest.

B) low fees and high interest.

C) high fees and low interest.

D) high fees and high interest.

Answer: D Diff: 1 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Recall 50) Which of the following is becoming less relevant with the proliferation of online banking?

A) Cheque registers B) Overdraft protection C) Stop payment services D) Debit cards Answer: A Diff: 2 Type: MC Categories: Banking Services Offered by Financial Institutions Financial Type: Qualitative Skill Type: Applied Essay 1) Research two financial institutions on the web and compare them based on important factors you should consider when choosing a financial institution. What advantages do they each give to students? How does that change once one is no longer a student? Indicate and justify which institution you feel would be better for you. Cite your sources.

Answer: Several answers are acceptable here, such as a debit card, service fees, number of free transactions per month, minimum monthly balances, credit card, location, free cheques, interest rate offered, interest rate charged on loans, convenience, deposit rates, international services, abundance of ATMs, cross country access and fees and then compared with non-student rates.

Diff: 3 Type: ES Categories: Selecting a Financial Institution Financial Type: Qualitative Skill Type: Applied 19 © 2019 Pearson Canada Inc.

2) Describe how interest rates affect your personal budget, income statement, balance sheet, and choices when managing money and liquidity. What kinds of accounts do they affect? Give two specific examples.

Answer: This is a subjective answer. Interest rates affect the income and expense groups. On the income side, interest earned on an account varies. High interest rates can inhibit the ability to purchase a home or car or to obtain a student loan. Low interest rates can make financing a more affordable choice.

An important factor to note in present economic times is how the low interest rates encourage people to borrow rather than to save.

Diff: 2 Type: ES Categories: Background on Money Management Financial Type: Qualitative Skill Type: Applied 3) Illustrate how you would quantify the effective annual interest rate for someone who was charged two $40 NSF fees on their account due to bouncing a cheque (writing a cheque when there are not enough funds in their bank account to cover it) for $1000 which would have been covered by their pay cheque in five days' time. Explain the effective interest rate charged if they had overdraft protection with a 21 percent interest charge and a $5.00 fee. Comment on better ways to manage liquidity than either of these options.

Answer: This illustrates the importance of money management, especially liquidity.

Effective annual rate for the $80 NSF fees This can be considered the interest charge for borrowing the funds for five days: 80/1000 × 356/5 = 584% Effective rate with the overdraft protection: (2.88 + 5)/1000 × 365/5 = 57.5% While the overdraft fee is much better than the NSF fees, even a credit card balance is a lower effective interest rate because it has no $5 service fee.

Diff: 3 Type: ES Categories: Banking Services Offered by Financial Institutions Financial Type: Quantitative Skill Type: Applied 4) CIBC offers a GIC at eight percent compounded annually and TD Bank offers the same rate but it is compounded semi-annually. What will be the return in five years on each bank's GIC for a $1000 investment? Illustrate your calculation.

Answer: CIBC PV = 1000; %I = 8; PV = 0; N = 5; CPT FV = = $469.33 TD Bank PV = 1000; %I = 8/2 = 4; N = 10; CPT FV = = $480.24 Diff: 2 Type: ES Categories: Background on Money Management Financial Type: Quantitative Skill Type: Applied 20 © 2019 Pearson Canada Inc.

5) Angela is concerned about saving money for the future and taking advantage of TFSA and RRSP accounts. If she was able to save $500 a month for 40 years, and her marginal tax bracket was 36%, how much more would she have in her RRSP, versus her TFSA, versus saving the funds in an unsheltered investment account? Assume the investment choice was the same for each account and grew at an annual rate of 6%.

Show your work.

Answer: There are a number of assumptions that could be made to approximate this scenario.

TFSA- she gets the full 6% growth N 40 × 12, I 6%, PV 0, PMT -500, CPT FV = $958 482 RRSP - she gets the full 6% growth and a refund each year of $2160 which she could invest as well, so can assume she effectively put away $680 a month at 6% return for 40 years N 40 × 12, I 6%, PV 0, PMT -680, CPT FV = 1 303 535 Investment Account - she would have to pay tax on part of the 6% return each year, but not fully assuming it is not all interest income. Can make an assumption half the investment return is taxed, so the tax rate is not 36%, but 18%, so really gets 4.92% return. So $500 a month away at 4.92% for 40 years N 40 × 12, I 4.92, PV 0, PMT -500, CPT FV = $729 608 Diff: 3 Type: ES Categories: Background on Money Management Financial Type: Quantitative Skill Type: Applied

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Personal Finance, Canadian Ed., 4e (Madura) Part 2 Managing Your Financial Resources - Assessing, Managing and Securing Your Credit True/False 1) Acquiring and using a credit card is an excellent way to start building your credit history.

Answer: TRUE Diff: 2 Type: TF Categories: Background on Credit Financial Type: Qualitative Skill Type: Applied 2) Credit issued by department stores for relatively long periods of time is called non-installment credit.

Answer: FALSE Diff: 1 Type: TF Categories: Credit Cards Financial Type: Qualitative Skill Type: Recall 3) If your only credit is a credit card with a $15 000 limit which you've had for ten years, and you keep your balance below $2000 and always pay at least the minimum due, you will have a good credit rating.

Answer: TRUE Diff: 3 Type: TF Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Applied 4) The credit scoring model used in Canada is referred to as the Fair Isaac Corporation (FICO).

Answer: FALSE Diff: 2 Type: TF Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Applied 5) Revolving open-end credit typically does not specify a maximum amount that can be borrowed.

Answer: FALSE Diff: 2 Type: TF Categories: Background on Credit Financial Type: Qualitative Skill Type: Recall

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6) When you use credit to purchase a second product at half price (e.g. a "buy one get another for 50% sale"), you save money.

Answer: FALSE Diff: 2 Type: TF Categories: Background on Credit Financial Type: Qualitative Skill Type: Applied 7) If you declare bankruptcy within seven years of ceasing to be a student, you may have your student loans forgiven.

Answer: FALSE Diff: 1 Type: TF Categories: Student Loans Financial Type: Qualitative Skill Type: Applied 8) Your credit report indicates your spouse's personal information.

Answer: FALSE Diff: 2 Type: TF Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall 9) If you have a poor credit score, there may be lenders willing to loan you money but at a higher interest rate.

Answer: TRUE Diff: 2 Type: TF Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall 10) The credit bureaus will have approximately the same score for each individual in their records.

Answer: FALSE Diff: 1 Type: TF Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall 11) In evaluating a borrower's creditworthiness, income and expenses are carefully reviewed, but assets are not relevant.

Answer: FALSE Diff: 2 Type: TF Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall 2 © 2019 Pearson Canada Inc.

12) A BEACON score of 820 indicates a person has a high likelihood of paying back debt as expected.

Answer: TRUE Diff: 2 Type: TF Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Applied 13) The most important element affecting your credit score is your debt level.

Answer: FALSE Diff: 2 Type: TF Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall 14) If you are a victim of identity theft, you may be turned down for employment as a result of incorrect background information.

Answer: TRUE Diff: 2 Type: TF Categories: Identity Theft: A Threat to Your Credit Financial Type: Qualitative Skill Type: Applied 15) Posing as an employee of a financial institution to obtain information for purposes of identity theft is an example of pretexting.

Answer: TRUE Diff: 2 Type: TF Categories: Identity Theft Tactics Financial Type: Qualitative Skill Type: Recall 16) Identity theft is only conducted by individuals who do not have legitimate access to your information.

Answer: FALSE Diff: 2 Type: TF Categories: Identity Theft Tactics Financial Type: Qualitative Skill Type: Recall 17) Credit insurance will pay off all your credit card debt when you cannot work due to accident or illness.

Answer: FALSE Diff: 2 Type: TF Categories: Background on Credit Financial Type: Qualitative Skill Type: Recall 3 © 2019 Pearson Canada Inc.

18) Someone with a credit score of 800 will pay a higher interest rate than someone with a score of 820.

Answer: FALSE Diff: 2 Type: TF Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Applied 19) Despite a high credit score, your income level may be the determining factor in whether you can get a loan.

Answer: TRUE Diff: 1 Type: TF Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall 20) Using your credit card provides you free financing each month.

Answer: TRUE Diff: 1 Type: TF Categories: Credit Cards Financial Type: Qualitative Skill Type: Recall 21) Someone with a poor credit rating might be offered a credit card with a 28 percent interest rate while someone with a high credit rating may be offered 21 percent.

Answer: FALSE Diff: 3 Type: TF Categories: Credit Cards Financial Type: Qualitative Skill Type: Applied 22) Using the previous balance method, if you paid your credit card off five days late and your balance was $5000, with interest 20% calculated daily, you would owe $15.16 in interest.

Answer: FALSE Diff: 3 Type: TF Categories: Credit Cards Financial Type: Quantitative Skill Type: Applied 23) Credit card use can be good for your financial plan if you have budgeted to pay the entire balance when the statement is due.

Answer: TRUE Diff: 2 Type: TF Categories: Credit Cards Financial Type: Qualitative Skill Type: Applied 4 © 2019 Pearson Canada Inc.

24) If not objected to by the creditors, a consumer proposal could enable someone with $50 000 in consumer debt to pay off $30 000 of it and have it removed from their credit bureau report.

Answer: TRUE Diff: 3 Type: TF Categories: Debt Management Financial Type: Qualitative Skill Type: Applied 25) The worst outcome from identity theft is that you could be responsible for charges someone made fraudulently on your credit card.

Answer: FALSE Diff: 2 Type: TF Categories: Identity Theft: A Threat to Your Credit Financial Type: Qualitative Skill Type: Applied 26) In considering the true cost of a personal loan, if you used collateral to reduce the interest charge, then the appraisal fee charged to evaluate the assets should not be considered part of the cost of borrowing.

Answer: FALSE Diff: 3 Type: TF Categories: Background on Personal Loans Financial Type: Quantitative Skill Type: Applied 27) The risk in co-signing on a loan for a friend is not significant, as you are not the primary borrower.

Answer: FALSE Diff: 1 Type: TF Categories: Personal Loans Financial Type: Qualitative Skill Type: Applied 28) If Brian has a home worth $400 000 and a mortgage of $200 000, he should be able to get a HELOC for $160 000 at a better interest rate than if he got an unsecured line of credit.

Answer: FALSE Diff: 3 Type: TF Categories: Home Equity Loans Financial Type: Quantitative Skill Type: Applied 29) The proceeds from a home equity loan must be used for home improvements.

Answer: FALSE Diff: 2 Type: TF Categories: Home Equity Loans Financial Type: Qualitative Skill Type: Applied 5 © 2019 Pearson Canada Inc.

30) The greatest benefit of student loans is that the interest is tax deductible.

Answer: FALSE Diff: 2 Type: TF Categories: Student Loans Financial Type: Qualitative Skill Type: Recall 31) One of the greatest benefits of leasing a car is that you do not have the hassles of ownership.

Answer: FALSE Diff: 2 Type: TF Categories: Background on Personal Loans Financial Type: Qualitative Skill Type: Applied 32) If you were charged the maximum legal rate of interest on a $1000 loan for one year, the interest cost would be $60.

Answer: FALSE Diff: 2 Type: TF Categories: Background on Personal Loans Financial Type: Quantitative Skill Type: Applied 33) A 20 percent annual interest rate on a $10 000 loan amortized over five-years would result in interest charges of $10 000.

Answer: FALSE Diff: 2 Type: TF Categories: Background on Personal Loans Financial Type: Quantitative Skill Type: Applied 34) If a buyer has limited capital, leasing a car will usually require lower monthly payments than a car loan.

Answer: TRUE Diff: 2 Type: TF Categories: Car Loans Financial Type: Qualitative Skill Type: Applied

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Multiple Choice 1) Which of the following is an advantage of using credit?

A) It increases the need to cover cash flow shortages.

B) It increases the number of cheques written.

C) It does not affect your cash flow statement.

D) It reduces the need to carry cash.

Answer: D Diff: 1 Type: MC Categories: Background on Credit Financial Type: Qualitative Skill Type: Recall 2) Which of the following is a typical example of an instalment loan?

A) A credit card B) A student loan C) A line of credit D) A demand loan Answer: B Diff: 2 Type: MC Categories: Background on Credit Financial Type: Qualitative Skill Type: Applied 3) Which of the following will have a negative effect on a credit history?

A) Taking out a car loan with a ten year maturity B) Making as many purchases as possible with cash C) Never exceeding your credit limit on your credit card D) All these options would have a positive effect on credit history.

Answer: B Diff: 2 Type: MC Categories: Background on Credit Financial Type: Qualitative Skill Type: Applied 4) Which of the following will not be included on your credit report?

A) Your personal information B) Your employment income C) Unpaid accounts D) Companies that have recently inquired about your credit report Answer: B Diff: 3 Type: MC Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall

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5) The item that receives the most weight in the BEACON credit scoring system is A) the amount of credit used each month.

B) credit payment history.

C) credit use.

D) the total amount of credit.

Answer: B Diff: 2 Type: MC Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall 6) Which of the following is not an element of a credit report?

A) Your account history B) Bank information C) Marital status D) A list of creditor contracts Answer: C Diff: 2 Type: MC Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall 7) Low credit scores may result in A) lower interest rates for borrowing.

B) higher interest rates for borrowing.

C) automatic acceptance of your credit application.

D) targeting by credit companies.

Answer: B Diff: 2 Type: MC Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall 8) A poor credit history will appear on your credit report for A) 3 to 5 years.

B) 3 to 10 years.

C) 5 to 7 years.

D) 7 to 10 years.

Answer: B Diff: 2 Type: MC Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall

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9) Which of the following can be used by a creditor in deciding whether or not to grant credit?

A) Credit history B) Marital status C) Gender D) Any of the above Answer: A Diff: 1 Type: MC Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall 10) Which of the following statements is true regarding a review of your credit agency report?

A) You will not have authority to make corrections, as the information must come from a financial institution.

B) It will help determine if there are credit cards you should apply for to improve your credit standing.

C) It will reveal if you have sufficient income to carry additional debt.

D) It will reveal deficiencies that you can work on to improve your credit rating.

Answer: D Diff: 2 Type: MC Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Applied 11) Which of the following is the most serious threat from identity theft?

A) Criminal activities attributed to the victim B) The financial cost to society C) Loss of access to credit D) Credit card charges made by the perpetrator Answer: A Diff: 3 Type: MC Categories: Identity Theft: A Threat to Your Credit Financial Type: Qualitative Skill Type: Applied 12) 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, he or she is A) shoulder surfing.

B) pharming.

C) pretexting.

D) skimming.

Answer: A Diff: 2 Type: MC Categories: Identity Theft: A Threat to Your Credit Financial Type: Qualitative Skill Type: Recall 9 © 2019 Pearson Canada Inc.

13) Identity thieves that obtain your information from the magnetic strip on your credit card are using a technique known as A) pharming.

B) phishing.

C) pretexting.

D) skimming.

Answer: D Diff: 2 Type: MC Categories: Identity Theft: A Threat to Your Credit Financial Type: Qualitative Skill Type: Recall 14) Posing as an employee of a brokerage firm to obtain information to allegedly update your account information is an example of A) phishing.

B) pharming.

C) pretexting.

D) skimming.

Answer: C Diff: 2 Type: MC Categories: Identity Theft: A Threat to Your Credit Financial Type: Qualitative Skill Type: Recall 15) Using email messages from a supposedly legitimate source to obtain account information for the purpose of identity theft is referred to as A) pharming.

B) phishing.

C) skimming.

D) trolling.

Answer: B Diff: 2 Type: MC Categories: Identity Theft: A Threat to Your Credit Financial Type: Qualitative Skill Type: Recall 16) Manipulating email viruses and host files to redirect users from legitimate commercial websites to bogus websites to obtain log-in names and passwords is referred to as A) pharming.

B) phishing.

C) skimming.

D) trolling.

Answer: A Diff: 2 Type: MC Categories: Identity Theft: A Threat to Your Credit Financial Type: Qualitative Skill Type: Recall 10 © 2019 Pearson Canada Inc.

17) Which of the following is true about credit bureaus in Canada?

A) There are two federally appointed credit bureaus in Canada.

B) It is impossible to have a better credit score at one bureau than another.

C) Lenders may access your credit information without your permission.

D) Lenders may use more than one credit bureau for information.

Answer: D Diff: 3 Type: MC Categories: Identity Theft: A Threat to Your Credit Financial Type: Qualitative Skill Type: Recall 18) If you receive a phone call that seeks to verify or update personal information, you should A) ask several questions of the solicitor to verify his or her authenticity.

B) ask to speak to a supervisor.

C) obtain his or her name and address in case you need to contact him or her in the future.

D) never give out any personal information to someone you do not know.

Answer: D Diff: 2 Type: MC Categories: Protecting Against Identity Theft Financial Type: Qualitative Skill Type: Applied 19) Revolving credit means A) the loan balance will fluctuate based on the amount used.

B) the interest rate will revolve above the prime rate.

C) it is a credit card.

D) it is a mortgage.

Answer: A Diff: 2 Type: MC Categories: Background on Credit Financial Type: Qualitative Skill Type: Recall 20) The best policy regarding credit is A) always go for the highest credit limit possible.

B) always make the minimum payment.

C) pay back debt using consistent payments every month.

D) take steps to increase your credit score.

Answer: D Diff: 3 Type: MC Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Applied

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21) Credit insurance A) is a free benefit on most credit cards.

B) can be used to pay off all debt when a creditor becomes unemployed.

C) is a good substitute for health and disability insurance.

D) can cover monthly credit repayments if a consumer cannot work.

Answer: D Diff: 3 Type: MC Categories: Background on Credit Financial Type: Qualitative Skill Type: Applied 22) A credit bureau report may include A) your account history.

B) your spouse's name.

C) a list of debtor contacts.

D) all of the above.

Answer: A Diff: 3 Type: MC Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall 23) A large number of recent credit inquiries suggests A) you have a high BEACON score.

B) you are having trouble getting credit.

C) you have a good rating with many financial institutions.

D) you are very diligent in tracking your credit information.

Answer: B Diff: 3 Type: MC Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Applied 24) Even though you may have a very high credit score, the loan approval A) relies on a lower BEACON score.

B) relies on consistent scores from all credit reporting agencies.

C) relies on the lender's assessment of sufficient income.

D) relies on the impression you make with your lender.

Answer: C Diff: 3 Type: MC Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall

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25) Errors on credit reports can occur. If there is an error on your report A) it is your responsibility to review it once a year for accuracy and inform of any errors.

B) it can result in the credit agency being charged under the Fair Credit Reporting Act. C) the creditor reporting to the agency must correct it solely at your request.

D) you must inform the Better Business Bureau to take your case to the authorities.

Answer: A Diff: 2 Type: MC Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Recall 26) When do you need to use a credit repair service?

A) When you find an error on your credit report which is negatively affecting your score B) At the point that you need to work with the trustee in bankruptcy to develop a consumer proposal C) A credit repair company should be contacted only as a last resort to avoid bankruptcy.

D) Never, as they have no special powers to correct information on your credit report.

Answer: D Diff: 3 Type: MC Categories: Credit Cards Financial Type: Qualitative Skill Type: Applied 27) A credit card charges 18 percent annual interest and Frank has $750 due on the statement date. He is only able to make the minimum payment of $22.50. If the billing cycle is 30 days and the grace period is 20 days, and he pays the full balance at the next due date, how much interest would he owe?

A) $10.76 B) $17.94 C) $28.70 D) $21.53 Answer: C Diff: 3 Type: MC Categories: Credit Cards Financial Type: Quantitative Skill Type: Applied

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28) Fred has a credit card which uses the average daily balance method, has a 30-day billing period, a 21-day grace period and charges 21 percent annual interest calculated (but not compounded) daily. His average daily balance for the billing period was $7900, and he could not pay it off until received his pay cheque eight days after the statement due date. How much interest does he owe?

A) $268.17 B) $172.72 C) $136.36 D) $36.36 Answer: A Diff: 3 Type: MC Categories: Credit Cards Financial Type: Quantitative Skill Type: Applied 29) If a credit card company has a 30-day billing period, 20-day grace period and an interest rate of 20 percent, how much interest will be charged on a $5000 average monthly balance which gets paid 40 days after the due date using the average daily balance method?

A) $258.90 B) $115.07 C) $201.37 D) $172.60 Answer: A Diff: 3 Type: MC Categories: Credit Cards Financial Type: Quantitative Skill Type: Applied 30) TransUnion is aware that you are one month late on your car payment, while Equifax has not yet uncovered this information. Which of the following statements is correct?

A) TransUnion will have a lower credit score for you than Equifax.

B) Both companies will have the same credit score because of the grace period.

C) Being late one month on a car payment will not affect your BEACON score.

D) Both companies will have the same credit score because car payments are backed by collateral.

Answer: A Diff: 2 Type: MC Categories: Credit Bureaus Financial Type: Qualitative Skill Type: Applied

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31) A proposal to creditors is made by an insolvent debtor having difficulty meeting payments.

Which of the following is true?

A) The proposal must be rejected by creditors within 45 days, or it will be deemed to be accepted.

B) The history will remain on the credit bureau report for three years after terms have been met.

C) The proposal must be for an amount over $50 000.

D) The proposal must require at least fifty percent of the total debt to be repaid.

Answer: A Diff: 2 Type: MC Categories: Debt Management Financial Type: Qualitative Skill Type: Recall 32) A person can be declared insolvent if A) he or she has more debts than assets.

B) his or her spouse is insolvent as well.

C) he or she owes $1000 and is unable to pay.

D) his or her monthly payments exceed $1000.

Answer: C Diff: 1 Type: MC Categories: Debt Management Financial Type: Qualitative Skill Type: Recall 33) Your credit card had balances of $800 for 13 days, $600 for 5 days, and $650 for 12 days.

Assume an annual interest rate of 18 percent, 30-day billing cycle and 20-day grace period. How much is the interest charge using the average daily balance method, if the credit card gets paid off five days after the statement due date?

A) $1.74 B) $8.71 C) $12.20 D) $19.17 Answer: D Diff: 3 Type: MC Categories: Credit Cards Financial Type: Quantitative Skill Type: Applied

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34) Jacob needs to borrow $19 000 to purchase a car. If the interest rate is seven percent compounded monthly, which of the following is true when considering a five, seven or ten year term?

A) If he selects a seven year term he will save interest by keeping his payments to $286.76 per month.

B) If he selects a ten year term he will save $2385.28 in interest compared with the seven year term.

C) If he selects a five year term he will save $1514.55 in interest compared with the seven year term.

D) The overall interest will be the same, regardless of the term.

Answer: C Diff: 3 Type: MC Categories: Personal Loans Financial Type: Quantitative Skill Type: Applied 35) The loan contract identifies all but which of the following?

A) Credit score B) Amount of the loan C) Interest rate D) Loan repayment schedule Answer: A Diff: 1 Type: MC Categories: Background on Credit Financial Type: Qualitative Skill Type: Recall 36) The term amortized refers to A) the method by which interest is calculated in a loan contract.

B) the repayment of a loan through a series of equal payments.

C) the loan maturity date in a loan contract.

D) the term contracted to pay off a loan.

Answer: B Diff: 1 Type: MC Categories: Personal Loans Financial Type: Qualitative Skill Type: Recall

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37) Making extra payments on a loan A) reduces the total interest paid.

B) frees up cash flow for other expenses.

C) lengthens the maturity of the loan.

D) reduces the size of future payments.

Answer: A Diff: 2 Type: MC Categories: Personal Loans Financial Type: Qualitative Skill Type: Recall 38) From a borrower's perspective, all else the same, a longer-term loan A) costs more in interest.

B) increases the size of monthly payments.

C) decreases the size of monthly payments so costs less in interest.

D) is most cost effective in the long run.

Answer: A Diff: 2 Type: MC Categories: Personal Loans Financial Type: Qualitative Skill Type: Recall 39) Collateral A) gives the lender additional recourse if the payments are not made.

B) is used on unsecured loans.

C) increases the interest rate on loans.

D) is required on all loans except revolving credit.

Answer: A Diff: 2 Type: MC Categories: Personal Loans Financial Type: Qualitative Skill Type: Recall 40) Which of the following is most accurate about interest rates in Canada?

A) Charging a rate of three percent for a seven day payday loan is legal in Canada.

B) As long as loan charges come in the form of fees, they are not included in interest rate calculations in Canada.

C) Payday loan companies provide a necessary service and have permission to charge above the maximum loan rate in Canada.

D) The maximum interest rate that can be legally charged on a consumer loan in Canada is 60 percent.

Answer: D Diff: 2 Type: MC Categories: Personal Loans Financial Type: Qualitative Skill Type: Recall 17 © 2019 Pearson Canada Inc.

41) What would be the real cost of borrowing in the following case? A home equity loan is advertised at three percent compounded monthly, however, there is a legal fee of $400 and appraisal fee of $450 to set up the house as collateral. If Sarah needs to borrow $20 000 for one year, at which time will be able to repay the full amount, what is the effective rate of borrowing the $20 000 for the year?

A) 3.04% B) 7.29% C) 7.25% D) 4.25% Answer: B Diff: 3 Type: MC Categories: The Real Cost of Borrowing Financial Type: Quantitative Skill Type: Applied 42) Harry purchased his condo for $330 000 and now the appraised value is . His outstanding mortgage is $228 000. What is the maximum home equity line of credit Harry would qualify for?

A) $36 000 B) $60 000 C) $72 000 D) $105,600 Answer: B Diff: 3 Type: MC Categories: Home Equity Loans Financial Type: Quantitative Skill Type: Applied 43) Which of the following is most accurate about second mortgages?

A) Most people have two mortgages on their homes.

B) The primary mortgage is for the down payment and the secondary mortgage is the main mortgage.

C) A home equity loan is commonly a second mortgage.

D) Second mortgages are last resort financing.

Answer: C Diff: 2 Type: MC Categories: Car Loans Financial Type: Qualitative Skill Type: Recall

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44) In making the purchase versus lease decision, it is important to remember that A) dealers may impose additional charges for leasing.

B) leasing is less risky because you do not have equity.

C) leasing is less expensive overall than purchasing.

D) you won't be required to pay maintenance costs on the leased car.

Answer: A Diff: 1 Type: MC Categories: Purchase Versus Lease Decision Financial Type: Qualitative Skill Type: Recall 45) The advantage of leasing over purchasing a vehicle is A) no deposit is required.

B) lower monthly payments than for borrowing.

C) there is less hassle than when purchasing a vehicle.

D) there are no maintenance expenses.

Answer: B Diff: 2 Type: MC Categories: Purchase Versus Lease Decision Financial Type: Qualitative Skill Type: Recall 46) Which of the following is a true statement about student loans?

A) The Federal Government is responsible for all student loans.

B) Loan limits are higher for students who are dependants.

C) The repayment schedule is deferred.

D) Students who declare bankruptcy within seven years of graduation may have their loans forgiven.

Answer: C Diff: 2 Type: MC Categories: Student Loans Financial Type: Qualitative Skill Type: Recall 47) What monthly payment (to the nearest dollar) would Dieter need to make on a with a nine percent interest rate compounded monthly and a three-year maturity?

A) $303 B) $318 C) $329 D) $360 Answer: B Diff: 3 Type: MC Categories: The Real Cost of Borrowing Financial Type: Quantitative Skill Type: Applied

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loan

48) A house was purchased for $300 000 and has a market value of . The equity in this house is A) $87 000.

B) 34.5 percent.

C) $112 000.

D) $25 000.

Answer: C Diff: 1 Type: MC Categories: Home Equity Loans Financial Type: Quantitative Skill Type: Applied

and a mortgage of

49) Over the past 10 years you have paid your mortgage principal down from to and your house has a market value went from to . Approximately how much of a home equity line of credit could you receive if you applied now?

A) $61 000.

B) $45 000.

C) $85 600.

D) $27 000.

Answer: B Diff: 3 Type: MC Categories: Home Equity Loans Financial Type: Quantitative Skill Type: Applied 50) Your house is worth $278 000 and you have a first mortgage of . You are also using the house to secure a personal loan for $8500. How large a home equity line of credit can you qualify for?

A) $63 600.

B) $31 400.

C) $70 400.

D) $23 900.

Answer: D Diff: 3 Type: MC Categories: Home Equity Loans Financial Type: Quantitative Skill Type: Applied

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51) Devon has owned a home for eight years. It was purchased for . She has a first mortgage of $156 500, a car lease with a buyout amount of $12 000, and credit card debt of $1989. How much of a home equity loan can be applied for if the house was recently appraised at ?

A) $96 300.

B) $108 300.

C) $139 600.

D) $74 700.

Answer: B Diff: 3 Type: MC Categories: Home Equity Loans Financial Type: Quantitative Skill Type: Applied 52) Sue obtains a one year loan of $3000 based on an annual interest rate of 12 percent. What would be the monthly payment to pay it off in one year?

A) $278 B) $280 C) $303 D) $266 Answer: D Diff: 3 Type: MC Categories: Personal Loans Financial Type: Quantitative Skill Type: Applied 53) What would be the total cost of leasing a vehicle for four years that requires a security deposit of $1000 (which would be withdrawn from your portfolio, which earns nine percent per year), has monthly lease payments of $500, and has a kilometer restriction of with excess kilometers resulting in a charge of 10 cents per kilometer? (Assume that, over the life of the lease, you exceed the kilometer limit by 8000.)

A) $24 420 B) $24 360 C) $24 800 D) $25 160 Answer: D Diff: 3 Type: MC Categories: Purchase Versus Lease Decision Financial Type: Quantitative Skill Type: Applied

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54) Tom needs a car to commute to work and has found a suitable Honda Civic from a dealer for $8000. He has $3000 saved for it and can afford a monthly payment up to $250. Which of the following is the best (lowest total cost) financing option for him?

A) Make a $2500 deposit and take a two year loan with monthly payments of $241.

B) Make a $3000 deposit and take a two year loan with monthly payments of $221.

C) Make a $2000 deposit and take a three year loan with monthly payments of $185.

D) Make a $1000 deposit and take a three year loan with monthly payments of $210.

Answer: A Diff: 3 Type: MC Categories: The Real Cost of Borrowing Financial Type: Quantitative Skill Type: Applied 55) Which would be the best loan offer? Loan A has a 9.5 percent rate calculated quarterly and Loan B has a 9.25 percent rate calculated monthly.

A) The effective rate on Loan A is 9.84 percent and on Loan B is 9.92. percent. Therefore, Loan A is best.

B) The effective rate on Loan A is 9.84 percent and on Loan B is 9.65 percent. Therefore, Loan B is best.

C) Loan B is a lower interest rate, so it is the better choice.

D) Loan A is compounded less frequently, so it would be the best option.

Answer: B Diff: 3 Type: MC Categories: The Real Cost of Borrowing Financial Type: Quantitative Skill Type: Applied 56) For the best customers, a bank will lend money at A) the prime rate.

B) the T-bill rate.

C) the minimum term rate.

D) the bank rate.

Answer: A Diff: 1 Type: MC Categories: Home Equity Loans Financial Type: Qualitative Skill Type: Recall

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Essay 1) Illustrate the cost implications of using a credit card with 21 percent interest charges versus a line of credit with five percent interest charges to fund a $10 000 purchase. In one case, assume you only have $250 per month you can allocate to paying off the debt. In the second case assume you need to get the debt paid off in five years.

Answer: Credit card paid off with $250 per month payments P/Y 12, C/Y 12, PV 10000, FV 0, i 21, PMT -250 CPT N 69.4 months, 5.78 years to pay off and total interest $7350 Line of Credit paid off with $250 per month payments P/Y 12, C/Y 12, PV 10000, FV 0, i 5, PMT -250 CPT N 43.8 months 3.65 years to pay off and total interest $962.

Credit card paid off in five years P/Y 12, C/Y 12, N 60, PV 10000, FV 0, i 21, CPT PMT $270 per month required to pay off and total interest $6232 Line of Credit paid off in five years P/Y 12, C/Y 12, N 60, PV 10000, FV 0, i 21, CPT PMT $188 per month required to pay off and total interest $1322 The credit card costs thousands of dollars more to pay off in both cases.

Diff: 3 Type: ES Categories: Debt Management Financial Type: Quantitative Skill Type: Applied

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2) Explain how use of a credit card can affect the successful implementation of a financial plan.

Itemize at least ten benefits and disadvantages of using credit cards in the financial planning process.

Answer: Answers will vary, but here is a selection of possibilities.

Benefits: Supplement cash flow in times of need.

Permanent free loan of funds if statements always paid at due date.

Make funds available in an emergency if the emergency fund has been depleted.

Reduce the need for carrying cash, although a limited benefit perhaps over the use of a debit card.

Convenience, security, disputes may be covered in fraudulent cases.

Merchant recognition over other methods of payment.

Reward points, provided that these are not obtained at the cost of huge interest payments.

If handled properly, can maximize returns on liquid holdings by taking advantage of grace periods.

Possible extended warranties or protection against merchant dishonesty.

Record of all expenses.

Reduce number of bills to pay each month.

Disadvantages: If use for an emergency that can't be paid off when the statement is due, it becomes an extremely expensive source of financing.

Over-extending credit inadvertently.

Too easy to use, so temptation to buy items not truly needed.

Takes disciplined approach to prevent overuse.

Diff: 3 Type: ES Categories: Background on Money Management Financial Type: Qualitative Skill Type: Applied 3) Beth wants to borrow $18 000 for five years and she has a choice of two loans. One carries an annual rate of 10 percent and the other a 9.5 percent rate compounded semi-annually. Which is her best choice? Calculate the answer by comparing the effective annual rates of interest.

Answer: Math calculations are required to compute the effective annual rate of 9.5 percent calculated semi-annually to compare it to the 10 percent annual rate. There are several methods, but here are two solutions. Calculator keystrokes 9.5; second function key; Effective key; 2 = 9.72, or you can calculate by using the formula and calculator.

The formula for effective rate EFF = (1 + (i / n)) n - 1. Substituting for the formula: Effective rate is (1 + (0.095/2))squared -1 = 1.0475 squared -1 = 0.0972 or 9.72 percent.

Keystrokes are 1.0475 2nd function key to the power 2 = 1.09725 - 1 = 9.72.

Diff: 3 Type: ES Categories: Debt Management Financial Type: Quantitative Skill Type: Applied

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4) You have the cash available to pay off a $6500 loan that will cost you $450 in interest this year and you are deciding whether to pay it off or make an investment. If you are in a 30 percent marginal tax bracket, how much interest would you have to earn to make the investment a better decision?

Answer: Your $6500 investment must obviously earn more than $450 in interest paid plus the tax on that amount. In order to earn at least $450 after tax, you would have to earn $642.86 before tax. You calculate this as follows: $450/(1-tax rate). (Proof: $642.86 x 0.3 = $192.86 in tax. $642.86 - $192.86 = $450. In order to earn a pre-tax profit of $642.86, your return would have to be: 642.86/6500 = .0989 This works out to 9.89 percent, so you would need to earn at least that to invest rather than pay off the loan.

Diff: 3 Type: ES Categories: Background on Credit Financial Type: Quantitative Skill Type: Applied 5) Incorporating the use of credit into your financial plan requires understanding the correct use of different types of loans. Compare and contrast the positive and negative effects that credit cards and personal, home equity, and student loans may have on the success and failure of your financial plan.

Answer: The student should demonstrate a complete understanding of each type of loan and its appropriate use, but the answers could vary widely. Some examples are: Credit card: high interest, should be paid off monthly, revolving-type uses.

Personal loans: for the purchase of larger items with a fixed rate over a specific time and budgeted expense.

Home equity line of credit: like a credit card, however, lower interest rate, available for purchases or investment opportunities if necessary or even debt consolidation.

Student loans: similar to personal loans with two major advantages. Deferred interest until education completed, and interest tax credit on student loans.

Paying interest of all kinds can be destructive to wealth unless borrowing is used for higher returning investments.

Overextension of credit can ruin a financial plan by making budgets unmanageable.

Education does not always translate into higher earnings but it is highly likely.

Asset builder opportunities increase net worth.

Positive things to use credit for are homes, investments, and other net-worth-increasing assets.

Poor uses of credit include cars and other depreciating assets.

Diff: 3 Type: ES Categories: Personal Loans Financial Type: Qualitative Skill Type: Applied

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6) Discuss six of the choices to be made when making a decision between leasing and buying a car with a personal loan.

Answer: The total cost of the lease versus the total cost of the loan.

Cash flow available Down payment available Security deposits The resale value versus the buy back on the lease at maturity Extra kilometre charges Trade-in considerations Opportunity cost on down payments Early escape from a lease versus a loan The car price when leasing versus buying Any admin charges that apply only to leasing versus buying Benefits of ownership Students might discuss tax considerations for self-employed - deduction of lease payments versus interest costs.

Diff: 2 Type: ES Categories: Purchase Versus Lease Decision Financial Type: Qualitative Skill Type: Applied 7) If you apply for a payday loan of $1000 from a financial institution for 10 days, you pay back $1150. What is the cost of financing this payday loan?

Answer: [(1150 -1000)/1000] × (365/10) = 547.5 percent Diff: 2 Type: ES Categories: The Real Cost of Borrowing Financial Type: Quantitative Skill Type: Applied 8) Discuss at least four ways in which you can protect yourself from identity theft.

Answer: Students may include other recommendations; however, these are the most common.

A) Go through your wallet or billfold and remove anything that contains your social insurance number as well as rarely used credit cards; B) maintain a list of all items in your wallet and toll-free numbers that can be used to make notification in the event of a loss; C) purchase/use a shredder for all identifying information; D) install a locked mailbox or rent a P.O. box; E) have your name removed from local directories.

F) Clear your browser history every time you access financial information from your computer.

Diff: 2 Type: ES Categories: Protecting Against Identity Theft Financial Type: Qualitative Skill Type: Recall 26 © 2019 Pearson Canada Inc.

Personal Finance, Canadian Ed., 4e (Madura) Part 2 Managing Your Financial Resources - Purchasing and Financing a Home True/False 1) The purchase of a home represents a potential risk if you need to move quickly and the home does not appreciate rapidly in value.

Answer: TRUE Diff: 1 Type: TF Categories: Selecting a Home Financial Type: Qualitative Skill Type: Applied 2) It is possible to sell a house without paying a commission.

Answer: TRUE Diff: 1 Type: TF Categories: Selecting a Home Financial Type: Qualitative Skill Type: Recall 3) Online realtor services are more convenient, but usually charge higher commissions than traditional full-service real estate companies.

Answer: FALSE Diff: 1 Type: TF Categories: Selecting a Home Financial Type: Qualitative Skill Type: Recall 4) Most individuals pay for a home with a down payment of five percent or less and then obtain a mortgage to finance the rest.

Answer: FALSE Diff: 1 Type: TF Categories: Selecting a Home Financial Type: Qualitative Skill Type: Recall 5) It is a good idea not to disclose defects of the home you are trying to sell, since these will adversely affect your selling price or your ability to sell your home quickly.

Answer: FALSE Diff: 2 Type: TF Categories: Selecting a Home Financial Type: Qualitative Skill Type: Recall

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6) If the average price of homes you are considering went from $300 000 to $330 000 last year, it would make sense to estimate that they should be worth around $439 000 in three more years.

Answer: FALSE Diff: 3 Type: TF Categories: Selecting a Home Financial Type: Quantitative Skill Type: Applied 7) To speed up the home-buying process, you should first give a verbal offer to see if the seller is willing to accept the price you are willing to offer.

Answer: FALSE Diff: 3 Type: TF Categories: Selecting a Home Financial Type: Qualitative Skill Type: Applied 8) If Jane had a total of $30 000 available for the purchase and transactions expenses to buy a condo, and an accepted offer of $150 000 for the property, she would be able to get a conventional mortgage.

Answer: FALSE Diff: 3 Type: TF Categories: Transaction Costs of Purchasing a Home Financial Type: Quantitative Skill Type: Applied 9) In addition to closing costs, realtor fees of three to seven percent are charged when you buy a home.

Answer: FALSE Diff: 2 Type: TF Categories: Transaction Costs of Purchasing a Home Financial Type: Qualitative Skill Type: Recall 10) Jane's monthly gross income is $4000 and her debt payments are $400 per month. Given a GDS limit of 320 percent and TDS limit of 40 percent, she will be able to qualify for mortgagerelated debt payments of $1200 per month.

Answer: TRUE Diff: 3 Type: TF Categories: House Purchase Affordability Financial Type: Quantitative Skill Type: Applied

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11) For a 25-year mortgage of $300 000 with monthly payments of $1745 and interest rate of five percent compounded semi-annually, the amount of principle paid off over five years would be approximately $34 500.

Answer: TRUE Diff: 3 Type: TF Categories: Mortgage Options Financial Type: Quantitative Skill Type: Applied 12) The interest you would pay on a $200 000 mortgage, amortized over 25 years, with an interest rate of six percent compounded semi-annually, would be $300 000.

Answer: FALSE Diff: 3 Type: TF Categories: Mortgage Options Financial Type: Quantitative Skill Type: Applied 13) A variable-rate mortgage starts with higher payments, which decrease as the mortgage is paid off.

Answer: FALSE Diff: 2 Type: TF Categories: Transaction Costs of Purchasing a Home Financial Type: Quantitative Skill Type: Applied 14) Refinancing a home may incur penalties which outweigh the benefits of acquiring a lower interest rate, so should therefore be thoroughly investigated before acting.

Answer: TRUE Diff: 1 Type: TF Categories: Mortgage Refinancing Financial Type: Qualitative Skill Type: Recall 15) Malcolm has a down payment of $45 000 on a house valued at $200 000. He might be better off to borrow an additional $5000 on a personal loan to avoid the high ratio insurance premium.

Answer: FALSE Diff: 2 Type: TF Categories: Transaction Costs of Purchasing a Home Financial Type: Quantitative Skill Type: Applied 16) It is impossible to finance a home purchase worth $210 000 with only $10 500 to put down.

Answer: FALSE Diff: 3 Type: TF Categories: Transaction Costs of Purchasing a Home Financial Type: Quantitative Skill Type: Applied 3 © 2019 Pearson Canada Inc.

17) A house valued at $288 000 with a down payment of $63 000 will result in an extra charge for a high ratio mortgage.

Answer: FALSE Diff: 3 Type: TF Categories: Transaction Costs of Purchasing a Home Financial Type: Quantitative Skill Type: Applied 18) In choosing an open mortgage over a closed mortgage, you should consider the likelihood of being able to prepay principal to make up for the higher interest rate on the open mortgage.

Answer: TRUE Diff: 2 Type: TF Categories: Mortgage Options Financial Type: Qualitative Skill Type: Recall 19) A fixed-rate mortgage will have a set amount applied to the principal with each monthly payment.

Answer: FALSE Diff: 1 Type: TF Categories: Mortgage Options Financial Type: Qualitative Skill Type: Recall 20) Gross debt service ratio refers to a calculation of all mortgage-related financing and must not exceed 32 percent of total household income.

Answer: TRUE Diff: 1 Type: TF Categories: House Purchase Affordability Financial Type: Qualitative Skill Type: Recall 21) Total mortgage financing of $968 per month, and monthly debt payments of $530, given total monthly household income of $3457 results in a gross debt service ratio of 28 percent.

Answer: FALSE Diff: 3 Type: TF Categories: House Purchase Affordability Financial Type: Quantitative Skill Type: Applied

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22) Sharaz has gross household income of $3800 and wants to qualify for total monthly mortgage financing of $1330. Based on the gross debt service ratio, she should be approved.

Answer: TRUE Diff: 3 Type: TF Categories: House Purchase Affordability Financial Type: Quantitative Skill Type: Applied 23) An interest adjustment occurs when there is a difference between the date on which you take possession of your home and the date from which your lender calculates your first mortgage payment.

Answer: TRUE Diff: 2 Type: TF Categories: Transaction Costs of Purchasing a Home Financial Type: Qualitative Skill Type: Applied 24) The maximum amortization period for a high ratio mortgage is 25 years.

Answer: TRUE Diff: 2 Type: TF Categories: Transaction Costs of Purchasing a Home Financial Type: Qualitative Skill Type: Recall 25) Loan protection life and disability insurance protects the lending institution against financial loss as a result of injury, illness, or death of the borrower.

Answer: TRUE Diff: 2 Type: TF Categories: Transaction Costs of Purchasing a Home Financial Type: Qualitative Skill Type: Recall 26) The terms duplex and semi-detached both refer to the same type of property.

Answer: FALSE Diff: 1 Type: TF Categories: Selecting a Home Financial Type: Qualitative Skill Type: Recall 27) In order to be guaranteed to be approved for a mortgage, you should first acquire a preapproval certificate.

Answer: FALSE Diff: 2 Type: TF Categories: Selecting a Financial Institution Financial Type: Qualitative Skill Type: Recall 5 © 2019 Pearson Canada Inc.

28) In order to qualify for a mortgage you must conform with both the gross debt service ratio and total debt service ratio.

Answer: FALSE Diff: 2 Type: TF Categories: Selecting a Financial Institution Financial Type: Qualitative Skill Type: Recall 29) A high ratio mortgage refers to a mortgage where the down payment is less than 10% of the home's appraised value.

Answer: FALSE Diff: 1 Type: TF Categories: Transaction Costs of Purchasing a Home Financial Type: Qualitative Skill Type: Recall 30) Due to the high interest rates charged, a vendor take-back mortgage is generally a worse option than a high ratio mortgage.

Answer: FALSE Diff: 1 Type: TF Categories: Transaction Costs of Purchasing a Home Financial Type: Qualitative Skill Type: Recall Multiple Choice 1) What should be the first step in the home-buying process?

A) Determine the price range for houses in your target area.

B) Determine how much you can afford to pay monthly for a mortgage.

C) Compare the costs of buying versus renting.

D) Interview three realtors.

Answer: B Diff: 2 Type: MC Categories: Selecting a Home Financial Type: Qualitative Skill Type: Recall 2) Which of the following is true about condominiums?

A) The purchaser owns the land on which the condominium is built.

B) The maintenance fees of common areas are shared.

C) Purchasing a condominium is a simpler decision than purchasing a house.

D) Purchasing a condominium is very different than purchasing a house.

Answer: B Diff: 2 Type: MC Categories: Selecting a Home Financial Type: Qualitative Skill Type: Recall 6 © 2019 Pearson Canada Inc.

3) Which of the following costs associated with home ownership is hardest to budget for?

A) Insurance B) Taxes C) Repairs D) Mortgage payments Answer: C Diff: 2 Type: MC Categories: Selecting a Home Financial Type: Qualitative Skill Type: Recall 4) How are most home purchases initially funded?

A) With a vendor take-back mortgage B) With a 5 to 20 percent down payment and a mortgage C) With a 0 to 5 percent down payment and a mortgage D) With a 25 to 50 percent down payment and a mortgage Answer: B Diff: 2 Type: MC Categories: Selecting a Home Financial Type: Qualitative Skill Type: Recall 5) What is the best advice regarding mortgage financing?

A) Get a pre-approval certificate to guarantee your mortgage approval.

B) Let an expert choose the type and length of mortgage you will need.

C) Ensure the mortgage payments do not absorb all your excess income.

D) Select the maximum payments you can afford based on your cash flow.

Answer: C Diff: 3 Type: MC Categories: Selecting a Home Financial Type: Qualitative Skill Type: Applied 6) Which of the following is an advantage of using online realtor services?

A) Easier access to qualified realtors B) Enables you to shop online and save time C) Increases your chances of selling a house by over 20 percent D) Higher price for houses sold or lower prices for houses bought Answer: B Diff: 2 Type: MC Categories: Transaction Costs of Purchasing a Home Financial Type: Qualitative Skill Type: Recall

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7) What is the most significant cause for concern in selecting a variable-rate mortgage?

A) Interest rate increases B) Lack of convertibility C) The locked in term D) Lack of security Answer: A Diff: 1 Type: MC Categories: Variable Rate Mortgages Financial Type: Qualitative Skill Type: Recall 8) Which of the following is the best advice in determining how large a mortgage you can afford?

A) Get the most you can borrow to get the home you want B) Whatever the banks will offer based on your TDS and GDS ratios C) Less than what your cash flow indicates you can afford D) The maximum that your cash flow indicates you can afford Answer: C Diff: 2 Type: MC Categories: Selecting a Home Financial Type: Qualitative Skill Type: Applied 9) If you have a lot of debt such as a car loan, student loan, line of credit and credit card balances which you carry from month to month, which will be most relevant in determining how much mortgage you can afford?

A) GDS ratio B) Both TDS and GDS equally C) TDS ratio D) HBP Answer: C Diff: 3 Type: MC Categories: Selecting a Home Financial Type: Qualitative Skill Type: Applied 10) What is the most important factor in determining the price of a home?

A) An estimate of the future value of the home for resale B) The market analysis to find the per foot price of other homes nearby C) The highest price you are willing to pay that the seller will accept D) The quality of the structure and materials Answer: C Diff: 3 Type: MC Categories: Negotiating a Price Financial Type: Qualitative Skill Type: Applied 8 © 2019 Pearson Canada Inc.

11) Why is a conventional mortgage a good idea for a buyer?

A) You will not need to purchase CMHC insurance.

B) You will not need to purchase life insurance.

C) You will get a better interest rate.

D) You will not need to purchase life insurance or CMHC insurance.

Answer: A Diff: 2 Type: MC Categories: Transaction Costs of Purchasing a Home Financial Type: Qualitative Skill Type: Recall 12) Which of the following is true regarding conventional mortgages?

A) They require a down payment of at least twenty-five percent.

B) They require a down payment of at least twenty percent.

C) They receive more favourable interest rates for the buyer.

D) They are a form of closed mortgage.

Answer: B Diff: 3 Type: MC Categories: Transaction Costs of Purchasing a Home Financial Type: Qualitative Skill Type: Applied 13) When selling a home, which of the following costs will you likely incur?

A) Loan application fees B) Realtor's commission C) Insurance premiums D) Appraisal fees Answer: B Diff: 2 Type: MC Categories: Transaction Costs of Purchasing a Home Financial Type: Qualitative Skill Type: Recall 14) When purchasing a home, which of the following costs will you incur?

A) Finder's fee B) Realtor's commission C) Tax arrears payments D) Appraisal fee Answer: D Diff: 1 Type: MC Categories: Transaction Costs of Purchasing a Home Financial Type: Qualitative Skill Type: Recall

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15) A house is sold for $300 000 and appraised for $285 000. What down payment will be needed to qualify for a conventional mortgage?

A) $60 000 B) $57 000 C) $71 250 D) $72 000 Answer: D Diff: 3 Type: MC Categories: Transaction Costs of Purchasing a Home Financial Type: Quantitative Skill Type: Applied 16) A 15-year mortgage compared to a 30-year mortgage has A) higher total principal payments.

B) lower monthly payments.

C) higher total payments.

D) lower total payments.

Answer: D Diff: 2 Type: MC Categories: Mortgage Options Financial Type: Qualitative Skill Type: Applied 17) Ianna has found a fixed rate mortgage for $300 000 at four percent interest amortized over 30 years. Her payment will be $1426 per month. How much would her payment be if she wanted to amortize the mortgage over 15 years?

A) $2219 B) $1733 C) $2214 D) $1711 Answer: C Diff: 3 Type: MC Categories: Mortgage Options Financial Type: Quantitative Skill Type: Applied 18) An amortization schedule shows all except the A) principal portion of the payment.

B) interest portion of the payment.

C) increase in equity.

D) beginning and ending balances.

Answer: C Diff: 1 Type: MC Categories: Fixed Rate Mortgages Financial Type: Qualitative Skill Type: Recall 10 © 2019 Pearson Canada Inc.

19) If Adam's house was purchased for $280 000 five years ago and is worth now, and his mortgage was $ and amortized over 25 years, at four percent interest, compounded semi-annually, what is his equity in his house now? (To the nearest $1000) A) $101 000 B) $72 000 C) $85 000 D) Not enough information given to answer this Answer: A Diff: 3 Type: MC Categories: Mortgage Options Financial Type: Quantitative Skill Type: Applied 20) Making extra mortgage payments does which of the following?

A) Reduces the payment amount B) Reduces the length of the loan C) Increases total amount paid D) Increases cash flow Answer: B Diff: 2 Type: MC Categories: Mortgage Options Financial Type: Qualitative Skill Type: Applied 21) Which of the following options regarding a mortgage, compounded semi-annually requires the lowest total interest payment?

A) A 4.0 percent interest rate, paid monthly and amortized over 15 years B) A 3.5 percent interest rate, paid monthly and amortized over 20 years C) A 3.5 percent interest rate, paid biweekly and amortized over 18 years D) A 3.25 percent interest rate, paid monthly and amortized over 22 years Answer: A Diff: 3 Type: MC Categories: Mortgage Options Financial Type: Quantitative Skill Type: Applied 22) Which of the following is accurate regarding types of mortgages?

A) A convertible VRM gives you protection in case interest rates go up.

B) Open mortgages offer slightly better rates than closed mortgages.

C) Most fixed-rate mortgages are convertible.

D) With a variable-rate mortgage your payments will never go up if prime goes up.

Answer: A Diff: 3 Type: MC Categories: Variable Rate Mortgages Financial Type: Qualitative Skill Type: Applied 11 © 2019 Pearson Canada Inc.

23) The interest rate on a VRM may be adjusted A) only when prime rate moves higher.

B) only on the expiry of the term.

C) only when prime rate moves lower.

D) any time the prime rate changes.

Answer: D Diff: 2 Type: MC Categories: Variable Rate Mortgages Financial Type: Qualitative Skill Type: Recall 24) Which of the following would be the best advice in a decision to buy or rent a house?

A) You should objectively perform the financial assessment.

B) If mortgage payments are more than renting, then you should rent.

C) Buying is always better because of the equity you get in the long term.

D) If interest costs are less than renting, then you should buy.

Answer: A Diff: 3 Type: MC Categories: Own Versus Rent a Home Financial Type: Qualitative Skill Type: Applied 25) Which would be the best mortgage option if you anticipate a windfall in the next year or two?

A) A one-year closed fixed-rate mortgage B) A closed convertible five-year VRM C) An open variable-rate mortgage D) A closed two-year VRM Answer: C Diff: 2 Type: MC Categories: Mortgage Options Financial Type: Qualitative Skill Type: Applied 26) For someone who has a $300 000 mortgage, at an interest rate of 6.3 percent, which mortgage would be the best choice for increasing one's net worth?

A) 22-year amortization with monthly payments B) 25-year amortization with accelerated biweekly payments C) 22-year amortization with semi-monthly payments D) 25-year amortization with weekly payments Answer: B Diff: 3 Type: MC Categories: Mortgage Options Financial Type: Quantitative Skill Type: Applied

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27) When is refinancing a home worthwhile?

A) When interest rates have dropped more than two percent B) When you can decrease your monthly payment significantly C) When the penalty cost is less than the financial benefit D) When interest rates have dropped significantly Answer: C Diff: 3 Type: MC Categories: Mortgage Refinancing Financial Type: Qualitative Skill Type: Applied 28) Which mortgage option is best in the following scenario. The Jones are purchasing their first home for and financing with a mortgage. They expect interest rates to stay the same for the next five years and have no prospects for any increase in their incomes. The prime rate is three percent.

A) A five-year closed mortgage at five and a half percent B) A four-year closed mortgage at five and a half percent C) A five-year open VRM at prime plus three percent D) A two-year open convertible VRM at prime plus three percent Answer: A Diff: 2 Type: MC Categories: Mortgage Options Financial Type: Qualitative Skill Type: Applied 29) For a $72 000 mortgage at nine percent, the monthly payments would be $730 for a 15-year mortgage and $579 for a 30-year mortgage. What would be the expected total savings in interest by taking a 15-year mortgage?

A) $27 180 B) $54 360 C) $77 040 D) $131 000 Answer: C Diff: 2 Type: MC Categories: Mortgage Options Financial Type: Quantitative Skill Type: Applied

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30) A house for sale is listed at $310 000 and you manage to win the competitive bid with an offer of . The appraisal indicates the value at $295 000. What will be the conventional mortgage loan amount approved by the bank?

A) $248 000 B) $221 250 C) $249 600 D) $236 000 Answer: D Diff: 3 Type: MC Categories: Transaction Costs of Purchasing a Home Financial Type: Quantitative Skill Type: Applied 31) Lenders require Canada Mortgage and Housing Corporation insurance on high ratio mortgages. What is the primary purpose of this insurance?

A) Life insurance for the borrowers to make sure they can pay off the house if one of them dies B) Disability insurance for the borrowers to make sure they can pay off the house if one of them can no longer work C) Insurance for the borrower in the event of foreclosure to compensate them for the full price they paid for the home D) Insurance for the lender to protect their collateral in case the borrower defaults and the home has declined in value Answer: D Diff: 3 Type: MC Categories: Transaction Costs of Purchasing a Home Financial Type: Qualitative Skill Type: Applied 32) A house is appraised at $298 000 and you have a down payment of . CMHC charges the following rates on the loan to value ratio: Up to and including 80 percent, 2.40 percent; up to 85 percent, 2.80 percent; up to 90 percent, 3.10 percent; up to 95 percent 4.00 percent. What will be the approximate total amount of the mortgage if the CMHC fee is included in it?

A) $280 152 B) $280 644 C) $281 463 D) $283 920 Answer: D Diff: 3 Type: MC Categories: Transaction Costs of Purchasing a Home Financial Type: Quantitative Skill Type: Applied

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33) Mertyl is interested in buying a house worth $335 000 and has a down payment of .

CMHC charges the following rates on the loan to value ratio: Up to and including 80 percent, 2.40 percent; up to 85 percent, 2.80 percent; up to 90 percent, 3.10 percent; up to 95 percent 4.00 percent. What will be the CMHC insurance premium?

A) $9145 B) $8260 C) $7080 D) $11 800 Answer: A Diff: 2 Type: MC Categories: Transaction Costs of Purchasing a Home Financial Type: Quantitative Skill Type: Applied 34) Principal, interest, and property taxes on a mortgage are $1209, with heating costs of $68 and condo fees of $180 monthly. The borrower also has a student loan with $100 monthly payments.

If the gross debt service ratio required is 32 percent, what will be the lowest monthly income that will qualify for the mortgage financing?

A) $4272 B) $4553 C) $3991 D) $4584 Answer: A Diff: 3 Type: MC Categories: Selecting a Home Financial Type: Quantitative Skill Type: Applied 35) The total household income available is $3963. Mortgage payments including taxes, principal, and interest are $1189. In addition, there are condo fees of $126 and heating costs of $56 monthly and a car lease of $241. What is the gross debt service ratio?

A) 40.7 percent B) 33.0 percent C) 39.1 percent D) 34.6 percent Answer: B Diff: 3 Type: MC Categories: Selecting a Home Financial Type: Quantitative Skill Type: Applied

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36) The total household income available is $4032. Mortgage payments including taxes, principal, and interest are $1174. In addition, there are condo fees of $150, heating costs of $65 monthly, a student loan payment of $100 and a car lease of $141. What is the total debt service ratio?

A) 38.6 percent B) 35.1 percent C) 36.1 percent D) 40.4 percent Answer: A Diff: 3 Type: MC Categories: Selecting a Home Financial Type: Quantitative Skill Type: Applied 37) Martina and Anton are attempting to qualify for total mortgage financing of $1486, heating costs of $68, and they have a car loan payment of $346. What minimum gross monthly income will they need to qualify for both GDS ratio of 32 percent and TDS ratio of 40 percent?

A) $5938 B) $4750 C) $4856 D) $4644 Answer: C Diff: 3 Type: MC Categories: Selecting a Home Financial Type: Quantitative Skill Type: Applied 38) Chuck obtained a mortgage of $90 000 to finance a $120 000 home. The title insurance will be $400, appraisal fee is $500, land transfer tax is one percent of the value of the property, legal fees are $900, and he will pay $900 to the movers and has planned to send $6000 on renovations.

How much are his closing costs?

A) $1800 B) $3900 C) $2100 D) $3000 Answer: D Diff: 2 Type: MC Categories: Transaction Costs of Purchasing a Home Financial Type: Quantitative Skill Type: Applied

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39) Mortgage companies usually charge interest semi-annually. What would be the effective rate of interest on a mortgage at 8.25 percent compounded semi-annually?

A) 8.56 percent B) 8.42 percent C) 8.46 percent D) 8.38 percent Answer: B Diff: 2 Type: MC Categories: Mortgage Refinancing Financial Type: Quantitative Skill Type: Applied 40) What is the purpose of getting a pre-approval certificate from a financial institution?

A) To guarantee you a mortgage interest rate valid for 30 days B) To provide you with a guideline on how large a mortgage you can afford C) To guarantee funding so you can make an offer on a house D) To guarantee you will be approved for a mortgage Answer: B Diff: 2 Type: MC Categories: Selecting a Home Financial Type: Qualitative Skill Type: Recall 41) Which of the following is true about the Home Buyers' Plan?

A) It's a government program which enables first time home owners with less than five percent down payment to purchase a home using CMHC insurance.

B) It's a government program exempting Canadian first time home buyers in certain provinces from land transfer tax.

C) It's a government program allowing first time home buyers to withdraw from their RRSPs tax free as long as paid back within ten years.

D) It's a government program allowing first time home buyers to withdraw from their RRSPs tax free as long as paid back within fifteen years.

Answer: D Diff: 3 Type: MC Categories: Selecting a Home Financial Type: Qualitative Skill Type: Recall

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42) Which of the following is most accurate in a case where a seller neglects to disclose a defect that affects the market value of the home they are selling?

A) It is morally repugnant, but commonly done and there is no legal recourse.

B) It is morally wrong, but is legal due to caveat emptor.

C) It is morally repugnant, and the seller could be charged for criminal negligence.

D) It is morally wrong, and the seller could be sued for misrepresentation.

Answer: D Diff: 2 Type: MC Categories: Selecting a Home Financial Type: Qualitative Skill Type: Applied 43) If you make an offer to the seller through the real estate broker, the following may happen except A) the seller may accept your offer.

B) the seller may reject your offer.

C) the seller may reject your offer and suggest that you revise the price.

D) the seller may accept your offer at and suggest that you revise the price.

Answer: D Diff: 2 Type: MC Categories: Selecting a Home Financial Type: Qualitative Skill Type: Applied 44) Which of the following is not one of the closing costs in purchasing a home?

A) Appraisal fee B) Home inspection fee C) Prepaid property tax D) Moving costs Answer: D Diff: 1 Type: MC Categories: Transaction Costs of Purchasing a Home Financial Type: Qualitative Skill Type: Applied 45) The lawyer normally will look after services for you when purchasing a home except for the A) legal fees and disbursements.

B) home inspection fee.

C) interest adjustment.

D) title insurance.

Answer: B Diff: 2 Type: MC Categories: Selecting a Home Financial Type: Qualitative Skill Type: Applied

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46) Mohammed and Parm are recently married and neither of them has ever owned a home.

They wish to use the Home Buyers' Plan (HBP) to make their down payment on their first home.

If they each have in their RRSPs, how much can they access for their down payment through the HBP? A) $100 000 B) $40 000 C) $25 000 D) $50 000 Answer: D Diff: 2 Type: MC Categories: Selecting a Home Financial Type: Qualitative Skill Type: Applied 47) Which of the following payment options would result in the lowest amount of interest paid on a mortgage?

A) Accelerated biweekly B) Biweekly C) Weekly D) Semi-monthly Answer: A Diff: 2 Type: MC Categories: Selecting a Home Financial Type: Quantitative Skill Type: Applied 48) The highest current CMHC premium is A) 4.00%.

B) 4.50%.

C) 5.00%.

D) 5.50%.

Answer: A Diff: 1 Type: MC Categories: Transaction Costs of Purchasing a Home Financial Type: Qualitative Skill Type: Recall

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49) Which payment frequency, all else being equal, will generally save you the most interest over the life of your mortgage?

A) Semi-monthly B) Biweekly C) Accelerated biweekly D) Weekly Answer: C Diff: 2 Type: MC Categories: Mortgage Options Financial Type: Qualitative Skill Type: Recall 50) Paying off an existing mortgage with a new mortgage that has a lower interest rate is referred to as A) mortgage replacement.

B) mortgage substitution.

C) mortgage refinancing.

D) mortgage modification.

Answer: C Diff: 2 Type: MC Categories: Mortgage Options Financial Type: Qualitative Skill Type: Recall

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Essay 1) Indicate your assumptions and calculations and comment on whether buying versus renting would make more sense in the following scenario. The couple each grosses $4000 monthly income. They have saved for the house purchase and are currently renting a two bedroom apartment for $1500 a month. They want to purchase a two bedroom condo for , which has monthly expenses as follows: property tax $220, heat $100, and condo fees $350. Consider closing costs, cash flow and other calculations to justify whether you recommend they buy, or not.

Answer: Many assumptions are possible. Look for a logical and accurate assessment of the numbers.

Assumptions: The $40 000 savings needs to cover the down payment and closing costs, so they have 10 percent to put down .

The remaining $10 000 will be sufficient for closing and moving costs.

CMHC insurance will be $5,400 and they will add that to the mortgage amount The mortgage will be $275 400, amortized over 25 years, 4% interest, compounded semiannually Therefore monthly mortgage payment would be $1449 GDSR: 30% 1449 + 220 + 100 + (350/2)/8000 = 24.3% so they easily qualify TDSR: 40% As long as their consumer debt is less than $1,256 monthly payment, they qualify on this too.

Renting is $1500 per month Buying will be $1944 per month (not including repairs and maintenance inside) Estimated value in five years If they rent they will have $40 000 plus 444 extra a month, so if invested at 4% return, they would have approximately $78 000 (PV -40000, PMT-444, I/Y 4, N 60, CPT FV) If they bought and the condo increased two percent per year, they equity they would have in five years is the equity of the condo minus the remaining mortgage (minus selling commission) approx $330,000 condo value, minus $15 000 selling commission, minus approx mortgage. Equity if they sold the condo: $75 000 So, as long as they want to buy, and are prepared to spend more on accommodation than they have been, and they plan to stay for five or more years, they should go ahead and buy.

Diff: 3 Type: ES Categories: Own Versus Rent a Home Financial Type: Quantitative Skill Type: Applied

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2) Peter and Mary make a $25 000 down payment on a $400 000 home.

CMHC charges the following rates on the loan to value ratio: Up to and including 80 percent, 2.40 percent; up to 85 percent, 2.80 percent; up to 90 percent, 3.10 percent; up to 95 percent 4.00 percent.

What will be the CMHC insurance premium?

Illustrate the calculation on the loan insurance premium that Peter and Mary have to pay.

Answer: Loan to value ratio: $375 000/400 000 = 93.75 % Their loan is in the 90 - 95% loan to value ratio Therefore they need to pay CMHC premium of 4.00% (400 000 - 25 000) × 4.00 percent = $15 000 Diff: 2 Type: ES Categories: Transaction Costs of Purchasing a Home Financial Type: Quantitative Skill Type: Applied 3) Discuss in detail all of the factors that may affect the value of your investment in a home in the future.

Answer: Many possibilities.

Length of time planning to remain in one area Convenience to transportation, schools, shopping, employment, and industry may be negative or positive factors depending on the student's interpretation.

Estimates in future growth in house prices, and expectations regarding interest rates Estimates in growth of alternative investments such as value of retirement investments Contributing factors such as demographics, or the economy The cost of borrowing over the years and the ability to save as well for retirement funding Diff: 3 Type: ES Categories: Own Versus Rent a Home Financial Type: Qualitative Skill Type: Applied

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4) Illustrate how GDS and TDS ratios as well as cash flow are important in calculating what size mortgage a person can afford. Use the following example to illustrate your conclusion.

Hannah earns an annual salary of $72 000 and has following monthly expenses.

Taxes and benefits: Rent Groceries and restaurants: Transportation misc Car loan, 3 more years Hobbies and entertainment Student loan, 5 more years RRSP Savings

$1800 $1300 $700 $300 $300 $550 $350 $700

Hannah has $31 000 saved in her RRSP. There is a new condo development going up in her area and she hopes to be able to purchase her own place. The unit she has her heart set on costs $310 000 and they advertise a mortgage rate of 3.5%, compounded semi-annually, for this development. The property taxes will be $170 per month, heating costs $80, and condo fees $300.

Answer: Many options are possible, but look for the following: $25 000 down as that is all she can take from her RRSP High ratio mortgage 285 000/310 000 = 92%, so 4.00 CMHC insurance ×

= 11 400

Mortgage payment: 285 000 + 11 400 = 296 400 PV, I/Y 3.5, N 25 × 12, FV 0, CPT PMT $1480 GDS for Hannah = TDS for Hannah =

= 31.3% so ok = 42% so ok, borderline

So Hannah would qualify for this mortgage; however, for cash flow, Hannah will have to change her habits quite a lot.

She currently pays $1300 for rent. If she buys this place, she will need to allocate $2030 to accommodation expenses, which is $730 more than she is used to. She could reduce her entertainment and hobbies, food, and/or RRSP savings, but all these will impact her lifestyle.

Diff: 3 Type: ES Categories: Own Versus Rent a Home Financial Type: Quantitative Skill Type: Applied

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5) Is purchasing a home an expense, an investment, or both? How important is it to consider how long you plan to remain in one location in order to determine the value in purchasing?

Answer: There are a variety of points that may be discussed here: A home builds equity from paying down the principal on the mortgage and it builds equity through appreciation in the value of the property.

The interest portion of the mortgage payments are an expense you would not have when renting.

Therefore, the purchase of a home is both an expense and an investment. In many situations it is the largest asset a Canadian family may build, which can provide substantial support during retirement years.

There are many expenses and responsibilities in owning that do not apply to renting.

If you may have to move for work in the short term, then buying can be a very expensive option as the total purchasing and selling costs can add up to more than $30 000 (Land transfer tax, CMHC Insurance, Other closing costs, selling commission, penalty for breaking the mortgage) In addition, although house prices have gained over time, they can turn down sharply and unpredictably as has happened many times in the past.

If you needed to sell after prices had dropped 'corrected' you could stand to lose your entire equity. For example, if a home was purchased for $400 000 with $40 000 down, and it dropped by ten percent in value and you had to sell, you would lose your entire down payment and more because of the selling fees and cost to break the mortgage etc. This is the power of leverage.

Diff: 2 Type: ES Categories: Own Versus Rent a Home Financial Type: Qualitative Skill Type: Applied 6) Describe some of the advantages and disadvantages of selling your home yourself instead of hiring a realtor.

Answer: Advantages: Save 6 percent of your home purchase price, which would be $6000 on a $100 000 home; you schedule the appointments.

Disadvantages: No realtor expertise; not as much marketing exposure; no contract and advertising experience; requires your time.

Diff: 2 Type: ES Categories: Selecting a Home Financial Type: Qualitative Skill Type: Applied

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Personal Finance, Canadian Ed., 4e (Madura) Part 3 Protecting Your Wealth - Auto and Homeowner's Insurance True/False 1) Insurance protects you against potential financial losses or liability that results from unexpected events.

Answer: TRUE Diff: 1 Type: TF Categories: Background on Insurance Financial Type: Qualitative Skill Type: Recall 2) In the context of insurance, the term liability is used to mean that you may be required to pay someone for damages that you caused.

Answer: TRUE Diff: 2 Type: TF Categories: Background on Insurance Financial Type: Qualitative Skill Type: Recall 3) The first step in the risk management process is to define and recognize your exposure to risk.

Answer: TRUE Diff: 1 Type: TF Categories: Managing Risk Financial Type: Qualitative Skill Type: Recall 4) When Jane decided not to select collision and comprehensive insurance coverage on her old car, she was accepting her exposure to financial loss from damage to her car.

Answer: TRUE Diff: 2 Type: TF Categories: Managing Risk Financial Type: Qualitative Skill Type: Applied 5) Insurance should be considered in some circumstances even when there is only a small likelihood than an event that could cause a financial loss would occur.

Answer: TRUE Diff: 2 Type: TF Categories: Role of Insurance Companies Financial Type: Qualitative Skill Type: Recall

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6) Insurance companies generate their revenue from charging premiums well above what they anticipate paying out in claims.

Answer: FALSE Diff: 2 Type: TF Categories: Role of Insurance Companies Financial Type: Qualitative Skill Type: Recall 7) Since insurance companies rely mostly on their premiums to cover claims, they price their insurance policies to reflect the probability of a claim and the size of the claim.

Answer: TRUE Diff: 2 Type: TF Categories: Role of Insurance Companies Financial Type: Qualitative Skill Type: Recall 8) Independent insurance agents are those that work for one particular company.

Answer: FALSE Diff: 2 Type: TF Categories: Role of Insurance Companies Financial Type: Qualitative Skill Type: Recall 9) Legal expenses incurred by an insurance company when defending you against a lawsuit are deducted from your limits of liability coverage.

Answer: FALSE Diff: 3 Type: TF Categories: Role of Insurance Companies Financial Type: Qualitative Skill Type: Recall 10) If Jack damages his car by skidding on ice and colliding with a fence, his property damage liability would cover the damage to his car.

Answer: FALSE Diff: 2 Type: TF Categories: Auto Insurance Financial Type: Qualitative Skill Type: Applied 11) A part of accident benefits coverage includes coverage for drivers and their passengers in the event of an accident caused by an uninsured driver.

Answer: TRUE Diff: 2 Type: TF Categories: Auto Insurance Financial Type: Qualitative Skill Type: Recall 2 © 2019 Pearson Canada Inc.

12) If Fred caused a car accident and his passenger required expensive medical care as a result, his third party liability coverage would first be used to cover those expenses.

Answer: FALSE Diff: 3 Type: TF Categories: Auto Insurance Financial Type: Qualitative Skill Type: Applied 13) If you have good health insurance, you don't require accidents benefits coverage in your automobile policy.

Answer: FALSE Diff: 3 Type: TF Categories: Auto Insurance Financial Type: Qualitative Skill Type: Applied 14) Collision and comprehensive coverage is optional in most provinces with the possible exception that you are financing your car and it is required by the lender.

Answer: TRUE Diff: 2 Type: TF Categories: Auto Insurance Financial Type: Qualitative Skill Type: Applied 15) Collision coverage is normally limited to the car itself and not to items that were damaged while in the car.

Answer: TRUE Diff: 2 Type: TF Categories: Auto Insurance Financial Type: Qualitative Skill Type: Recall 16) Some credit cards provide you with collision and comprehensive insurance benefits if you use that card to pay for car rentals.

Answer: TRUE Diff: 1 Type: TF Categories: Auto Insurance Financial Type: Qualitative Skill Type: Recall 17) Third party liability insurance coverage would cost more for an expensive car than for an inexpensive car of the same age.

Answer: FALSE Diff: 2 Type: TF Categories: Factors That Affect Your Auto Insurance Premiums Financial Type: Qualitative Skill Type: Applied 3 © 2019 Pearson Canada Inc.

18) Jasmeen was involved in a car accident which caused extensive medical expenses for herself and her son totalling $700 000. If the driver who caused the accident had $200 000 third party liability coverage, then Jasmeen's family protection coverage could cover $500 000.

Answer: TRUE Diff: 3 Type: TF Categories: Factors That Affect Your Auto Insurance Premiums Financial Type: Quantitative Skill Type: Applied 19) Drivers considered "high risk" cannot get automobile insurance at any price.

Answer: FALSE Diff: 3 Type: TF Categories: Factors That Affect Your Auto Insurance Premiums Financial Type: Qualitative Skill Type: Recall 20) More than sixty percent of homeowner's insurance premiums go towards settling claims.

Answer: TRUE Diff: 3 Type: TF Categories: Homeowner's Insurance Premiums Financial Type: Qualitative Skill Type: Applied 21) If Zack had a replacement value home insurance policy and had a custom made table that he paid for a number of years ago and which was recently appraised for $22 000, the insurance company would pay him $16 000 for it, if it were destroyed in a fire.

Answer: FALSE Diff: 3 Type: TF Categories: Homeowner's Insurance Financial Type: Quantitative Skill Type: Applied 22) It is a good idea to list all of your personal assets, estimate the market value of each item, and then film the contents of your house with a video camera to be able to show proof of their existence.

Answer: TRUE Diff: 1 Type: TF Categories: Homeowner's Insurance Financial Type: Qualitative Skill Type: Recall

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23) If your neighbour falls down the steps in your home and sues you for damages, you could be held responsible to pay compensation for his or her injuries and rehabilitation.

Answer: TRUE Diff: 1 Type: TF Categories: Homeowner's Insurance Financial Type: Qualitative Skill Type: Applied 24) A higher insurance deductible reduces the amount of coverage provided by homeowner's insurance, and therefore results in a lower insurance premium.

Answer: TRUE Diff: 1 Type: TF Categories: Homeowner's Insurance Premiums Financial Type: Qualitative Skill Type: Recall 25) While renter's insurance would reimburse you if you had to replace furniture damaged in a fire, it would not pay for the medical expenses for a friend who was injured in your home.

Answer: FALSE Diff: 2 Type: TF Categories: Tenant's Insurance Financial Type: Qualitative Skill Type: Applied 26) An HDTV was purchased for $6500 and is now three years old. If it is stolen and it is deemed to have a life of five years, the insurance company will settle for $3000 under a cash value policy.

Answer: FALSE Diff: 2 Type: TF Categories: Homeowner's Insurance Policy Provisions Financial Type: Quantitative Skill Type: Applied 27) If Eric's dog ran across a road and caused a driver to swerve and injure a passerby, Eric's umbrella personal liability coverage could cover the expenses of both the driver and the injured pedestrian.

Answer: TRUE Diff: 3 Type: TF Page Ref: P.242 Categories: Homeowner's Insurance Policy Provisions Financial Type: Qualitative Skill Type: Applied

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28) If Peter caused an accident, and his passenger, John, had to miss work for a month while he recovered, Peter's bodily injury liability coverage could cover medical expenses and loss of income for John.

Answer: TRUE Diff: 3 Type: TF Page Ref: P.220 Categories: Auto Insurance Financial Type: Qualitative Skill Type: Applied 29) If you have automobile and homeowner's insurance, there is no reason to purchase an umbrella personal liability policy for additional coverage of $1 million.

Answer: FALSE Diff: 2 Type: TF Page Ref: P.247 Categories: Homeowner's Insurance Policy Provisions Financial Type: Qualitative Skill Type: Applied 30) Using one insurer for all types of insurance will not reduce your homeowner's insurance premium.

Answer: FALSE Diff: 2 Type: TF Page Ref: P.231 Categories: Homeowner's Insurance Premiums Financial Type: Qualitative Skill Type: Applied 31) Homeowner's insurance also covers medical payments and loss of income to the policyholder.

Answer: FALSE Diff: 2 Type: TF Categories: Homeowner's Insurance Policy Provisions Financial Type: Qualitative Skill Type: Applied 32) Brenda inherited some pieces of valuable art which she keeps in her home. She needs full comprehensive coverage to make sure her art is covered for replacement value.

Answer: FALSE Diff: 3 Type: TF Categories: Homeowner's Insurance Policy Provisions Financial Type: Qualitative Skill Type: Applied

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33) Named perils coverage protects the automobile owner against theft of specific items named in the auto insurance policy.

Answer: FALSE Diff: 2 Type: TF Page Ref: P.228 Categories: Homeowner's Insurance Financial Type: Qualitative Skill Type: Applied 34) Comprehensive coverage insures Peter against damage to his car that results from something such as hail or vandalism.

Answer: TRUE Diff: 2 Type: TF Categories: Auto Insurance Financial Type: Qualitative Skill Type: Applied Multiple Choice 1) Refusing to go bungee jumping is A) avoiding risk.

B) accepting risk.

C) transferring risk.

D) sharing risk.

Answer: A Diff: 1 Type: MC Categories: Managing Risk Financial Type: Qualitative Skill Type: Applied 2) Driving carefully and obeying traffic laws is A) avoiding risk.

B) reducing risk.

C) accepting risk.

D) managing risk.

Answer: B Diff: 2 Type: MC Categories: Managing Risk Financial Type: Qualitative Skill Type: Applied

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3) Getting the flu vaccine is an example of A) avoiding risk.

B) reducing risk.

C) accepting risk.

D) transferring risk.

Answer: B Diff: 1 Type: MC Categories: Managing Risk Financial Type: Qualitative Skill Type: Applied 4) Which of the following is the best case for the need for third party liability insurance coverage?

A) You cause a car accident and damage your Honda Civic.

B) You cause a car accident and destroy the other driver's Maserati.

C) You cause a car accident which disables a pedestrian.

D) You cause a car accident and the injuries cause you to miss six months of work.

Answer: C Diff: 3 Type: MC Categories: Auto Insurance Financial Type: Qualitative Skill Type: Applied 5) In general, insurance companies generate their profit from A) overestimating the value of client claims and keeping the difference as profit.

B) investing the proceeds of premiums until the funds are needed to cover claims.

C) selling a lot of certain kinds of highly profitable insurance products.

D) only insuring people who are low risk to claim.

Answer: B Diff: 2 Type: MC Categories: Role of Insurance Companies Financial Type: Qualitative Skill Type: Recall 6) Insurance agents for an insurance company A) market insurance policies.

B) calculate the risks of specific policies.

C) decide what insurance policies to offer.

D) decide what premiums to charge.

Answer: A Diff: 2 Type: MC Categories: Role of Insurance Companies Financial Type: Qualitative Skill Type: Recall

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7) Underwriters for an insurance company A) calculate the risks of specific insurance requests from the public.

B) market insurance policies.

C) recommend insurance policies that fit customers' needs.

D) invest the premiums of policies to make their company a profit.

Answer: A Diff: 2 Type: MC Categories: Role of Insurance Companies Financial Type: Qualitative Skill Type: Recall 8) Insurance agents who work for one particular company are called A) company agents.

B) captive agents.

C) independent agents.

D) insurance brokers.

Answer: B Diff: 1 Type: MC Categories: Role of Insurance Companies Financial Type: Qualitative Skill Type: Recall 9) Independent insurance agents, sometimes called brokers A) work for just one insurance company.

B) represent many different insurance companies.

C) work for only two or three companies.

D) are self-employed and represent their own companies.

Answer: B Diff: 1 Type: MC Categories: Role of Insurance Companies Financial Type: Qualitative Skill Type: Recall 10) Which section of auto insurance would pay for medical care for people who were injured in your automobile as a result of an accident that was your fault?

A) Accident benefits B) Bodily injury liability coverage C) Insured automobile coverage D) Third party liability coverage Answer: A Diff: 2 Type: MC Categories: Auto Insurance Financial Type: Qualitative Skill Type: Applied

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11) For auto insurance, which area has the highest level of insurance coverage required by law?

A) Comprehensive coverage B) Accident benefits coverage C) Uninsured motorist coverage D) Third party liability coverage Answer: D Diff: 2 Type: MC Categories: Auto Insurance Financial Type: Qualitative Skill Type: Recall 12) Which of the following statements about uninsured motorist coverage is true?

A) This coverage applies to bodily injury when you are in an accident with an uninsured driver, regardless of who was at fault.

B) It does not apply to accidents caused by a hit-and-run driver.

C) It covers bodily injury when an accident is caused by another driver who is not insured.

D) It does not pay out when a driver who is at fault has an insurance company that goes bankrupt.

Answer: C Diff: 3 Type: MC Categories: Auto Insurance Financial Type: Qualitative Skill Type: Recall 13) Which of the following statements is true concerning comprehensive and collision insurance?

A) If you are financing a car, this insurance may be required by the lender.

B) Financially, it is advisable to take out the lowest deductible possible.

C) If you were in an accident, this coverage could enable you to replace your older car with a new one.

D) The deductible is really a form of transferring insurance.

Answer: A Diff: 2 Type: MC Categories: Auto Insurance Financial Type: Qualitative Skill Type: Recall 14) Comprehensive coverage would cover financial losses due to A) damage to your car caused by a hit and run collision.

B) damage to your car in an accident for which you were at fault.

C) damage to your car caused by wind or hail.

D) damage to a neighbour's fence caused by your car.

Answer: C Diff: 2 Type: MC Categories: Auto Insurance Financial Type: Qualitative Skill Type: Applied 10 © 2019 Pearson Canada Inc.

15) If you cause an accident resulting in $2000 damage to your car and have collision coverage with $500 deductible, which of the following statements is true?

A) Your insurance company will pay $2000 and your insurance premiums will go up $500.

B) You will pay $1500.

C) Your insurance company will pay $1500.

D) The other insurance company will pay $500 and your company will pay $1500.

Answer: C Diff: 2 Type: MC Categories: Auto Insurance Financial Type: Quantitative Skill Type: Applied 16) Which of the following is true about pure no-fault insurance?

A) No one is deemed to be at fault when an accident occurs.

B) You cannot sue the at-fault driver for pain and suffering and economic loss.

C) It is the most cost effective insurance because there are no legal expenses.

D) The dollar value of accident benefits is much lower.

Answer: B Diff: 3 Type: MC Categories: Auto Insurance Financial Type: Qualitative Skill Type: Recall 17) Additional coverage on your automobile insurance policy can be purchased for A) the cost of a rental car while you are having the oil changed.

B) the protection of valuables you are carrying in your car.

C) reupholstering a worn driver's seat.

D) repainting the vehicle before preparing to trade it in.

Answer: B Diff: 1 Type: MC Categories: Auto Insurance Financial Type: Qualitative Skill Type: Recall 18) To significantly reduce your automobile insurance premiums and still have adequate coverage, you should A) take the minimum levels of liability coverage.

B) raise the deductibles on comprehensive and collision.

C) waive medical payments coverage.

D) waive uninsured motorist coverage.

Answer: B Diff: 2 Type: MC Categories: Factors That Affect Your Auto Insurance Premiums Financial Type: Qualitative Skill Type: Recall 11 © 2019 Pearson Canada Inc.

19) Which of the following is the appropriate action to take in the event of an accident?

A) If possible, move your car out of traffic and collect information using an accident checklist.

B) As long as no one is injured, remain in place and contact your insurance company to come and document the specifics so they can determine fault.

C) Contact the police immediately and stay where you are regardless of how minor the accident was.

D) If you feel the other driver might be guilty of a Criminal Code offence such as drunk driving, conduct a Citizen's arrest.

Answer: A Diff: 2 Type: MC Categories: If You Are In an Auto Accident Financial Type: Qualitative Skill Type: Applied 20) Auto insurance rates are based on all but your A) vehicle use.

B) height and weight.

C) driving record.

D) sex.

Answer: B Diff: 1 Type: MC Categories: Factors That Affect Your Auto Insurance Premiums Financial Type: Qualitative Skill Type: Recall 21) Auto insurance rates are based on A) whether or not you keep your car in the garage.

B) your marital status.

C) the number of kilometres and the type of driving you do each year.

D) the condition of your vehicle.

Answer: C Diff: 1 Type: MC Categories: Factors That Affect Your Auto Insurance Premiums Financial Type: Qualitative Skill Type: Recall 22) If you live in a province with private auto insurance, it can be very expensive if you A) have a new car.

B) are a male under age 25.

C) have not taken a driver training course.

D) have an older car without air bags.

Answer: B Diff: 1 Type: MC Categories: Factors That Affect Your Auto Insurance Premiums Financial Type: Qualitative Skill Type: Recall 12 © 2019 Pearson Canada Inc.

23) One of the advantages of no-fault automobile insurance is that A) it does not use the legal system so the overall costs are much lower.

B) it results in higher jury awards to victims.

C) the injured receives immediate medical treatment through their own insurance.

D) the drivers who are at fault face no penalties for their risky behaviours.

Answer: C Diff: 3 Type: MC Categories: Factors That Affect Your Auto Insurance Premiums Financial Type: Qualitative Skill Type: Recall 24) In which of the following scenarios would your auto insurance coverage be in effect?

A) You have family protection coverage and are hit by an uninsured motorist.

B) You take your damaged car straight to your friend's autobody repair shop for repair.

C) You drive your parents' car without permission and get in an accident.

D) Insurance claims would be covered in all these scenarios.

Answer: A Diff: 3 Type: MC Categories: Auto Insurance Financial Type: Qualitative Skill Type: Applied 25) Which of the following will reduce your insurance rate?

A) Decreasing your deductible B) Paying all speeding tickets promptly C) Driving antique classic cars D) Increasing your deductible Answer: D Diff: 2 Type: MC Categories: Factors That Affect Your Auto Insurance Premiums Financial Type: Qualitative Skill Type: Applied 26) Which is the best advice about shopping for car insurance in provinces where there are private insurers?

A) Shop online for insurance before you start to shop for a car.

B) Ask friends and family where to get the best rates.

C) Ask at the car dealership while waiting for the delivery of your car.

D) Use the agent recommended by the car dealer as prices rarely vary.

Answer: A Diff: 1 Type: MC Categories: Factors That Affect Your Auto Insurance Premiums Financial Type: Qualitative Skill Type: Recall

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27) You are in an accident which causes $3000 in damages to your car, and your policy has a $500 deductible for collision and $300 for comprehensive. If the other driver is at fault, which is correct?

A) You pay $500 deductible and claim it from the other driver's insurance company.

B) You pay $300 deductible and claim it from the other driver's insurance company.

C) Your insurance company covers the deductible.

D) You have to pay the deductible and can claim it back if you have an umbrella policy.

Answer: A Diff: 2 Type: MC Categories: Factors That Affect Your Auto Insurance Premiums Financial Type: Qualitative Skill Type: Applied 28) What is the best advice when considering how much third party liability insurance coverage to purchase?

A) At least $1 million coverage B) The provincially required amount C) $500 000 coverage D) As much as you can afford Answer: A Diff: 2 Type: MC Categories: Factors That Affect Your Auto Insurance Premiums Financial Type: Qualitative Skill Type: Recall 29) Most standard home insurance policies provide coverage for A) earthquake damage.

B) liability.

C) flood damage.

D) computers.

Answer: B Diff: 2 Type: MC Categories: Homeowner's Insurance Financial Type: Qualitative Skill Type: Recall 30) Ownership of assets such as cars, homes, and boats results in higher A) liability risk.

B) physical risk.

C) real risk.

D) comprehensive risk.

Answer: A Diff: 2 Type: MC Categories: Managing Risk Financial Type: Qualitative Skill Type: Applied 14 © 2019 Pearson Canada Inc.

31) Your home insurance provides for replacement value for personal property losses. If your china hutch (ten year depreciation) was vandalized and completely destroyed and cost $400 four years ago, but a new one will cost $600, how much will the insurance company pay?

A) $400 B) $240 C) $600 D) Nothing, vandalism is not covered.

Answer: C Diff: 3 Type: MC Categories: Homeowner's Insurance Policy Provisions Financial Type: Quantitative Skill Type: Applied 32) You have cash value coverage for your personal property on your homeowner's policy. Your camera cost $300 eight years ago had a life expectancy of 10 years. The camera was stolen, and a new one will cost $100. How much will the insurance company pay?

A) $60 B) $100 C) $200 D) $300 Answer: A Diff: 3 Type: MC Categories: Homeowner's Insurance Policy Provisions Financial Type: Quantitative Skill Type: Applied 33) Which of the following would not be covered by liability portion of your homeowner's insurance?

A) Your dog bites a guest and the guest sues you.

B) While your accountant is visiting you, she trips on your carpet, breaks her leg and sues you.

C) Your neighbour sues you because you have a tree he feels will fall on his home and damage it.

D) An uninvited salesman walking up your sidewalk trips and falls and sues you.

Answer: C Diff: 2 Type: MC Categories: Homeowner's Insurance Policy Provisions Financial Type: Qualitative Skill Type: Applied

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34) Which of the following is true about liability insurance in a homeowner's policy?

A) The amount of coverage you select should not be tied to the value of your home.

B) It would pay for temporary housing while your home is repaired due to covered damage.

C) It would reimburse a homeowner for damage done by a visitor.

D) It would not cover you for a skiing accident where you cause injury to someone else.

Answer: A Diff: 3 Type: MC Categories: Homeowner's Insurance Policy Provisions Financial Type: Qualitative Skill Type: Applied 35) Your home insurance policy has a $500 deductible and provides cash value coverage on contents. If your home is over 25 years old and a small fire causes $6000 damage to it, what amount of the claim would the insurance company pay?

A) $500 B) $5500 C) $6000 D) None because the home is over 25 years old Answer: B Diff: 3 Type: MC Categories: Homeowner's Insurance Policy Provisions Financial Type: Quantitative Skill Type: Applied 36) What is the name of the document which needs to be completed for additional personal property insurance not adequately covered by your homeowner's policy?

A) A general liability agreement B) A personal property floater C) Extra value full replacement rider D) An endorsement Answer: B Diff: 2 Type: MC Categories: Homeowner's Insurance Policy Provisions Financial Type: Qualitative Skill Type: Recall 37) The best way to reduce your homeowner's insurance premiums is to A) insure your home for 60 percent of its value.

B) drop coverage for medical payments.

C) increase deductibles.

D) eliminate liability coverage.

Answer: C Diff: 2 Type: MC Categories: Homeowner's Insurance Premiums Financial Type: Qualitative Skill Type: Recall 16 © 2019 Pearson Canada Inc.

38) Which of the following actions is a suggestion to reduce your homeowner's insurance?

A) Install better locks or a security system.

B) Make prompt small claims against your policy.

C) Eliminate your deductible all together.

D) Decrease your liability coverage.

Answer: A Diff: 3 Type: MC Categories: Homeowner's Insurance Premiums Financial Type: Qualitative Skill Type: Recall 39) Which of the following is true of tenants insurance?

A) You only need to buy it if you have possessions of considerable value.

B) It will not cover you if a visitor sues you for an injury received in your apartment.

C) It covers only your own property, not the property of your landlord.

D) Because premiums are low, most people who need it have renter's insurance.

Answer: C Diff: 2 Type: MC Categories: Tenant's Insurance Financial Type: Qualitative Skill Type: Recall 40) A 46-inch HDTV originally purchased for $5000 has a life expectancy of seven years. It is five years old and has been destroyed in a fire. Today a similar TV would cost $2100. Your cash value policy will A) pay you $2100 to replace it with a similar model available now.

B) pay you the $5000 original purchase price.

C) pay you $1429 as settlement in full.

D) pay you the accumulated depreciation value of $3571.

Answer: C Diff: 3 Type: MC Categories: Homeowner's Insurance Policy Provisions Financial Type: Quantitative Skill Type: Applied 41) Consider the loss from fire damage of furniture which cost $6000 thee years ago and has an expected life of ten years. This furniture would cost $9000 to purchase today. Under a replacement cost policy, how much would the insurance company pay you for this loss?

A) $6000 B) $9000 C) $4200 D) $6300 Answer: B Diff: 2 Type: MC Categories: Homeowner's Insurance Policy Provisions Financial Type: Quantitative Skill Type: Applied 17 © 2019 Pearson Canada Inc.

42) Your insurance policy carries a $200 deductible for collision and $500 deductible for comprehensive. If you cause an accident which results in the following repairs and losses to your car and possessions, what will be the reimbursement from the insurance company under your collision and comprehensive coverage?

• Replacement of trailer hitch $500 • Replacement of rear bumper $700 • Replacement of computer (in trunk) $400 • Replacement of rear windshield $400 A) $1400 B) $1800 C) $1500 D) nothing Answer: A Diff: 3 Type: MC Categories: Loss of or Damage to Insured Automobile Financial Type: Quantitative Skill Type: Applied 43) How much coverage would be provided under a standard homeowner's cash value policy which deems furniture to be fully depreciated in ten years, if your antique dresser from the 1860s is destroyed by fire? You purchased the dresser eleven years ago for $1300 and it was recently appraised at $2600, and you have an offer from an antique collector to purchase it for $3100.

A) $0 B) $1300 C) $2600 D) $3100 Answer: A Diff: 3 Type: MC Categories: Homeowner's Insurance Financial Type: Quantitative Skill Type: Applied

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44) You are not at fault in a car accident that causes you total damages for injuries and lost employment in the amount of $550 000. If you have under insured motorist coverage and the other driver who is at fault has coverage for $500 000, what will you be able to claim?

A) The other driver's insurance company will pay $550 000.

B) Your auto insurance company will cover $550 000.

C) The other driver's insurance company will pay $500 000 and your health coverage will pay .

D) The other driver's insurance company will pay $500 000 and your auto insurance will pay .

Answer: D Diff: 3 Type: MC Categories: Auto Insurance Financial Type: Quantitative Skill Type: Applied 45) In order to have an umbrella personal liability policy A) you must have existing auto insurance.

B) you must have existing homeowner's insurance.

C) you must have both existing auto and homeowner's insurance.

D) you must prove your insurability.

Answer: C Diff: 2 Type: MC Page Ref: P.232 Categories: Homeowner's Insurance Policy Provisions Financial Type: Qualitative Skill Type: Recall 46) Jennifer rents an apartment and is considering tenant's insurance. Which of the following is accurate about what Jennifer can expect to get coverage for in a standard cash value tenant's insurance policy with a $500 deductible?

A) Coverage for the diamond ring she inherited from her grandmother and keeps hidden.

B) Coverage for her brother's antique car, which got damaged by hail in her back yard.

C) Coverage for her laptop, which she purchased a year ago for $500 and was stolen.

D) Coverage for smoke damage to her furniture.

Answer: D Diff: 3 Type: MC Categories: Tenant's Insurance Financial Type: Qualitative Skill Type: Applied

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47) On average, which is the largest category for claims to homeowner's insurance?

A) Fire and lightning B) Wind and hail C) Water damage and freezing D) Other claims not specified above Answer: A Diff: 1 Type: MC Categories: Homeowner's Insurance Financial Type: Qualitative Skill Type: Recall 48) What would be the main benefit to Peter on the option of including a personal property floater in his insurance policy?

A) Reduce the amount of deductible in his insurance claims.

B) Extend liability insurance protection to his boat and secondary properties.

C) Receive replacement cost coverage in the event of insurance claims.

D) Extend his homeowner's insurance policy to cover certain expensive assets.

Answer: D Diff: 2 Type: MC Page Ref: P.229 Categories: Homeowner's Insurance Policy Provisions Financial Type: Qualitative Skill Type: Applied 49) John just purchased a new home and he wants to feel sure that his home and possessions are covered as fully as possible. Which coverage should John select?

A) Comprehensive coverage B) Broad coverage C) Full perils coverage D) Custom coverage Answer: A Diff: 2 Type: MC Page Ref: P.228 Categories: Homeowner's Insurance Premiums Financial Type: Qualitative Skill Type: Applied

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50) Which of the following is the most important reason to carry significant third party liability coverage?

A) It would provide medical and rehabilitation coverage for you and the passengers in your car, to the limit you select, and if insufficient, you would be required to pay the difference.

B) It provides excess medical and rehabilitation coverage if you are not at fault.

C) It provides excess coverage for accidents caused by uninsured and under insured motorists, when you are not at fault and if insufficient, you would be required to pay the difference.

D) It provides coverage for any court ordered awards to injured parties if you are at fault and if your coverage is insufficient, you would be required to pay the difference.

Answer: D Diff: 3 Type: MC Categories: Homeowner's Insurance Policy Provisions Financial Type: Qualitative Skill Type: Applied

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Essay 1) Various home homeowners' insurance policy features can play a significant role in the protection of one's net worth. Give your own specific examples of what the following elements of property insurance could protect you from, compared with someone who had weaker coverage, or no coverage.

Comprehensive coverage versus named perils Personal property floater Umbrella personal liability coverage Tenant's insurance Personal property replacement cost Answer: Answers will vary a lot.

Comprehensive coverage would cover other structures like a shed, garage, and recreational items not explicitly covered in a named perils type basic insurance contract.

Personal property floater would cover very expensive valuables such as jewellery, and art that might not be covered if the values are above standard limits in the general contract.

Umbrella personal liability coverage could cover in the event that you or a pet of yours inadvertently cause major injuries that could limit or terminate someone's earning potential, or require a lifetime of special medical care, through an event such as a pet getting loose which causes a traffic accident, a pet attacking someone, or losing control of a boat or recreational vehicle and causing damages and injuries to a bystander.

Tenant's insurance could cover all your belongings if they were damaged by fire or smoke or water in a home you rent.

Personal property replacement cost (versus cash value) can be important because even though your belongings may decrease in value over time, they are still required by you and would need to be replaced if damaged or lost. In addition, inflationary pressures over time can mean that replacing an item would actually cost more than when it was first purchased. Examples for replacement value insurance would be for loss or theft of jewellery, antiques, paintings and other artworks, collections of stamps, coins, and other collectibles that can increase in value over time.

Diff: 3 Type: ES Categories: Homeowner's Insurance Policy Provisions Financial Type: Qualitative Skill Type: Applied

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2) Discuss six ways to reduce your automobile insurance premiums and indicate whether it is via sharing, reducing, avoiding, or accepting.

Answer: Any six of the following, categorization could vary: • Buy a less expensive car - reducing • Reduce the mileage you drive each year - reducing • Maintain a safe driving record - reducing • Take driver's training - reducing • Take advantage of discounts for air bags, anti-lock brakes, alarms, or other safety features - reducing • Shop around for good rates with different companies - sharing • Raise your deductible amount on comprehensive and collision - sharing • Don't make small claims - accepting • Not own a car and use alternate forms of transportation - avoiding Diff: 3 Type: ES Categories: Factors That Affect Your Auto Insurance Premiums Financial Type: Qualitative Skill Type: Applied 3) List four ways to reduce your homeowner's insurance premiums and categorize whether it is via sharing, reducing, avoiding or accepting.

Answer: Any four of the following: • Increase your deductible - sharing (increasing risk to you, less to the insurance company) • Improve protection for your home with better locks, alarms, shutters, etc. - reducing • Use one insurer for all types of insurance to get a discount - sharing • Stay with the same company at renewal time if the rate is good - sharing • Shop around for good rates - sharing • Don't make small claims - accepting more risks • Choose basic coverage - accepting more risk yourself, or sharing less • Do not get extra liability coverage - accepting Diff: 3 Type: ES Categories: Homeowner's Insurance Premiums Financial Type: Qualitative Skill Type: Applied

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4) Use specific examples to discuss whether it is justifiable that government sets rules for requiring people to have liability insurance coverage. Should individuals be allowed to choose whether or not they are prepared to accept risk? When, if ever, is it justifiable for government to impose regulations on this?

Answer: Many possibilities, however, the most obvious example is that all provinces have a minimum compulsory third party liability insurance coverage for auto insurance.

Why is this justifiable?

One could argue that people have the right to cause their own financial losses, but not to cause losses to others, and therefore third party liability should be required for more than car ownership, and that the minimum coverage should be a lot higher than .

Driving is not a right. Lack of third party liability coverage could leave others in worse financial circumstances than the person at fault.

Perhaps there should be required coverage for other privileges, such as ownership of other kinds of vehicles and pets which could cause harm to third parties.

One could argue that liability insurance coverage be required for home ownership, for gun ownership, boat, ATV, etc.

One could also argue that $200 000 third party liability is not nearly enough and regulation should require more.

People could also argue, that if they can prove sufficient means to 'self-insure' that one would not be required to purchase coverage.

Diff: 3 Type: ES Categories: Homeowner's Insurance Policy Provisions Financial Type: Qualitative Skill Type: Applied

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Personal Finance, Canadian Ed., 4e (Madura) Part 3 Protecting Your Wealth - Health and Life Insurance True/False 1) The Canada Health Act ensures that all provinces offer the same medical services.

Answer: FALSE Diff: 2 Type: TF Categories: Canada's Health Care System Financial Type: Qualitative Skill Type: Recall 2) While the Canada Health Act is federal legislation, it is the responsibility of the provinces and territories to Administer and deliver health care services.

Answer: TRUE Diff: 1 Type: TF Categories: Role of the Provincial and Territorial Governments Financial Type: Qualitative Skill Type: Recall 3) There is very little need for individual disability insurance because most workers have employer-sponsored disability coverage and are also eligible for CPP and worker's compensation.

Answer: FALSE Diff: 2 Type: TF Categories: Disability Insurance Financial Type: Qualitative Skill Type: Applied 4) The Canada Health Act dictates that the provinces provide minimum universal standards of health care coverage.

Answer: TRUE Diff: 1 Type: TF Categories: Canada's Health Care System Financial Type: Qualitative Skill Type: Recall 5) Your most important asset is your ability to earn income.

Answer: TRUE Diff: 3 Type: TF Categories: Background on Health and Life Insurance Financial Type: Quantitative Skill Type: Applied

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6) Disability insurance coverage will replace all your lost income while disabled.

Answer: FALSE Diff: 2 Type: TF Categories: Disability Insurance Financial Type: Qualitative Skill Type: Recall 7) "Own occupation" disability insurance is the least expensive disability insurance coverage.

Answer: FALSE Diff: 2 Type: TF Categories: Disability Insurance Financial Type: Qualitative Skill Type: Recall 8) CPP has a disability insurance option that will cover you if you are partially disabled.

Answer: FALSE Diff: 2 Type: TF Categories: Disability Insurance Financial Type: Qualitative Skill Type: Recall 9) You may be able save money on disability insurance premiums if your emergency fund is large enough to cover a few months' expenses, allowing you to select a longer waiting period.

Answer: TRUE Diff: 3 Type: TF Categories: Disability Insurance Financial Type: Qualitative Skill Type: Applied 10) The "any occupation" type of disability insurance is attractive to professionals.

Answer: TRUE Diff: 3 Type: TF Categories: Disability Insurance Financial Type: Qualitative Skill Type: Applied 11) A person age 25 to 35 has a greater than 50 percent chance of becoming disabled for longer than three months.

Answer: TRUE Diff: 2 Type: TF Categories: Disability Insurance Financial Type: Qualitative Skill Type: Applied

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12) Critical illness insurance benefits are paid out to disabled employees on a monthly basis.

Answer: FALSE Diff: 2 Type: TF Categories: Critical Illness Insurance Financial Type: Qualitative Skill Type: Recall 13) To collect the benefits from a critical illness insurance policy, you must survive a specified illness for 30 days.

Answer: TRUE Diff: 2 Type: TF Categories: Critical Illness Insurance Financial Type: Qualitative Skill Type: Recall 14) Over 30 percent of Canadians over age 65 receive some kind of kind of care due to long-term health problems.

Answer: TRUE Diff: 3 Type: TF Categories: Long-Term Care Insurance Financial Type: Qualitative Skill Type: Applied 15) The cost of having an aide provide basic care such as assistance with feeding and dressing can easily cost over $50 000 per year.

Answer: TRUE Diff: 2 Type: TF Categories: Long-Term Care Insurance Financial Type: Qualitative Skill Type: Applied 16) The death benefit and cash values are not guaranteed in a universal life insurance contract but are in whole life.

Answer: TRUE Diff: 2 Type: TF Categories: Life Insurance Financial Type: Qualitative Skill Type: Recall 17) Mortgage life insurance is usually the best deal because the policy owners get a group discount through the lender.

Answer: FALSE Diff: 3 Type: TF Categories: Life Insurance Financial Type: Qualitative Skill Type: Applied 3 © 2019 Pearson Canada Inc.

18) The beneficiary of a life insurance policy cannot be the owner's estate.

Answer: FALSE Diff: 3 Type: TF Categories: Life Insurance Financial Type: Qualitative Skill Type: Applied 19) If used properly, term life insurance can be an effective estate planning tool.

Answer: FALSE Diff: 2 Type: TF Categories: Life Insurance Financial Type: Qualitative Skill Type: Applied 20) Term life insurance is considered temporary insurance, since the policy is in effect for only a relatively short period of time.

Answer: TRUE Diff: 2 Type: TF Categories: Life Insurance Financial Type: Qualitative Skill Type: Recall 21) Non-forfeiture options allow you to re-instate your term insurance if you lapse the policy accidentally and have no medical conditions.

Answer: FALSE Diff: 2 Type: TF Categories: Life Insurance Financial Type: Qualitative Skill Type: Applied 22) Some disadvantages of term insurance are that it increases in cost when you renew it and that it has no value when it matures or you discontinue your policy.

Answer: TRUE Diff: 2 Type: TF Categories: Life Insurance Financial Type: Qualitative Skill Type: Recall 23) The problem with the cash value built up in a whole life insurance policy is that the money can only be used to pay off the policy or buy additional insurance.

Answer: FALSE Diff: 2 Type: TF Categories: Life Insurance Financial Type: Qualitative Skill Type: Recall

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24) "Term-100" life insurance generally costs more than "minimum premium universal life".

Answer: FALSE Diff: 3 Type: TF Categories: Life Insurance Financial Type: Qualitative Skill Type: Recall 25) Some advantages of whole life insurance are that it can provide coverage until death, the premiums and death benefit are guaranteed, and there is a savings or cash value feature.

Answer: TRUE Diff: 2 Type: TF Categories: Life Insurance Financial Type: Qualitative Skill Type: Recall 26) Universal life insurance is similar to whole life except it provides less guarantees.

Answer: TRUE Diff: 3 Type: TF Categories: Life Insurance Financial Type: Qualitative Skill Type: Applied 27) The income method, basing life insurance needs on multiples of current income, is the most useful method for determining how much life insurance a person should buy.

Answer: FALSE Diff: 2 Type: TF Categories: Determining the Amount of Life Insurance Needed Financial Type: Qualitative Skill Type: Recall 28) After the incontestability period a life insurance policy cannot be cancelled by the insurance company.

Answer: FALSE Diff: 1 Type: TF Categories: Contents of a Life Insurance Policy Financial Type: Qualitative Skill Type: Recall 29) The budget method of determining life insurance needs considers a family's future expenses and goals.

Answer: TRUE Diff: 2 Type: TF Categories: Determining the Amount of Life Insurance Needed Financial Type: Qualitative Skill Type: Recall

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30) The major underwriting factors of life insurance are age, sex, smoking status, driving record, and other health and lifestyle considerations.

Answer: TRUE Diff: 1 Type: TF Categories: Contents of a Life Insurance Policy Financial Type: Qualitative Skill Type: Recall 31) Critical illness insurance covers any life threatening illness as long as you live for at least 30 days following the diagnosis.

Answer: FALSE Diff: 2 Type: TF Categories: Contents of a Life Insurance Policy Financial Type: Qualitative Skill Type: Recall 32) A rider is an option that allows you to customize an insurance policy, such as by adding term insurance for a child.

Answer: TRUE Diff: 1 Type: TF Categories: Contents of a Life Insurance Policy Financial Type: Qualitative Skill Type: Recall 33) For long-term care insurance, all else equal, the higher the premium charged, the more comprehensive the coverage.

Answer: TRUE Diff: 1 Type: TF Categories: Long-Term Care Insurance Financial Type: Qualitative Skill Type: Recall 34) Your life insurance policy can be terminated if you understate your age on the application form.

Answer: FALSE Diff: 2 Type: TF Categories: Life Insurance Financial Type: Qualitative Skill Type: Recall

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Multiple Choice 1) Which of the following is true about the cost of health care in Canada?

A) The supplementary health care benefits funded by the provinces vary across the country.

B) The federal government administers all Canadian health care through the Canada Health Act. C) Health care costs as a portion of revenue are growing minimally over time.

D) Approximately half the funding for health care comes from private health care plans.

Answer: A Diff: 3 Type: MC Categories: Background on Health and Life Insurance Financial Type: Qualitative Skill Type: Recall 2) Which of the following is not an important consideration from the employer's perspective in sponsoring a group benefits plan?

A) The ability to write off premiums as business expenses B) Providing coverage for employees who are uninsurable C) Encouraging loyalty and trust from employees D) Improving staff retention Answer: B Diff: 2 Type: MC Categories: Background on Health and Life Insurance Financial Type: Qualitative Skill Type: Applied 3) Which of the following is not an important consideration from the employee's perspective regarding group benefits plans?

A) Saving money on premiums for insurance B) Coverage for employees who are uninsurable C) Protection on top of government plans D) Improving staff retention Answer: D Diff: 2 Type: MC Categories: Background on Health and Life Insurance Financial Type: Qualitative Skill Type: Applied

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4) What principles must the provinces and territories meet to qualify for the full Canada Health Transfer?

A) Public administration, accountability, universality, portability and accessibility B) Public administration, comprehensiveness, universality, portability and accessibility C) Public administration, comprehensiveness, universality, accountability and accessibility D) Public administration, fairness, portability, universality and comprehensiveness Answer: B Diff: 3 Type: MC Categories: Canada's Health Care System Financial Type: Qualitative Skill Type: Recall 5) While the Canada Health Act ensures that medically necessary services are provided based on individual need rather than the ability to pay, who funds the supplementary benefits available to certain segments of the population such as seniors, children, and social assistance recipients?

A) Canada Security Plan B) Private sector insurance C) The provinces and territories D) Federal government assistance plan Answer: C Diff: 2 Type: MC Categories: Canada's Health Care System Financial Type: Qualitative Skill Type: Recall 6) Additional insurance commonly offered through employers includes A) dental insurance.

B) critical illness insurance.

C) liability insurance.

D) long-term care insurance.

Answer: A Diff: 1 Type: MC Categories: Canada's Health Care System Financial Type: Qualitative Skill Type: Recall 7) Which of the following is correct regarding long-term care insurance?

A) It has an elimination period before owners are eligible to have their long-term care costs covered.

B) It is relatively inexpensive and good value for those over age 60.

C) It covers most Canadians over age 65 who receive care due to a long-term health problem.

D) It offers standard coverage and insurance premiums.

Answer: A Diff: 3 Type: MC Categories: Long-Term Care Insurance Financial Type: Qualitative Skill Type: Recall 8 © 2019 Pearson Canada Inc.

8) Which of the following statements is true regarding disability insurance?

A) You should have it even if you are retired and living on a pension.

B) The principle of indemnification will limit the amount of coverage you can get with an individual policy.

C) If you are self-employed, critical illness insurance would be a better option than disability.

D) Disability insurance from an employee group plan is the best coverage.

Answer: B Diff: 3 Type: MC Categories: Disability Insurance Financial Type: Qualitative Skill Type: Applied 9) Regarding the definition of "disability," A) the "any occupation" definition is the best one for the insured.

B) it varies from one disability policy to another and is the most important consideration.

C) the "own occupation" definition would pay benefits as long as you were not earning income from another occupation.

D) most employee group insurance uses the regular occupation to age 65 definition.

Answer: B Diff: 3 Type: MC Categories: Disability Insurance Financial Type: Qualitative Skill Type: Recall 10) Which of the following would be of little concern when calculating the amount of disability insurance needed?

A) The cost of one's monthly mortgage payments B) One's level of CPP disability coverage C) One's employee group disability insurance coverage D) One's financial goals Answer: B Diff: 2 Type: MC Categories: Disability Insurance Financial Type: Qualitative Skill Type: Applied 11) Which of the following is true regarding employer sponsored long-term disability insurance?

A) Most group plans offer full disability benefits payable to age 65.

B) Most firms offer employees disability insurance.

C) Most plans use the 'any occupation' definition after two years of disability.

D) A typical disability policy covers about 90 percent of the employee's gross salary.

Answer: C Diff: 3 Type: MC Categories: Disability Insurance Financial Type: Qualitative Skill Type: Applied 9 © 2019 Pearson Canada Inc.

12) If Tom is a technology consultant and wants to purchase reliable long-term disability insurance coverage that is cost effective for him, which would be the best choice?

A) Professional occupation B) Any occupation C) Regular occupation D) Own occupation Answer: C Diff: 3 Type: MC Categories: Disability Insurance Financial Type: Qualitative Skill Type: Applied 13) The average duration of a disability lasting more than three months is longest for which age?

A) 25 years old B) 35 years old C) 45 years old D) 55 years old Answer: C Diff: 3 Type: MC Categories: Disability Insurance Financial Type: Qualitative Skill Type: Applied 14) If John's business had purchased disability insurance coverage for its employees which was guaranteed renewable, which of the following is true?

A) The insurance company must renew the coverage with same benefits and premiums at the renewal date.

B) The employer must renew the same benefits each year, even if the premiums increase.

C) The insurance company must renew the coverage with the same benefits but could increase the premiums.

D) The insurance company must renew the coverage, but could change the definition of disability used.

Answer: C Diff: 3 Type: MC Categories: Disability Insurance Financial Type: Qualitative Skill Type: Applied

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15) Which of the following is true about the chances of becoming disabled?

A) The probability of a 35-year-old becoming disabled for three months or longer before they reach age 65 is around 25 percent.

B) Because the chance of becoming disabled is small, most people do not need disability insurance coverage.

C) Disability insurance is a good thing to have even if you have a low probability of becoming disabled.

D) The probability of a 50-year-old becoming disabled for three months or longer before they reach age 65 is around 50 percent.

Answer: C Diff: 3 Type: MC Categories: Disability Insurance Financial Type: Qualitative Skill Type: Recall 16) Which of the following is true about disability insurance?

A) For most people, their emergency fund would look after them if they became disabled.

B) Most people have excellent disability insurance coverage from their group insurance at work.

C) People under age 35 recover quickly and are less likely to become disabled than older people.

D) Becoming disabled could be more financially devastating than losing your home.

Answer: D Diff: 2 Type: MC Categories: Contents of Health Care Insurance Policies Financial Type: Qualitative Skill Type: Recall 17) Employee group health insurance policies commonly offer A) employee assistance programs.

B) critical illness insurance.

C) long term care insurance.

D) universal life insurance.

Answer: A Diff: 2 Type: MC Categories: Role of Private Health Insurance Financial Type: Qualitative Skill Type: Recall 18) Individual health insurance plans A) duplicate coverage offered by group plans.

B) expire when you resign your employment.

C) have less expensive premiums.

D) are purchased directly through agents.

Answer: D Diff: 1 Type: MC Categories: Role of Private Health Insurance Financial Type: Qualitative Skill Type: Recall 11 © 2019 Pearson Canada Inc.

19) An individual covered by disability insurance who has recently recovered and is returning to work after receiving benefits would be most concerned with A) the waiting period.

B) the benefit period.

C) the guaranteed renewable provision.

D) the non-cancellable provision.

Answer: D Diff: 3 Type: MC Categories: Disability Insurance Financial Type: Qualitative Skill Type: Applied 20) Critical illness insurance A) is one of the benefits commonly offered in employee group insurance plans.

B) reimburses you for treatment expenses if you survive a life-altering illness at least 30 days.

C) pays a lump sum if you survive a life-altering illness listed in the policy for at least 30 days.

D) pays a lump sum on a list of life-threatening illnesses, with evidence from a physician.

Answer: C Diff: 2 Type: MC Categories: Critical Illness Insurance Financial Type: Qualitative Skill Type: Recall 21) The similarity between disability income and long-term care insurance is A) they both require proof of income.

B) they both have a waiting period.

C) they both provide a death benefit.

D) they both extend benefits beyond age 65.

Answer: B Diff: 2 Type: MC Categories: Long-Term Care Insurance Financial Type: Qualitative Skill Type: Recall 22) What would be the out-of-pocket cost to an individual whose long-term care policy includes a 20 percent co-insurance clause? A current long-term illness has resulted in total expenses of .

A) $250 000 B) $200 000 C) $50 000 D) $0 Answer: C Diff: 2 Type: MC Categories: Long-Term Care Insurance Financial Type: Quantitative Skill Type: Applied 12 © 2019 Pearson Canada Inc.

23) Which of the following types of life insurance has a cash value component?

A) Term life B) Dependant life C) Whole life D) Mortgage insurance Answer: C Diff: 2 Type: MC Categories: Permanent Insurance Financial Type: Qualitative Skill Type: Recall 24) A disadvantage of term insurance is A) that it becomes more expensive when you renew it.

B) the incontestability period.

C) the policy owner must make the investment decisions.

D) cannot be converted to permanent insurance without medical evidence.

Answer: A Diff: 2 Type: MC Categories: Life Insurance Financial Type: Qualitative Skill Type: Recall 25) You are putting $300 per month into a savings account to pay for your child's post-secondary education. You worry that if you die before you get enough saved, your child will not be able to get a good 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) Term life D) Variable life Answer: C Diff: 2 Type: MC Categories: Life Insurance Financial Type: Qualitative Skill Type: Applied 26) In comparing term insurance with mortgage life insurance, which of the following is true?

A) The premiums decrease with mortgage insurance but not with term insurance.

B) Mortgage insurance is less expensive because of the group discount.

C) The owner has more control with term insurance.

D) Mortgage insurance is guaranteed renewable.

Answer: C Diff: 3 Type: MC Categories: Life Insurance Financial Type: Qualitative Skill Type: Applied 13 © 2019 Pearson Canada Inc.

27) Which of the following is the most important consideration in deciding on creditor insurance versus personally owned life insurance?

A) Who the beneficiary is B) Who the creditor is C) What the face amount is D) What the term is Answer: A Diff: 3 Type: MC Categories: Life Insurance Financial Type: Qualitative Skill Type: Applied 28) If you buy a term insurance policy with a conversion option, this means that you A) can covert the policy to variable life insurance before it terminates.

B) can convert the amount of coverage by a set amount at the renewal time.

C) can convert it to a whole life policy before it terminates.

D) can convert it to a longer term at the renewal time.

Answer: C Diff: 2 Type: MC Categories: Life Insurance Financial Type: Qualitative Skill Type: Recall 29) Whole life insurance has a premium that A) declines.

B) is variable.

C) is fixed.

D) increases.

Answer: C Diff: 2 Type: MC Categories: Contents of a Life Insurance Policy Financial Type: Qualitative Skill Type: Recall 30) A disadvantage of whole life policies is that A) the premiums are not predictable.

B) the premiums are higher than for term policies.

C) the face value of the policy can change over time.

D) the cash value is not available to policy owners.

Answer: B Diff: 2 Type: MC Categories: Permanent Insurance Financial Type: Qualitative Skill Type: Recall

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31) The Wongs prefer whole life insurance because it will provide for their beneficiaries, regardless of how long they live, but they cannot afford the premiums for the full $1.1 million coverage they feel they need. What would be the best option for them?

A) Purchase an affordable amount of whole life insurance and add a term rider.

B) Purchase term insurance and add a guaranteed insurability rider.

C) Purchase creditor insurance and group life insurance only.

D) Purchase universal life insurance only.

Answer: A Diff: 3 Type: MC Categories: Contents of a Life Insurance Policy Financial Type: Qualitative Skill Type: Applied 32) What happens if a policyholder with a universal life insurance policy misses a payment?

A) The policy is terminated after 30 days.

B) The cash value is refunded and the policy terminated.

C) Funds are withdrawn from the cash value to pay the premium.

D) The policy is terminated after 60 days.

Answer: C Diff: 3 Type: MC Categories: Permanent Insurance Financial Type: Qualitative Skill Type: Applied 33) What is the most important difference between universal life (UL) insurance and whole life (WL) insurance?

A) With WL the policy would terminate after 30 days if a premium is missed.

B) With UL the policy owner is responsible for selecting the investments.

C) With WL the policy owner is responsible for selecting the investments.

D) With UL the policy would terminate after 30 days if a premium is missed.

Answer: B Diff: 3 Type: MC Categories: Permanent Insurance Financial Type: Qualitative Skill Type: Applied 34) Which is true in comparing universal life (UL) insurance and whole life (WL) insurance?

A) With WL the cash value is not guaranteed.

B) With UL you will likely receive policy dividends.

C) With WL the premiums are flexible.

D) With UL the premiums are flexible.

Answer: D Diff: 3 Type: MC Categories: Permanent Insurance Financial Type: Qualitative Skill Type: Applied 15 © 2019 Pearson Canada Inc.

35) Which of the following is true regarding policy dividends from insurance?

A) They only apply to Universal Life policies.

B) They are investment distributions.

C) They only apply to participating policies.

D) They are taxable profits to shareholders.

Answer: C Diff: 3 Type: MC Categories: Life Insurance Financial Type: Qualitative Skill Type: Recall 36) Which of the following insurance types is only intended to provide insurance in the event of death?

A) Whole life B) Term life C) Universal life D) Variable life Answer: B Diff: 2 Type: MC Categories: Life Insurance Financial Type: Qualitative Skill Type: Recall 37) The income method, used to calculate your life insurance coverage, multiplies your current annual income by A) your expenses per month.

B) the number of your dependants.

C) an arbitrary number, such as 10.

D) a present value factor of your future income earning potential.

Answer: C Diff: 2 Type: MC Categories: Determining the Amount of Life Insurance Needed Financial Type: Qualitative Skill Type: Recall 38) The budget method for determining the amount of life insurance needed is based on A) your investments and cash flow.

B) your annual income and expenses.

C) you current situation and your company pension.

D) your current situation and expected future needs.

Answer: D Diff: 2 Type: MC Categories: Determining the Amount of Life Insurance Needed Financial Type: Qualitative Skill Type: Recall

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39) The job marketability of your spouse A) would be considered in the budget method of determining life insurance needs.

B) is used in the income method of determining life insurance needs.

C) is not important in determining life insurance needs.

D) is the main factor in determining whether you need life insurance.

Answer: A Diff: 2 Type: MC Categories: Determining the Amount of Life Insurance Needed Financial Type: Qualitative Skill Type: Applied 40) Jenny has no dependants, an annual income of $50 000, and debt of insurance should she buy using the income method and a factor of 10?

A) none B) $100 000 C) $400 000 D) $500 000 Answer: D Diff: 3 Type: MC Categories: Determining the Amount of Life Insurance Needed Financial Type: Quantitative Skill Type: Applied

. How much

41) Sam's annual income is $60 000 and Jane is staying home looking after their children. If Sam died, they figure it would take invested at four percent to provide suitable income for the family for 15 years until the kids are more independent. They would also like to have set aside for university for his two children. Sam and Jane's total RRSP savings are . How much life insurance does he need using the budget method?

A) $270 000 B) $350 000 C) $390 000 D) $500 000 Answer: C Diff: 2 Type: MC Categories: Determining the Amount of Life Insurance Needed Financial Type: Quantitative Skill Type: Applied

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42) Jane and Vitorio are both professionals earning roughly each annually. If one of them died and their debts were gone, the survivor could easily live on their own income. They have a combined net worth of . They have debts in the amount of a mortgage and car loans of . In addition, they pay off their credit cards each month, usually around $21 000. If anything should happen to either one of them, they want to leave their family debt-free.

How much life insurance should they consider?

A) They should each have a policy for $356 000.

B) None because their net worth is $950 000.

C) They should each have a policy for $475 000.

D) They should each have a policy for $335 000.

Answer: A Diff: 2 Type: MC Categories: Determining the Amount of Life Insurance Needed Financial Type: Quantitative Skill Type: Applied 43) When calculating the amount of life insurance premiums, underwriters of life insurance would not be concerned with A) the amount of coverage you desire.

B) your age when you take out the policy.

C) your health habits.

D) the length of time you plan to keep the coverage.

Answer: D Diff: 2 Type: MC Categories: Life Insurance Financial Type: Qualitative Skill Type: Applied 44) Which considerations would be irrelevant when considering whether to cancel an old life insurance policy and start a new one?

A) The suicide clause B) The premium schedule C) The incontestability dates D) The grace period Answer: D Diff: 2 Type: MC Categories: Contents of a Life Insurance Policy Financial Type: Qualitative Skill Type: Applied

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45) Which of the following factors is most important in determining your life insurance premium rate?

A) Your profession B) Your health C) Your net worth D) The amount of coverage Answer: B Diff: 2 Type: MC Categories: Life Insurance Financial Type: Qualitative Skill Type: Recall 46) Which of the following is an important rider for a young person who is not sure of their future life insurance needs?

A) Waiver of premium rider B) Guaranteed insurability rider C) Accidental death rider D) Term rider Answer: B Diff: 2 Type: MC Categories: Contents of a Life Insurance Policy Financial Type: Qualitative Skill Type: Applied 47) The beneficiary of a life insurance policy is A) the owner of the policy.

B) the one who pays the premiums.

C) the life insured.

D) the one who receives the settlement option.

Answer: D Diff: 1 Type: MC Categories: Background on Health and Life Insurance Financial Type: Qualitative Skill Type: Recall 48) If you have maximized your RRSP contributions, have positive cash flow and wish to maximize the transfer of wealth to your beneficiaries, which would be the most efficient choice of insurance?

A) Universal life with level term insurance B) Term to 100 C) Whole life D) Universal Life with YRT Answer: D Diff: 3 Type: MC Categories: Permanent Insurance Financial Type: Qualitative Skill Type: Applied 19 © 2019 Pearson Canada Inc.

49) The best description for a "participating policy" is that the owner is A) entitled to receive a share of the net operating profits of the insurance company.

B) entitled to receive a refund when the insurance company has overcharged on premiums.

C) entitled to receive dividends paid on the common stock of the insurance company.

D) entitled to refunds from extra premiums from policyholders who have cancelled their policies.

Answer: B Diff: 2 Type: MC Categories: Permanent Insurance Financial Type: Qualitative Skill Type: Recall 50) The term grace period is very important to an insurance policy because A) it refers to living benefits that can be paid for a grace period prior to death in special circumstances.

B) it refers to the period when a policy can no longer be contested by an insurance company.

C) it refers to the period when the policy has lapsed and can be reinstated.

D) it refers to the period when benefits are still payable while premiums are in arrears.

Answer: D Diff: 2 Type: MC Categories: Contents of a Life Insurance Policy Financial Type: Qualitative Skill Type: Recall 51) Which of the following is most correct about the guaranteed renewable clause in an insurance policy?

A) It guarantees you can renew your insurance up to a certain age.

B) It guarantees you can renew your insurance up to a certain age without an increase in premiums.

C) It guarantees you can renew your mortgage insurance at the end of the term.

D) It guarantees you can renew your disability insurance at the same premium rate.

Answer: A Diff: 3 Type: MC Categories: Contents of a Life Insurance Policy Financial Type: Qualitative Skill Type: Recall

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52) Jane and Joe each earn $55 000 and have estimated that over the next 20 years will need 60 percent of total income to manage debt, pay off the mortgage, and pay for children's postsecondary education. How much life insurance should they apply for? (Investment returns are 6 percent.)

A) $587 000 B) $1 320 000 C) $843 000 D) $757 000 Answer: D Diff: 3 Type: MC Categories: Determining the Amount of Life Insurance Needed Financial Type: Quantitative Skill Type: Applied 53) In which case are life insurance benefits not payable?

A) If the insured is killed in an accident ten days after the policy's effective date.

B) If the insured commits suicide within two years of the policy's effective date.

C) If the insured is diagnosed with a serious illness one month after the policy's effective date.

D) If the insured is killed in a car accident and the premium is 23 days overdue.

Answer: B Diff: 3 Type: MC Categories: Contents of a Life Insurance Policy Financial Type: Qualitative Skill Type: Applied 54) If the policy owner decides to terminate the policy prior to death, the cash value can be used in a variety of ways. What is this called?

A) Non-forfeiture options B) Cash value options C) Participating options D) Settlement options Answer: A Diff: 2 Type: MC Categories: Life Insurance Financial Type: Qualitative Skill Type: Recall

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55) Employment Insurance (EI) does not provide adequate coverage for a long-term disability because A) it provides benefits for only a 15-week period.

B) it provides only 20 percent of regular income for the insured.

C) it takes a long time to process the application.

D) it is only payable in extreme cases of disability.

Answer: A Diff: 2 Type: MC Categories: Disability Insurance Financial Type: Qualitative Skill Type: Applied 56) Which best describes long-term care insurance?

A) It provides a lump sum payment if you are diagnosed with an illness specified in the insurance contract.

B) It provides an income if you need assistance with the everyday tasks of daily living.

C) It reimburses specific expenses if you need assistance with everyday tasks of daily living.

D) It only covers costs if someone needs to be placed in a long-term care facility.

Answer: C Diff: 2 Type: MC Categories: Long-Term Care Insurance Financial Type: Qualitative Skill Type: Recall

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Essay 1) Family A consists of two spouses in their early thirties who have two children. They have just purchased a house with a low down payment, so they have a fairly high mortgage. They own two older cars. He works as an engineer with growing earnings potential and he has very basic medical coverage and a small insurance policy at work. She is studying accounting part-time while she stays home to look after the children.

Family B consists of a single woman in her late twenties who has been granted tenure as a professor at York University. Student loans are at a minimum, as they have been paid regularly since graduating with her PhD. Because of her dedication to academics, there is no plan for marriage in the long-term future. She owns a recent model compact car and occupies a onebedroom apartment close to the school. She has a valuable art collection, most of which was left to her by her parents, and she intends to add to it as her growing income permits. Annual longterm vacations are her second passion. She will not qualify for York University's benefit plan until she completes two years of probationary service.

Compare and contrast the insurance needs of these two cases. Please be as comprehensive as possible and provide the reasons for each decision.

Answer: The answers to this question will vary. Family A needs life insurance coverage for debt repayment and income loss on both lives as well as disability income for loss of income and the cost of a family care giver. Since his company offers only basic insurance, the family should seek a broker to advise on supplemental health coverage for the entire family. Long-term care probably isn't required at this time.

Family B is a single professional with a good income, no debts, and no dependants. This creates a bit of a dilemma for the student in terms of making insurance decisions. The student might only come up with increased coverage for life and health until the employer's policy starts in two years. It is probably wise to explore cheap (due to age) long-term care in her present circumstances, as she will likely remain a single earning professional. An "own occupation" disability policy is probably in order along with a supplementary individual health care policy.

As well, she needs some out-of-the-country medical coverage for her vacations.

Professors may want to turn this into a more comprehensive question by including home, tenants, liability, medical, and fire insurance as well as coverage for other personal assets.

Diff: 3 Type: ES Categories: Background on Health and Life Insurance Financial Type: Qualitative Skill Type: Applied

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2) How much insurance would be needed to provide for a family for 20 years if the pre-tax income necessary to cover living expenses is $50 000 and the money can be invested at 6 percent?

Answer: $50 000 × 11.47 (PVIFA, I = 6%, n = 20) = $573 500 Calculator 50 000 PMT; 20 N; 6.0% I; 0 FV; CPT PV = $573 49 Diff: 3 Type: ES Categories: Determining the Amount of Life Insurance Needed Financial Type: Quantitative Skill Type: Applied 3) Now that you have studied home, auto, liability, health, disability, critical illness, and longterm care insurance coverage, you should have a good understanding of how they relate to your financial plan. With respect to each type of insurance, discuss the relative importance that each type has to your current understanding of financial planning. Rank the importance of each type of coverage as it pertains to you personally. What types of insurance could you do without?

What coverage can you not do without under your present circumstances? What types of insurance would you consider adding to your plan as your lifestyle changes?

Answer: There is no correct answer to this question but the student should be able to apply sufficient knowledge of each type of insurance, including features, and incorporate them to the student's present situation. The ability to apply this knowledge and connect it to the financial planning process is the main point of this question.

Diff: 3 Type: ES Categories: Background on Health and Life Insurance Financial Type: Qualitative Skill Type: Applied

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4) If you become disabled while employed and have disability insurance coverage, what types of resources might you have to cover you during the waiting period?

Answer: A variety of possibilities: Short-term disability or sick leave from employee benefits is used first but often only covers a few days to two weeks.

If you are covered by an employer's disability plan, coverage may start fairly soon and cover a portion of your earnings for a few months.

You may have to use your assets, such as savings accounts and investments, to live on until the disability insurance starts to pay if you have a 90 or 120 day waiting period.

Emergency funds are important for this.

RRSP funds are a poor option.

CPP would only help in rare and extreme cases EI would cover a small amount and be offset by employee benefits.

Diff: 2 Type: ES Categories: Disability Insurance Financial Type: Qualitative Skill Type: Recall 5) From the employer's perspective, describe four advantages for group health insurance plans.

Answer: (1) Provide owners with the opportunity to write off premiums as business expenses; (2) encourage loyalty and trust among employees; and (3) enable better staff retention because of the security employees feel.

(4) Be in a position to help if tragedy befalls an employee and there is great need.

Diff: 2 Type: ES Categories: Background on Health and Life Insurance Financial Type: Qualitative Skill Type: Recall

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Personal Finance, Canadian Ed., 4e (Madura) Part 4 Personal Investing - Investing Fundamentals True/False 1) Bonds are certificates representing partial ownership of a firm.

Answer: FALSE Diff: 1 Type: TF Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 2) The primary market is used by firms to raise funds and is a market where newly issued securities are traded.

Answer: TRUE Diff: 2 Type: TF Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 3) Many more shares of stock are traded daily on the primary market than on the secondary market.

Answer: FALSE Diff: 2 Type: TF Categories: Types of Investments Financial Type: Qualitative Skill Type: Applied 4) A younger firm, with more growth opportunities, is less likely to pay dividends than an older company.

Answer: TRUE Diff: 2 Type: TF Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 5) Growth stocks are likely to pay high dividends.

Answer: FALSE Diff: 3 Type: TF Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall

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6) The higher the dividend paid by a firm, the lower its potential stock price appreciation.

Answer: TRUE Diff: 3 Type: TF Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 7) Owners of common stock have the right to vote on key corporate issues and have the last claim to the profits of a company.

Answer: TRUE Diff: 1 Type: TF Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 8) Because dividends on preferred shares are fixed, the price is not as volatile as those of common stock.

Answer: TRUE Diff: 2 Type: TF Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 9) One of the advantages of investing in bonds is that their value is guaranteed and they pay predictable interest (coupon) payments.

Answer: FALSE Diff: 3 Type: TF Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 10) One of the attractive features of mutual funds is that they offer investors a diversified portfolio and professional management.

Answer: TRUE Diff: 1 Type: TF Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 11) Mutual fund gains can be in the form of dividends, interest and/or capital gains.

Answer: TRUE Diff: 2 Type: TF Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall

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12) Real estate is a good investment option for individuals and it offers the same liquidity as stocks or bonds.

Answer: FALSE Diff: 2 Type: TF Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 13) The standard deviation of a stock's monthly returns is an indication of its investment risk.

Answer: TRUE Diff: 3 Type: TF Categories: Investment Return and Risk Financial Type: Qualitative Skill Type: Recall 14) Savvy investors can find investments that generate high rates of return with low levels of risk.

Answer: FALSE Diff: 2 Type: TF Categories: Investment Return and Risk Financial Type: Qualitative Skill Type: Recall 15) Preferred shares always pay their dividends.

Answer: FALSE Diff: 2 Type: TF Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 16) A stock trading at $20 pays a dividend annually of $0.50. The yield is 2.5 percent.

Answer: TRUE Diff: 1 Type: TF Categories: Trade-off Between Return and Risk Financial Type: Quantitative Skill Type: Applied 17) For people in the highest marginal tax bracket, a $1000 capital gain would be taxed less than $1000 dividend income.

Answer: TRUE Diff: 3 Type: TF Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied

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18) When the Blackberry share price fell due to disappointment after the launch of their new phone, that is an example of systematic risk.

Answer: FALSE Diff: 3 Type: TF Categories: Risk of Investing Financial Type: Qualitative Skill Type: Applied 19) Ellie bought a stock for $18 and sold it for $26. She has a taxable capital gain of $4.

Answer: TRUE Diff: 3 Type: TF Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied 20) An investment with a return of 9.5 percent, while the government rate for a similar investment is 3.5 percent, has a 6 percent risk premium.

Answer: TRUE Diff: 2 Type: TF Categories: Trade-off Between Return and Risk Financial Type: Quantitative Skill Type: Applied 21) Asset allocation improves diversification, but has no effect on the risk premium of your portfolio.

Answer: FALSE Diff: 2 Type: TF Categories: Asset Allocation Strategies Financial Type: Qualitative Skill Type: Recall 22) Investing prescribed percentages in stocks, bonds, and preferred shares is a type of asset allocation.

Answer: TRUE Diff: 2 Type: TF Categories: Strategies for Diversifying Financial Type: Qualitative Skill Type: Recall 23) When diversifying a portfolio, you should select investments with high positive correlation.

Answer: FALSE Diff: 3 Type: TF Categories: Strategies for Diversifying Financial Type: Qualitative Skill Type: Recall

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24) An investor's willingness to accept (or not accept) risk in their investments is referred to as risk intolerance.

Answer: FALSE Diff: 3 Type: TF Categories: Asset Allocation Strategies Financial Type: Qualitative Skill Type: Applied 25) Taking a loan for $5000 to invest in a conservative portfolio is always more risky than saving $5000 to invest in the conservative portfolio.

Answer: TRUE Diff: 3 Type: TF Categories: Learning from Investment Mistakes Financial Type: Quantitative Skill Type: Applied 26) Low-risk bonds tend to offer higher interest payments.

Answer: FALSE Diff: 1 Type: TF Categories: Trade-off Between Return and Risk Financial Type: Qualitative Skill Type: Recall 27) A stock with larger standard deviations of returns has higher risk than a stock with lower standard deviations.

Answer: TRUE Diff: 1 Type: TF Categories: Risk of Investing Financial Type: Qualitative Skill Type: Recall 28) An investor whose income is less than $20 000 will pay more tax on capital gains than on the same amount of divided income.

Answer: TRUE Diff: 3 Type: TF Categories: Investment Return and Risk Financial Type: Qualitative Skill Type: Applied 29) Research shows that sophisticated investors are able to outperform various stock indexes on average.

Answer: FALSE Diff: 1 Type: TF Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 5 © 2019 Pearson Canada Inc.

30) More than half of all trading in the financial markets is attributable to individual investors.

Answer: FALSE Diff: 1 Type: TF Categories: Types of Mutual Funds Financial Type: Qualitative Skill Type: Recall Multiple Choice 1) Before you start to invest, you should ensure you have liquidity by owning A) a line of credit.

B) money market securities.

C) credit cards.

D) corporate bonds.

Answer: B Diff: 1 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 2) The market for newly issued securities and initial public offerings (IPOs) is the A) initial market.

B) open market.

C) primary market.

D) secondary market.

Answer: C Diff: 2 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 3) Institutional investors A) are responsible for most of the trading in financial markets.

B) focus most of their investment decisions on less than one year.

C) primarily select stocks using technical analysis.

D) invest primarily in stocks rather than bonds.

Answer: A Diff: 3 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Applied

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4) In the secondary market, stock prices are A) determined by supply and demand.

B) often undervalued.

C) easy to predict.

D) less expensive than on the primary market.

Answer: A Diff: 1 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 5) Which of the following is good investment advice?

A) Set high goals and expectations for your investments even if they are unrealistic.

B) Investing in mutual funds is an effective way to diversify if you have $200 per month to invest.

C) If you are not getting the returns you need on your savings, select a more risky investment.

D) If you own a stock that has dropped 50 percent in value, purchase more to average your price down.

Answer: B Diff: 2 Type: MC Categories: Learning from Investment Mistakes Financial Type: Qualitative Skill Type: Applied 6) Which is true about dividends?

A) They are earnings distributed to shareholders.

B) They usually provide the same return as bonds.

C) They are retained earnings.

D) They change each quarter.

Answer: A Diff: 2 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 7) Which of the following is true about dividends?

A) Dividends are not based on earnings.

B) All large companies pay dividends.

C) Dividends are usually around five percent of the stock price.

D) Dividends are likely paid by older, established companies.

Answer: D Diff: 3 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall

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8) Which of the following is true about growth stocks?

A) They are more established companies.

B) They mainly produce a return to investors via capital gains.

C) They pay high dividends.

D) They are the opposite of value stocks.

Answer: B Diff: 2 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Applied 9) Stocks that are undervalued by the market for reasons other than the performance of their business are called A) growth stocks.

B) value stocks.

C) preferred stocks.

D) dividend stocks.

Answer: B Diff: 2 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 10) Which one thing do you always have with a common stock?

A) Dividends B) Voting rights C) Capital appreciation D) A guarantee of minimum par value Answer: B Diff: 1 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 11) If you believe that a firm will grow rapidly in the future, you should buy its A) bonds.

B) debentures.

C) common stock.

D) preferred stock.

Answer: C Diff: 2 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Applied

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12) Compared with common stock, preferred stock values A) are more variable.

B) are less variable.

C) are lower.

D) are higher.

Answer: B Diff: 2 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 13) Which of the following is a good example of systematic risk?

A) The low interest rates in effect since the 2008 - 2009 credit crisis B) The decline in Nortel stock price after the crash of 2000 - 2001 C) The decline in Blackberry stock price since the 2008 - 2009 credit crisis D) The decline in the stock price of Canadian banks in the 2008 - 2009 credit crisis Answer: A Diff: 3 Type: MC Categories: Investment Return and Risk Financial Type: Qualitative Skill Type: Applied 14) The difference between common and preferred stock is that preferred stock A) may or may not receive dividends.

B) has more predictable income and more safety.

C) has greater potential for capital appreciation.

D) is issued more frequently than common stock.

Answer: B Diff: 2 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 15) If you wish to have a direct voice in the running of a company, you should purchase A) directorships.

B) debentures.

C) common stock.

D) preferred stock.

Answer: C Diff: 1 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall

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16) Corporate bonds A) offer a return to investors in the form of interest payments.

B) maintain their value even in periods of changing interest rates.

C) appreciate in value as the maturity date nears.

D) lose value as the maturity date nears.

Answer: A Diff: 1 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 17) Which of the following is true about mutual funds?

A) They offer a diversified portfolio of stocks to investors with specific investment objectives.

B) Professionally managed mutual funds consistently beat the TSX index returns.

C) Dividends received from their investments are used to pay the fund's expenses.

D) They provide access to professional money management for a low investment.

Answer: D Diff: 2 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 18) Real estate returns can be in the form of A) capital gains, losses, interest and rental income.

B) interest and dividends.

C) capital gains, losses and dividends.

D) capital gains, losses and rental income.

Answer: D Diff: 2 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 19) One advantage of investing in your home compared to stocks, bonds, and mutual funds is A) real estate is more likely to go up in value.

B) only fifty percent of the capital gains are taxed.

C) the capital gains are usually tax exempt.

D) real estate is less risky.

Answer: C Diff: 1 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall

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20) Of the following, which is not used in measuring a stock's return?

A) The price of the stock at the time of purchase B) The average price of stock during the period owned C) The price of stock at the time of sale D) The dividends earned during the period owned Answer: B Diff: 1 Type: MC Categories: Investment Return and Risk Financial Type: Qualitative Skill Type: Recall 21) If you invest $1000 in stock that pays no dividends and sell the stock exactly one year later for $1100, what will be your return? (Ignore commissions and trading fees.)

A) 1 percent B) 5 percent C) 10 percent D) 100 percent Answer: C Diff: 2 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied 22) 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 percent B) 33 percent C) 47 percent D) 40 percent Answer: C Diff: 3 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied 23) For someone whose salary is $120 000, what type of investment income receives the lowest tax consequences?

A) Dividends B) Interest C) Capital gains D) Trust income Answer: C Diff: 3 Type: MC Categories: Investment Return and Risk Financial Type: Qualitative Skill Type: Applied 11 © 2019 Pearson Canada Inc.

24) If you predicted that a stock would be worth $40 in five years and that you wanted to get a nine percent average annual return, what price should you be willing to pay for it now? (Assume no fees or taxes.)

A) $38.53 B) $22.00 C) $26.00 D) $25.54 Answer: C Diff: 3 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied 25) The return-risk relationship means A) the ideal investment has high return and low risk.

B) the downside risk is all that really matters to investors.

C) the higher the return expectation of an investment, the greater the uncertainty.

D) a diversified mutual fund will have low risk.

Answer: C Diff: 2 Type: MC Categories: Trade-off Between Return and Risk Financial Type: Qualitative Skill Type: Recall 26) Investment risk refers to A) the risk premium in the markets.

B) Beta.

C) the risk of investments dropping in value.

D) volatility in investment returns.

Answer: D Diff: 3 Type: MC Categories: Asset Allocation Strategies Financial Type: Qualitative Skill Type: Recall 27) To measure an investment's risk, which of the following would you use?

A) Time value of money B) Range of returns on the entire market C) Standard deviation of returns D) Standard deviation of prices Answer: C Diff: 3 Type: MC Categories: Investment Return and Risk Financial Type: Qualitative Skill Type: Recall 12 © 2019 Pearson Canada Inc.

28) You can reduce your investment risk most effectively through A) asset allocation.

B) limiting the time horizon.

C) diversifying stocks.

D) maximizing the beta.

Answer: A Diff: 2 Type: MC Categories: Strategies for Diversifying Financial Type: Qualitative Skill Type: Recall 29) If you have $3000 to invest, but could need the money at any time in the next year, you should A) put the money in a liquid short-term interest-bearing investment.

B) invest in a one-year closed GIC. C) put the money in a dividend mutual fund.

D) invest in an asset allocation mutual fund.

Answer: A Diff: 2 Type: MC Categories: Trade-off Between Return and Risk Financial Type: Qualitative Skill Type: Applied 30) You have $10 000 to invest now and can add $550 a month, have a moderate risk profile, and would like to set these funds aside for retirement in 20 years. Your most appropriate option would be to A) put the money in a money market savings account.

B) buy one-year GICs. C) invest in small cap mutual funds.

D) invest in mutual funds managed by the asset allocation method.

Answer: D Diff: 2 Type: MC Categories: Asset Allocation Strategies Financial Type: Qualitative Skill Type: Applied 31) A stock was purchased at $23, sold exactly two years later at $25.50, and paid a $0.70 dividend per year. What was the annual return on investment?

A) 7 percent B) 8.5 percent C) 17 percent D) 10.9 percent Answer: B Diff: 2 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied 13 © 2019 Pearson Canada Inc.

32) Amalgamated Monkey Nuts Inc. has a range of returns between 4 percent and 7 percent while Moose Pasture Minerals Ltd. has a range of returns between 3 percent and 10 percent. This means A) Amalgamated Monkey Nuts Inc. is a less risky stock.

B) Moose Pasture Minerals Ltd. is a less risky stock.

C) Amalgamated Monkey Nuts Inc. is a more risky stock.

D) Moose Pasture Minerals Ltd. is a better investment.

Answer: A Diff: 2 Type: MC Categories: Investment Return and Risk Financial Type: Qualitative Skill Type: Applied 33) Given the bank rate of 3.5 percent, and a corporate bond that will pay 10 percent. What is the risk premium?

A) 13.5 percent B) 6.5 percent C) 7.5 percent D) 0 percent Answer: B Diff: 2 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied 34) Given the bank rate of 3 percent, purchasing an investment with a 9 percent risk premium means A) the investor is expecting a 12 percent return and will likely get close to that.

B) the investor is expecting a 9 percent return but will not likely get that exact amount.

C) the investor is expecting a 12 percent return but will not likely get that exact amount.

D) the investor is expecting a 9 percent return and will likely get close to that.

Answer: C Diff: 2 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied

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35) Which portfolio provides the advantage of asset allocation?

A) A portfolio invested in stocks of several different countries to maximize return with less risk B) A portfolio invested in bonds and stocks in equal amounts to maximize return with less risk C) A portfolio invested in a variety of assets to maximize return with less risk D) A fully diversified equity portfolio eliminating unsystematic risk Answer: C Diff: 3 Type: MC Categories: Asset Allocation Strategies Financial Type: Qualitative Skill Type: Applied 36) An income trust A) pays taxes on its earnings and then distributes the remainder of the cash flow to investors.

B) is a good replacement for bonds in your asset allocation.

C) is similar to a stock investment in price volatility but pays all cash flows to investors.

D) has tax implications similar to dividends.

Answer: C Diff: 2 Type: MC Categories: Asset Allocation Strategies Financial Type: Qualitative Skill Type: Recall 37) Buying more of a stock that has just plummeted in value is an example of A) averaging your cost base down.

B) purchasing stocks on sale.

C) dollar cost averaging.

D) taking excessive risk to recover from a losing position.

Answer: D Diff: 2 Type: MC Categories: Learning from Investment Mistakes Financial Type: Qualitative Skill Type: Recall 38) Your investment portfolio matches your risk profile perfectly but you are not meeting your investment goals. You should remedy this by A) increasing the high-risk portion of the portfolio to achieve higher returns.

B) cutting expenses to increase savings and stay with the same asset allocation.

C) reviewing your investment goals to see if they are realistic and make adjustments.

D) selling all of the investment assets to reinvest in low risk investments.

Answer: C Diff: 3 Type: MC Categories: Asset Allocation Strategies Financial Type: Qualitative Skill Type: Applied

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39) You want to save $10 000 toward the down payment on a house in five years. If you can earn 8 percent (compounded monthly), approximately how much should you save each month to reach this short-term goal?

A) $142 B) $136 C) $167 D) $131 Answer: B Diff: 2 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied 40) For your retirement you want to have enough funds in your RRSPs to provide an income stream of $22 000 for 30 years. How much money would you need to have accumulated if your RRSPs averaged a real return of four percent per year? (Round to the nearest thousand) A) $384 000 B) $627 000 C) $660 000 D) $380 000 Answer: D Diff: 3 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied 41) You are investing a lump sum of $7200 with a goal of saving $200 000 total in 30 years.

What annual interest rate on your investments would you need to reach your goal?

A) 15 percent B) 11.7 percent C) 11.3 percent D) 12.4 percent Answer: B Diff: 3 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied

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42) How much more will you earn on a lump sum investment of if you increase your risk tolerance to improve your return from 6 percent to 8 percent over a 20-year period?

A) $29 077 B) $31 065 C) $28 555 D) $8000 Answer: A Diff: 3 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied 43) You have invested $16 000. How long it will approximately take to accumulate the fairly conservative rate of 6 percent?

A) 38 years B) 34 years C) 28 years D) 31 years Answer: D Diff: 3 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied

at

44) You are investing to achieve the following goals: A down payment for a cottage in the amount of $8000 in six years, $4000 for a trip to Europe in three years, and to supplement retirement income in 24 years. If you can earn 7 percent compounded monthly on your investments, how much should you be saving each month?

A) $392.

B) $377.

C) $409.

D) $396.

Answer: A Diff: 3 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied

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45) If you wish to supplement your retirement by saving in 25 years, how much more would you have to save monthly if you saved the money outside rather than in an RRSP? Consider that investment returns should provide a yield of 8.5 percent compounded monthly and your tax rate is 30 percent, so the after tax return would be 5.95 percent.

A) $9.71 B) $87.63 C) $97.05 D) $101.05 Answer: C Diff: 3 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied 46) It is now 2030 and you have saved $250 000 since you started saving in 2007. During the same period inflation averaged 3 percent. What would your be worth in 2007 dollars?

A) $493 397 B) $126 673 C) $121 891 D) $236 047 Answer: B Diff: 3 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied 47) You have been very risky with your investments but, having just turned 50 years of age, your investment adviser suggests you reallocate to reduce your risk. He advises you that your returns will be lower but it would be a wise move. You have saved and wish to retire with . When will you be able to achieve this if the return is now 5.5 percent compounded monthly?

A) In 4.37 years B) In 5.5 years C) In 9.91 years D) In 1.3 years Answer: A Diff: 3 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied

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48) Your after tax return on your investments is 2.8 percent compounded monthly.

Approximately how much will you have to save per month in order to have $80 000 in 25 years to buy a retirement cottage? Assume your investments are not tax sheltered.

A) $123 B) $193 C) $189 D) $184 Answer: D Diff: 3 Type: MC Categories: Investment Return and Risk Financial Type: Quantitative Skill Type: Applied 49) Investing in growth stocks usually refers to A) younger companies paying large dividends.

B) large companies paying large dividends.

C) younger companies with potential for large capital gains.

D) any company with a market expansion strategy.

Answer: C Diff: 2 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 50) If the market value for ABC Ltd. is and its number of shares outstanding is , the value of stock per share is A) $19.69.

B) $1.969.

C) $196.90.

D) Insufficient information to answer this question Answer: B Diff: 2 Type: MC Categories: Types of Investments Financial Type: Quantitative Skill Type: Applied 51) Stocks that provide investors with periodic income in the form of large dividends are called A) large cap stocks.

B) growth stocks.

C) value stocks.

D) income stocks.

Answer: D Diff: 2 Type: MC Categories: Types of Investments Financial Type: Qualitative Skill Type: Recall 19 © 2019 Pearson Canada Inc.

52) In December 1977 the TSX index was 1059. In December 2007 the TSX index was What has been the approximate historical return on equities during this period?

A) 4.2 percent B) 10.1 percent C) 15.6 percent D) 8.4 percent Answer: D Diff: 3 Type: MC Categories: How Stock Decisions Fit Within Your Financial Plan Financial Type: Quantitative Skill Type: Applied 53) The returns on bond investments may come from A) fixed coupon interest only.

B) fixed coupon interest and bond price appreciation.

C) fixed coupon dividend and bond price appreciation.

D) bond price appreciation only.

Answer: B Diff: 2 Type: MC Categories: Bond Investment Strategies Financial Type: Qualitative Skill Type: Recall

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Essay 1) Find an online questionnaire designed to determine your tolerance to investment risk. Explain how the results would suggest you invest funds for the following goals, purchasing a home in seven years and for retiring in 35 years. Indicate the asset allocation you would use for each of these purposes based on your risk tolerance. Explain why the textbook suggests that your asset allocation in your early career should be mostly stocks and in retirement should be mostly bonds and why there could be exceptions to this general rule.

Answer: Answer will vary with each student's assessment of his or her own risk level, but it should be clear that he or she understands the risk-reward level of each asset class he or she will invest in.

Ideally the student should indicate that with a longer time horizon, there is time to ride out shortterm volatility, and that if a person is retired and drawing on their funds, then volatility works against them.

Therefore they should indicate a more conservative assets mix for the seven year goal.

Exceptions: If a young person would be very uncomfortable with volatility, then they should not have an aggressive portfolio.

If an older person is comfortable with volatility and has high net worth, so is not forced to draw on investments which have done poorly, then an aggressive portfolio could be appropriate for them.

Diff: 3 Type: ES Categories: Investment Return and Risk Financial Type: Qualitative Skill Type: Applied 2) Describe three applications used to judge an investment's risk. Do you feel these methods give a full explanation of how investors feel about risk?

Answer: Students will discuss "range of returns," "standard deviation," or Beta, or perhaps other subjective methods.

Student may realize that most people are very concerned about the negative side of risk, but not very concerned about the positive side. In other words, they would not be concerned if their investments doubled in value, but they would be highly concerned if they dropped by 50 percent.

This starts to lead into topics in behavioural finance.

Diff: 3 Type: ES Categories: Trade-off Between Return and Risk Financial Type: Qualitative Skill Type: Recall

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3) Explain how it is possible to add more risky assets to a portfolio and reduce the overall risk.

Give a specific example of how this could be done for a conservative portfolio.

Answer: Answers will vary. However, the student needs to indicate how correlation of different investments impacts the overall risk in a portfolio.

The adding in of risky assets which are negatively correlated to the portfolio would reduce the overall risk and increase return.

They also need to give an example of a conservative portfolio, with more than 70 percent in bonds and indicate how adding equities could reduce the volatility.

Diff: 3 Type: ES Categories: Factors That Affect Your Asset Allocation Decision Financial Type: Qualitative Skill Type: Recall 4) Last year you held the following investments: $50 000 in bonds, which earned 5.5 percent last year $5000 in shares of Moose Pasture Minerals, which lost 22 percent last year $10 000 in shares of Amalgamated Monkey Nuts, which earned 12 percent last year $20 000 in Offshore Diversification Mutual Fund, which earned 8 percent last year $15 000 in XIU exchange-traded fund, and the TSX was up 11 percent last year Show how you determine the return on the portfolio for last year, and what it is worth now?

Answer: 50 000 (.50% × 5.5%) = 2.75 -5000 (.05 × 22%) = -1.1 10 000 (.10 × 12%) = 1.2 20 000 (.2 × 8%) = 1.6 15 000 (.15 × 11%) = 1.65 Total 100 000 @ 6.1% 6.1 percent, and it is worth $106 100.

Diff: 3 Type: ES Categories: Trade-off Between Return and Risk Financial Type: Quantitative Skill Type: Applied

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5) You have been given an overview of stocks, bonds, and mutual funds. Give one advantage and one disadvantage of investing in each of these.

Answer: Stocks—Advantage: You may get a dividend and also capital appreciation if you pick a good stock.

Disadvantage: You have all of your investment in one company and may lose everything.

Bonds—Advantage: You have a predictable return that is lower risk with a highly rated bond.

Disadvantage: The bond price may actually drop before you want to sell it and the capital gain potential is limited.

Mutual funds—Advantage: You have a diversified investment run by a professional.

Disadvantage: You have no personal control of your investment and the management expenses take away from your return.

Diff: 2 Type: ES Categories: Types of Investments Financial Type: Qualitative Skill Type: Applied 6) Describe how someone's risk tolerance directly impacts their retirement planning. Use an example to illustrate how much difference it would make if someone was a conservative investor who averaged a six percent return over 35 years on their savings versus another more aggressive investor who averaged eight percent over the same period.

Answer: Stocks are part of the investment plan and the overall financial plan. Purchasing stocks requires liquidity or financing/borrowing. In considering purchasing individual stocks, it should be done to increase your wealth either in the short term or long term.

Conservative guy invests $500 per month in his RRSP for 35 years (form age 30 to age 65) P/Y 12 and C/Y 1 and, N 500 × 12, PV 0, I 6%, PMT -$500, CPT FV $686 800 Aggressive lady invests $500 per month in her RRSP for 35 years (from age 30 to age 65) P/Y 12 and C/Y 1 and, N 500 × 12, PV 0, I 8%, PMT -$500, CPT FV $1 071 280 The aggressive investor would have more lifestyle choices in retirement, with almost 50% more money, even though she only had a 2% better rate of return.

Diff: 3 Type: ES Categories: How Investments Fit Within Your Financial Plan Financial Type: Quantitative Skill Type: Applied

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Personal Finance, Canadian Ed., 4e (Madura) Part 4 Personal Investing - Investing in Stocks True/False 1) The Toronto Stock Exchange (TSX) is the only Canadian stock exchange.

Answer: FALSE Diff: 1 Type: TF Categories: Stock Exchanges Financial Type: Qualitative Skill Type: Recall 2) Floor traders no longer exist on the TSX because trades are now handled electronically.

Answer: TRUE Diff: 1 Type: TF Categories: Stock Exchanges Financial Type: Qualitative Skill Type: Recall 3) The over-the-counter (OTC) market is a non-transparent communications network.

Answer: TRUE Diff: 1 Type: TF Categories: Stock Exchanges Financial Type: Qualitative Skill Type: Recall 4) Market makers are required to help make markets more liquid by taking the same position as those who want to buy or sell the stock.

Answer: FALSE Diff: 2 Type: TF Categories: Stock Exchanges Financial Type: Qualitative Skill Type: Recall 5) For most firms, having slightly more short-term assets versus short-term liabilities would be considered a reasonable current ratio.

Answer: FALSE Diff: 2 Type: TF Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Applied

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6) A firm with a low debt ratio relative to the industry norm has a high degree of financial leverage and therefore may have a relatively high risk of default.

Answer: FALSE Diff: 3 Type: TF Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Recall 7) A high times-interest-earned ratio means that the firm should be more capable of covering its debt payments.

Answer: TRUE Diff: 2 Type: TF Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Recall 8) When you look at inventory turnover (cost of goods sold divided by average daily inventory), a high ratio means that a company is more efficient than those with lower ratios.

Answer: TRUE Diff: 2 Type: TF Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Recall 9) Company's with lower P/E ratios are usually better long term investments than those with higher P/E ratios.

Answer: FALSE Diff: 2 Type: TF Categories: Stock Quotations Financial Type: Qualitative Skill Type: Applied 10) When the federal government fiscal policy moves to increases taxes, these revenues would generally be used to stimulate economic growth.

Answer: FALSE Diff: 2 Type: TF Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Recall 11) Low interest rates can increase demand for stocks and therefore have a direct impact on stock prices.

Answer: TRUE Diff: 2 Type: TF Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Applied 2 © 2019 Pearson Canada Inc.

12) Low interest rates tend to entice investors into the stock market where they can achieve better returns.

Answer: TRUE Diff: 2 Type: TF Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Recall 13) As long as you purchase the stock of a good company, it will be a good investment.

Answer: FALSE Diff: 3 Type: TF Categories: Stock Valuation Financial Type: Qualitative Skill Type: Applied 14) Fundamental analysis is the valuation of stocks based on sensitivity of the firm's performance to economic conditions.

Answer: TRUE Diff: 1 Type: TF Categories: Stock Valuation Financial Type: Qualitative Skill Type: Recall 15) The price-earnings method used to value stock is limited because it assumes that the firm has the same P/E ratio as its competitors.

Answer: FALSE Diff: 2 Type: TF Categories: Stock Valuation Financial Type: Qualitative Skill Type: Recall 16) A stock with a low P/E ratio compared with its peers means it is a good value using fundamental analysis.

Answer: FALSE Diff: 2 Type: TF Categories: Stock Valuation Financial Type: Quantitative Skill Type: Applied 17) If the stock market is efficient, then fundamental analysis will be a good way to determine when stocks are well priced.

Answer: FALSE Diff: 2 Type: TF Categories: Stock Valuation Financial Type: Qualitative Skill Type: Applied 3 © 2019 Pearson Canada Inc.

18) A discount brokerage firm executes transactions and provides investment advice at a price less than that of full-service brokers.

Answer: FALSE Diff: 1 Type: TF Categories: Purchasing or Selling Stocks Financial Type: Qualitative Skill Type: Recall 19) One study tracked recommendations by stockbrokers and showed that they make "buy" recommendations hundreds of times more often than "sell" recommendations.

Answer: TRUE Diff: 2 Type: TF Categories: Purchasing or Selling Stocks Financial Type: Qualitative Skill Type: Recall 20) Limit orders are always preferable to market orders.

Answer: FALSE Diff: 2 Type: TF Categories: Purchasing or Selling Stocks Financial Type: Qualitative Skill Type: Applied 21) The risk of a market order is that you could pay more for a stock than you anticipated.

Answer: TRUE Diff: 2 Type: TF Categories: Purchasing or Selling Stocks Financial Type: Qualitative Skill Type: Applied 22) When using a sell stop order to sell 100 shares of ABCO at $30, it could happen that you only get $2500 for the transaction.

Answer: TRUE Diff: 3 Type: TF Categories: Purchasing or Selling Stocks Financial Type: Qualitative Skill Type: Applied 23) A stock purchase of 100 shares of CN at $30 per share requiring a 30% margin means you would need $900 cash to make the purchase.

Answer: TRUE Diff: 3 Type: TF Categories: Buying Stocks on Margin Financial Type: Quantitative Skill Type: Applied 4 © 2019 Pearson Canada Inc.

24) When you buy a stock on margin, your return is magnified if the stock goes up in value.

Answer: TRUE Diff: 1 Type: TF Categories: Buying Stocks on Margin Financial Type: Qualitative Skill Type: Recall 25) A margin call is a request from a brokerage firm for the investor to increase the cash in the account in order to bring the margin back up to the minimum level.

Answer: TRUE Diff: 2 Type: TF Categories: Buying Stocks on Margin Financial Type: Qualitative Skill Type: Recall 26) Venture capital refers to funds that investors are prepared invest in risky new businesses with growth potential.

Answer: TRUE Diff: 1 Type: TF Categories: Stock Valuation Financial Type: Qualitative Skill Type: Recall 27) Inflation is the measure of the increase in the general level of prices of products and services over a specified period.

Answer: TRUE Diff: 1 Type: TF Categories: Economic Analysis of Stocks Financial Type: Qualitative Skill Type: Recall 28) Fiscal policy is about how the government manages interest rates and money supply.

Answer: FALSE Diff: 2 Type: TF Categories: Economic Analysis of Stocks Financial Type: Qualitative Skill Type: Recall 29) The Investment Industry Regulatory Organization of Canada (IIROC) limits the amount that can be borrowed for a TSX list stock to 70 percent for stocks that trade for more than $5 per share.

Answer: TRUE Diff: 2 Type: TF Categories: Purchasing or Selling Stocks Financial Type: Qualitative Skill Type: Recall 5 © 2019 Pearson Canada Inc.

30) A firm's financial leverage indicates its reliance on debt to support its operations.

Answer: TRUE Diff: 2 Type: TF Categories: Stock Valuation Financial Type: Qualitative Skill Type: Recall Multiple Choice 1) Computer systems that match up buyers and sellers of stocks or bonds are A) the NYSE Euronext exchange.

B) the over-the-counter (OTC) markets.

C) the Toronto Stock Exchange.

D) the national stock exchanges.

Answer: B Diff: 2 Type: MC Categories: Stock Exchanges Financial Type: Qualitative Skill Type: Recall 2) A company's earnings are $3 per share, its dividend is $2 per share, and its stock price is $30 per share. Its P/E is A) 15.

B) 10.

C) 6.

D) 15 percent.

Answer: B Diff: 2 Type: MC Categories: Analysis of a Firm Financial Type: Quantitative Skill Type: Applied 3) Which are the main Canadian stock exchanges?

A) TSX, TSX Venture Exchange and Montreal Exchange B) TSX, NASDAQ, and Montreal Exchange C) TSX, TSX Venture Exchange and Canadian OTC D) TSE, NASDAQ and Canadian OTC Answer: A Diff: 2 Type: MC Categories: Stock Exchanges Financial Type: Qualitative Skill Type: Recall

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4) A way to evaluate the performance of a stock investment is to compare it to A) The buy and sell recommendations from analysts B) The returns of other stocks in your portfolio C) The stocks relevant industry index D) The historical return of the Canadian stock market Answer: C Diff: 2 Type: MC Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Recall 5) When reviewing a corporate income statement, to find gross profit, cost of goods sold is subtracted from A) revenue.

B) net income.

C) earnings before interest and taxes.

D) operating expenses.

Answer: A Diff: 2 Type: MC Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Recall 6) To evaluate the liquidity of a firm, you should look at the A) current ratio.

B) debt ratio.

C) inventory turnover.

D) return on net assets.

Answer: A Diff: 2 Type: MC Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Recall 7) Which of the following ratios measures efficiency?

A) Times interest earned B) Inventory turnover C) Return on assets D) Return on equity Answer: B Diff: 3 Type: MC Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Recall

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8) If you wish to evaluate the financial leverage of a firm, you could look at the A) short-term liabilities versus assets.

B) long-term liabilities versus total assets.

C) gross revenue versus total assets.

D) long-term debt versus total equity.

Answer: B Diff: 2 Type: MC Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Recall 9) Stocks would be most favourably 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.

Answer: A Diff: 2 Type: MC Categories: Economic Analysis of Stocks Financial Type: Qualitative Skill Type: Recall 10) Which of the following factors would contribute to an increase in stock prices?

A) Low inflation B) High interest rates C) Fiscal policy to increase tax rates D) Inflationary monetary policy Answer: A Diff: 3 Type: MC Categories: Economic Analysis of Stocks Financial Type: Qualitative Skill Type: Applied 11) The means by which the Canadian government imposes taxes on individuals and corporations and the way it spends tax revenues is the A) tax policy.

B) fiscal policy.

C) monetary policy.

D) budgetary policy.

Answer: B Diff: 2 Type: MC Categories: Economic Analysis of Stocks Financial Type: Qualitative Skill Type: Recall

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12) One of the most commonly used measures of inflation is the A) gross domestic product.

B) fiscal policy.

C) consumer price index.

D) inflation factor.

Answer: C Diff: 1 Type: MC Categories: Economic Analysis of Stocks Financial Type: Qualitative Skill Type: Recall 13) In fundamental research you look for a stock that is A) overvalued.

B) from a well-known company.

C) undervalued.

D) trending upwards.

Answer: C Diff: 2 Type: MC Categories: Stock Valuation Financial Type: Qualitative Skill Type: Recall 14) Technical analysts look for stock price patterns which A) indicate stocks with rapidly changing P/Es. B) indicate a possible price trend.

C) indicate value trends.

D) demonstrate profit trends.

Answer: B Diff: 2 Type: MC Categories: Stock Valuation Financial Type: Qualitative Skill Type: Recall 15) Which of the following methods is used most commonly to value stock?

A) Price-earnings method B) Price-revenue method C) General evaluation of the economy and industry D) Technical analysis Answer: A Diff: 2 Type: MC Categories: Stock Valuation Financial Type: Qualitative Skill Type: Recall

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16) How much should a share of stock be worth for a firm whose earnings per share are $4 if the industry's average P/E is 11?

A) $40 B) $44 C) $48 D) $88 Answer: B Diff: 2 Type: MC Categories: Stock Valuation Financial Type: Quantitative Skill Type: Applied 17) If a company's P/E is 20 and its industry's mean P/E is 15, the company is likely considered to be A) overvalued.

B) poorly managed.

C) undervalued.

D) risky.

Answer: A Diff: 2 Type: MC Categories: Stock Valuation Financial Type: Qualitative Skill Type: Recall 18) Which of the following is a limitation of the P/E method?

A) Finding the price of the stock B) Finding earnings per share information C) Difficulty forecasting earnings D) Changing dividend payouts Answer: C Diff: 1 Type: MC Categories: Stock Valuation Financial Type: Qualitative Skill Type: Recall 19) What is the safest type of stock order to use?

A) Market order B) Limit order C) Buy stop order D) Sell stop order Answer: B Diff: 3 Type: MC Categories: Purchasing or Selling Stocks Financial Type: Quantitative Skill Type: Applied

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20) What additional risk is involved when buying stock on margin?

A) The interest rate charge B) The leverage C) A margin call D) The amount borrowed Answer: B Diff: 3 Type: MC Categories: Purchasing or Selling Stocks Financial Type: Quantitative Skill Type: Applied 21) If IIROC limits the margin on a stock to 70 percent, initially how much money would you need to personally invest to purchase worth of BMO stock?

A) $7000 B) $3000 C) It depends on the price.

D) $10 000 Answer: B Diff: 2 Type: MC Categories: Purchasing or Selling Stocks Financial Type: Quantitative Skill Type: Applied 22) A market in which stock prices fully reflect all information that is available to investors is called A) inefficient.

B) efficient.

C) overvalued.

D) factored.

Answer: B Diff: 2 Type: MC Categories: Stock Market Efficiency Financial Type: Qualitative Skill Type: Recall 23) If stock markets are truly efficient, it implies that A) it will not be easy to find undervalued stocks.

B) technical analysis should be more effective than fundamental analysis.

C) professional money managers should outperform individual investors.

D) stock purchase and sell orders can always be completed within a number of seconds.

Answer: A Diff: 3 Type: MC Categories: Stock Market Efficiency Financial Type: Qualitative Skill Type: Applied

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24) One of the key ways to apply fundamental analysis is by A) following an investor newsletter.

B) tracking historical stock price trends.

C) charting stock price patterns.

D) using the dividend discount model.

Answer: D Diff: 2 Type: MC Categories: Stock Valuation Financial Type: Qualitative Skill Type: Recall 25) You want to purchase 100 shares of CIB for a maximum price of $3000 and it is currently trading at $33. Which order should you place?

A) A buy stop order to purchase 100 shares of CIB at $30 good until filled B) A limit order to buy 100 shares of CIB at $30 good until filled C) A market order to buy 100 shares of CIB at $30 D) A market order to purchase 100 shares of CIB at $33 Answer: B Diff: 3 Type: MC Categories: Purchasing or Selling Stocks Financial Type: Quantitative Skill Type: Applied 26) What can be said about broker and analyst recommendations?

A) They generally beat the markets.

B) They tend to be optimistic on "buy" recommendations.

C) They cannot own the stocks they recommend.

D) They tend to give more "sell" recommendations.

Answer: B Diff: 2 Type: MC Categories: Purchasing or Selling Stocks Financial Type: Qualitative Skill Type: Recall 27) Which of the following orders to buy or sell is an odd lot?

A) 1000 shares at $10 B) $3780 worth of shares at $20 C) $8600 worth of shares at $4.30 D) 500 shares at $22.50 Answer: B Diff: 3 Type: MC Categories: Purchasing or Selling Stocks Financial Type: Quantitative Skill Type: Applied

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28) If you need to be sure you will sell your shares of a certain stock if the price drops below a certain threshold, which type of order should you place?

A) Sell stop order for price X B) Limit order to sell for price X C) Market order to sell for price X D) Short sell order for price X Answer: A Diff: 3 Type: MC Categories: Purchasing or Selling Stocks Financial Type: Qualitative Skill Type: Applied 29) An order to execute a transaction to buy or sell a stock at its prevailing price is called a A) limit order.

B) stock order.

C) market order.

D) good till cancelled order.

Answer: C Diff: 1 Type: MC Categories: Purchasing or Selling Stocks Financial Type: Qualitative Skill Type: Recall 30) How many shares of TIC could you purchase on margin if you have $6000? The market price is $20 and the margin requirement is 30 percent.

A) 900 shares B) 300 shares C) 1000 shares D) 428 shares Answer: C Diff: 3 Type: MC Categories: Buying Stocks on Margin Financial Type: Qualitative Skill Type: Applied 31) If you need to be sure to buy shares of a company when the price rises above a certain level, you need to use a A) buy limit order.

B) buy stop order.

C) buy market order.

D) buy price order.

Answer: B Diff: 3 Type: MC Categories: Purchasing or Selling Stocks Financial Type: Qualitative Skill Type: Recall 13 © 2019 Pearson Canada Inc.

32) You bought IBM stock at $70 per share. It is now $120 a share. You think it could go higher but you are nervous that it could go down and you would lose your gains. To protect your gains but still give yourself the chance to make future profits, you could place a A) limit order to sell for $130 a share.

B) sell stop order at $110 a share.

C) limit order to sell for $110 a share.

D) sell stop order at $130 a share.

Answer: B Diff: 3 Type: MC Categories: Purchasing or Selling Stocks Financial Type: Quantitative Skill Type: Applied 33) A brokerage firm currently limits the margin rate to 70 percent. The amount that can be borrowed for a transaction to buy 100 shares at $50 is A) $4000.

B) $3500.

C) $5000.

D) $1500.

Answer: B Diff: 2 Type: MC Categories: Buying Stocks on Margin Financial Type: Quantitative Skill Type: Applied 34) You purchased stock worth $10 000 on margin (50 percent). Now the value of your stock has declined to $7000 and you receive a margin call. How much cash do you need to bring the margin back to the minimum level?

A) $1500 B) $3000 C) $5000 D) $2000 Answer: A Diff: 3 Type: MC Categories: Buying Stocks on Margin Financial Type: Quantitative Skill Type: Applied

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35) You have bought 1000 shares on margin at $50 per share, putting up $25 000. The stock price has increased to $65. If the margin rate is 50 percent, how much more will the broker lend you?

A) $0 B) $15 000 C) $7500 D) $5000 Answer: C Diff: 3 Type: MC Categories: Buying Stocks on Margin Financial Type: Quantitative Skill Type: Applied 36) The best assessment of the performance of your selection of stocks is to compare the returns to A) the average gains or losses you had in the last five years.

B) the average returns of GICs. C) a comparable stock index during the same period.

D) the prime rate set by the Bank of Canada.

Answer: C Diff: 2 Type: MC Categories: Assessing Performance of Stock Investments Financial Type: Qualitative Skill Type: Applied 37) If Jim's stock return was -1 percent and the TSX stock index had a 3 percent return, the excess return of Jim's stock is A) -4 percent.

B) 2 percent.

C) -2 percent.

D) 4 percent.

Answer: A Diff: 2 Type: MC Categories: Assessing Performance of Stock Investments Financial Type: Quantitative Skill Type: Applied 38) In deciding to invest in stocks, the most time-consuming part is A) fundamental analysis.

B) choosing a broker.

C) the actual purchase of the stock.

D) monitoring results.

Answer: A Diff: 1 Type: MC Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Recall 15 © 2019 Pearson Canada Inc.

39) Which technique for valuing stocks is used in technical analysis?

A) Index comparisons B) Price charting C) DDM D) P/E ratio analysis Answer: B Diff: 2 Type: MC Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Recall 40) An example of fraud in financial reporting would be A) allowing orders to be cancelled.

B) arriving at a P/E using the weighted average number of shares outstanding during the year.

C) inflating revenues by recording income from contracts which will extend beyond one year.

D) advising your auditors about a change in accounting procedures.

Answer: C Diff: 3 Type: MC Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Recall 41) To assess the performance of your purchase of TD Bank stock, which index would be the most relevant?

A) TSX 60 Index B) TSX Capped Financials Index C) TSX Global Financials Index D) TSX Unweighted Answer: B Diff: 3 Type: MC Categories: Assessing Performance of Stock Investments Financial Type: Quantitative Skill Type: Applied 42) TD Bank pays an annual dividend of $2.12 at the rate of $0.53 quarterly. The stock is trading at $63.21. What is the effective annual yield?

A) 3.35 percent B) 3.25 percent C) 3.60 percent D) 0.84 percent Answer: A Diff: 3 Type: MC Categories: Assessing Performance of Stock Investments Financial Type: Quantitative Skill Type: Applied 16 © 2019 Pearson Canada Inc.

43) The TSX Index had a return of 12 percent and Apple Inc. had a return of two percent over the same six month period. What can you say about whether your purchase of Apple Inc. was a good decision?

A) Nothing because the TSX Index is not a relevant comparison for an American company.

B) Your analysis of Apple was poor.

C) Apple is always a good company to buy, but this was too short a time to compare.

D) Comparing returns with an Index is irrelevant.

Answer: A Diff: 2 Type: MC Categories: Assessing Performance of Stock Investments Financial Type: Quantitative Skill Type: Applied 44) The dividend discount model method is used to value a stock based on a firm's is at an appropriate rate of interest.

A) future dividend payments, compounded B) future earnings, discounted C) future earnings, compounded D) future dividend payments, discounted Answer: D Diff: 2 Type: MC Categories: Stock Valuation Financial Type: Qualitative Skill Type: Recall 45) If stock markets are inefficient A) fundamental value analysis will not be effective.

B) it will be easier for investors to find stocks that are undervalued.

C) stock prices fully reflect information that is available to investors.

D) stock selections by investors will not consistently beat the market.

Answer: B Diff: 3 Type: MC Categories: Stock Market Efficiency Financial Type: Qualitative Skill Type: Recall 46) Which of the following techniques is regarded as fundamental analysis?

A) Study of the firm's revenue and earnings B) Study of the firm's stock price history C) Study of the firm's recent change in management D) Study of the firm's commentary by the financial news Answer: A Diff: 2 Type: MC Categories: Stock Valuation Financial Type: Qualitative Skill Type: Recall 17 © 2019 Pearson Canada Inc.

and

47) If John executes a buy order to take place when the stock price of ABC Ltd. falls to $10, it is a(n) A) on-stop order.

B) limit buy order.

C) buy stop order.

D) sell stop order.

Answer: C Diff: 2 Type: MC Categories: Purchasing or Selling Stocks Financial Type: Qualitative Skill Type: Applied 48) Which of the following was put in place to restore investor confidence in the markets and to prevent further occurrences of corporate fraud?

A) Ontario Securities Commission (OSC) B) Securities and Exchange Commission (SEC) C) Investment Industry Regulatory Organization of Canada (IIROC) D) Sarbanes-Oxley Act Answer: D Diff: 2 Type: MC Categories: Stock Valuation Financial Type: Qualitative Skill Type: Recall 49) Which of the following is not a typical way to analyze firm-specific characteristics through financial statements?

A) Profitability B) Efficiency C) Liquidity D) Competitive strategy Answer: D Diff: 2 Type: MC Categories: Stock Valuation Financial Type: Qualitative Skill Type: Recall 50) When the Bank of Canada uses interest rates to regulate the economy, it is using A) monetary policy.

B) fiscal policy.

C) economic growth policy.

D) gross domestic product (GDP) policy.

Answer: A Diff: 1 Type: MC Categories: Economic Analysis of Stocks Financial Type: Qualitative Skill Type: Recall 18 © 2019 Pearson Canada Inc.

Essay 1) What is the fair market value of a preferred share that pays $2.25 in dividends per year when long-term government bond yield is 5.42 percent annually?

Answer: This is essentially the present value of a perpetual annuity. Using the formula, the solution would be: $2.25 divided by 0.0542 = $41.51.

With the calculator, the solution would be: N = 999 (you cannot enter infinity so you need to fool the calculator). Keystrokes are: N = 999; %I = 5.42; PMT = $2.25; CPT PV = $41.51 Diff: 3 Type: ES Categories: Stock Valuation Financial Type: Quantitative Skill Type: Applied 2) Explain, with several examples, the concept of fundamental analysis and all of its potential components.

Answer: Fundamental Analysis: Fundamental analysis is the valuation of stocks based on an examination of fundamental characteristics such as revenue or earnings. Examples include: 1. Review of annual reports/financial statements 2. Liquidity analysis - current ratio 3. Financial leverage analysis - debt to equity ratio, times interest earned ratio 4. Efficiency Ratios - inventory turnover, average collection period, asset turnover ratio 4. Profitability analysis - net profit margin, return on assets, return on equity 5. Economic analysis - economic growth, fiscal policy, interest rate trends, monetary policy, inflation analysis 6. Industry analysis 7. Dividend discount model 8. P/E ratio analysis Diff: 3 Type: ES Categories: Analysis of a Firm Financial Type: Qualitative Skill Type: Applied

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3) Discuss investing on margin, illustrating the positives and negatives of this investing technique. Illustrate with a specific example.

Answer: Investing on margin increases risk and profit potential due to leverage. Any example which illustrates the positive and the negative would be sufficient.

Consider purchasing 1000 shares of stock B which is trading at $10. The maximum margin would be 30 percent.

You would own $10 000 worth of B and have put up $3000 and borrowed $7000.

The positive: If the stock went up, say doubled in price, then you would have of the stock and you would have only invested $3000. Your return on the $3000 (ignoring interest charges and trading costs) would be 17/3 = 566% versus 200% if you had purchased it directly.

The negative: If the stock dropped to $5 per share you would own $5000 worth of shares and owe $7000, so your return would be -7/3 = -233% versus -5/10 = - 50% if you had purchased the stock directly.

Diff: 3 Type: ES Categories: Buying Stocks on Margin Financial Type: Quantitative Skill Type: Applied 4) What is the appropriate time for someone to invest in the stock market and when should the investment be moved to safer vehicles? Do you believe you have enough knowledge to invest in the stock market? Why or why not? How would you assess your success?

Answer: These chapters are fairly comprehensive and provide a basic investing foundation to become an investor. However, investment courses are available.

There are a number of objective considerations that should be addressed: Time frame. When investing for longer than a ten year time horizon, short-term market fluctuations will have less impact on returns.

Selecting a sufficient number of holdings to diversify unsystematic risk.

One can invest in the stock market through managed securities such as mutual funds or exchange traded funds to avoid the risk in picking individual stocks.

This is a personal decision and either answer will suffice.

Assessing success: Historical returns, your performance as compared to a relevant stock index, is return better than those you could have achieved with safer investments, are you gaining in net worth compared to inflation, did you have sufficient diversification, etc.

Diff: 3 Type: ES Categories: Assessing Performance of Stock Investments Financial Type: Qualitative Skill Type: Applied 20 © 2019 Pearson Canada Inc.

Personal Finance, Canadian Ed., 4e (Madura) Part 4 Personal Investing - Investing in Bonds True/False 1) The bond par value or face value is the amount the investor will be paid when the bond matures.

Answer: TRUE Diff: 1 Type: TF Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 2) Generally, bonds have maturities between 1 and 30 years and pay interest annually.

Answer: FALSE Diff: 1 Type: TF Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 3) A bond with a call feature would pay a slightly higher interest rate than the same bond without this feature.

Answer: TRUE Diff: 2 Type: TF Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 4) Bonds are issued with a call feature when the issuers expect interest rates to rise.

Answer: FALSE Diff: 1 Type: TF Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 5) A convertible bond allows the investor to exchange that bond for another issue of bonds within the convertible period.

Answer: FALSE Diff: 2 Type: TF Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall

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6) A bond's yield to maturity is the annualized percentage return of both interest and capital gains or losses if the bond were held until it matured.

Answer: TRUE Diff: 1 Type: TF Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 7) If you paid $9600 for a bond with par value of $10 000 and a 5 percent coupon rate, the semiannual payment would be $250.

Answer: TRUE Diff: 2 Type: TF Categories: Return From Investing in Bonds Financial Type: Quantitative Skill Type: Applied 8) If you purchased a bond with face value $10 000 and coupon of 6 percent, then sold it for a half year later, you would have to pay tax on the capital gain as well as tax on the coupon payment of $300.

Answer: TRUE Diff: 2 Type: TF Categories: Return From Investing in Bonds Financial Type: Qualitative Skill Type: Applied 9) If you purchased a bond on August 1, 2014 on the secondary market with face value and received $200 interest on January 1, 2015, you would owe tax on the interest earned on your 2014 tax return.

Answer: TRUE Diff: 3 Type: TF Categories: Return From Investing in Bonds Financial Type: Quantitative Skill Type: Applied 10) Bond interest is exempt from income tax (in the current year) if it is held in an RRSP, a TFSA or an RESP. Answer: TRUE Diff: 1 Type: TF Categories: Other Fixed Income Products Financial Type: Qualitative Skill Type: Recall

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11) T-Bills and BAs are both very secure short-term debt securities which pay the same interest rate.

Answer: FALSE Diff: 3 Type: TF Categories: Other Fixed Income Products Financial Type: Qualitative Skill Type: Applied 12) If a new issue corporate bond offers a coupon rate of 6.2 percent and Government of Canada bonds with the same term and features are paying a 3.8 percent coupon, then the risk premium for the corporate bond is 2.4 percent.

Answer: TRUE Diff: 2 Type: TF Categories: Risk from Investing in Bonds Financial Type: Quantitative Skill Type: Applied 13) Canada Savings Bonds and T-Bills are both secure short-term debt securities which can be purchased on the secondary market.

Answer: FALSE Diff: 2 Type: TF Categories: Other Fixed Income Products Financial Type: Qualitative Skill Type: Recall 14) A government of Canada strip bond maturing in 22 years has lower interest rate risk than a real return bond maturing in 10 years.

Answer: FALSE Diff: 2 Type: TF Categories: Other Fixed Income Products Financial Type: Qualitative Skill Type: Applied 15) Real return bonds have their par value and coupon payments adjusted by the consumer price index.

Answer: TRUE Diff: 2 Type: TF Categories: Other Fixed Income Products Financial Type: Qualitative Skill Type: Recall

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16) A bond with a coupon rate of 6.5 percent and trading at $960 will pay annual interest of $62.40.

Answer: FALSE Diff: 2 Type: TF Categories: Return From Investing in Bonds Financial Type: Quantitative Skill Type: Applied 17) A passive strategy of bond investing consists of buying bonds for the long-term and not selling them until maturity.

Answer: TRUE Diff: 2 Type: TF Categories: Bond Investment Strategies Financial Type: Qualitative Skill Type: Recall 18) A real return bond with a 7 percent coupon will increase its interest payment annually to $71.40 if inflation rises by 2 percent.

Answer: TRUE Diff: 3 Type: TF Categories: Other Fixed Income Products Financial Type: Quantitative Skill Type: Applied 19) The maturity matching strategy of investing in bonds is the surest way to have money available to meet a specific goal.

Answer: TRUE Diff: 1 Type: TF Categories: Bond Investment Strategies Financial Type: Qualitative Skill Type: Recall 20) If you expect that interest rates will decline, it would make sense to switch from a par value bond with a 4 percent semi-annual coupon maturing in three years to a bond with the same features, except maturing in 12 years.

Answer: TRUE Diff: 3 Type: TF Categories: Return From Investing in Bonds Financial Type: Qualitative Skill Type: Applied 21) Callable bonds and mortgage backed securities both have prepayment risk.

Answer: TRUE Diff: 3 Type: TF Categories: Risk from Investing in Bonds Financial Type: Qualitative Skill Type: Recall 4 © 2019 Pearson Canada Inc.

22) A retractable bond pays a lower interest rate, all else equal.

Answer: TRUE Diff: 1 Type: TF Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 23) When the economic conditions are weak, bonds with higher default risk become more susceptible.

Answer: TRUE Diff: 1 Type: TF Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 24) A bond with a credit rating of AA is riskier than a bond with a credit rating of A. Answer: FALSE Diff: 2 Type: TF Categories: Risk from Investing in Bonds Financial Type: Qualitative Skill Type: Applied 25) You should be willing to pay $12 064 for a $10 000 face value bond with semi-annual 5 percent coupon which matures in 14 years, if similar bonds are now yielding 4 percent.

Answer: FALSE Diff: 3 Type: TF Categories: Valuing a Bond Financial Type: Quantitative Skill Type: Applied 26) A debenture and a bond issued by the same company are the same.

Answer: FALSE Diff: 1 Type: TF Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 27) When considering the risk from investing in a 25-year government of Canada bond yielding 4 percent, the most significant risk is interest rate risk.

Answer: TRUE Diff: 3 Type: TF Categories: Background on Bonds Financial Type: Qualitative Skill Type: Applied

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28) A 25-year strip bond with face value of $25 000 and yielding 4.2 percent should cost $8938.

Answer: TRUE Diff: 3 Type: TF Categories: Valuing a Bond Financial Type: Quantitative Skill Type: Applied 29) The yield to maturity on at $10 000 face value bond with semi-annual coupon of 3 percent, maturing in three years and price of $9180 is 6 percent.

Answer: FALSE Diff: 3 Type: TF Categories: Background on Bonds Financial Type: Quantitative Skill Type: Applied 30) A put feature on a bond is attractive to investors who believe interest rates will drop before the bond matures.

Answer: FALSE Diff: 2 Type: TF Categories: Background on Bonds Financial Type: Qualitative Skill Type: Applied Multiple Choice 1) The amount returned to the investor when a bond matures is called A) principal.

B) interest gain.

C) capital gain.

D) terminal value.

Answer: A Diff: 2 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 2) Which of the following is wrong?

A) The par value of a bond is its face value.

B) The par value of a bond is its market value in the secondary market.

C) The par value of a bond will be paid to the bondholder at maturity.

D) The par value multiplied by the coupon rate equals the interest paid to investors annually.

Answer: B Diff: 2 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 6 © 2019 Pearson Canada Inc.

3) Bonds usually pay interest A) annually.

B) semi-annually.

C) quarterly.

D) monthly.

Answer: B Diff: 1 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 4) Investors purchase bonds because A) they are a risk-free investment.

B) they pay interest income.

C) they pay dividends.

D) the returns are higher than with stocks.

Answer: B Diff: 1 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 5) Which of the following bonds would be most attractive to an investor who is very concerned about risk?

A) A real return bond maturing in five years B) A government of Canada bond maturing in fifteen years C) A government of Canada strip bond maturing in ten years D) An AAA rated corporate bond maturing in five years Answer: A Diff: 3 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Applied 6) The benefit of the extendible feature of a bond is that A) it allows the issuer to extend the callable period when interest rates rise.

B) it allows the investor to continue receiving a higher interest rate for a longer period.

C) it allows the issuer the option to extend the bond during lower interest rate periods.

D) it allows the investor the option of extending the period before the bond will become callable.

Answer: A Diff: 2 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall

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7) If an investor is expecting a period of higher interest rates soon, which bond feature would she prefer?

A) Callable B) Retractable C) Convertible D) Extendible Answer: B Diff: 3 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Applied 8) If an issuer wanted to protect against a drop in interest rates, the issuer of a bond would probably include which feature?

A) Callable B) A put C) Extendible D) Convertible Answer: A Diff: 3 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 9) Convertible bonds are suitable for investors who A) want to maximize interest returns in periods when interest rates are low.

B) want to convert the bond into a longer term at the same rate of interest.

C) want the possibility of benefiting from a rise in the issuer's share price.

D) have a lower risk tolerance and are seeking income.

Answer: C Diff: 2 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 10) A corporate bond trading at below par will have A) a higher yield to maturity than the coupon rate.

B) a lower yield to maturity than the coupon rate.

C) lower risk than one trading at par.

D) higher risk than one trading at par.

Answer: A Diff: 2 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall

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11) Investing in bonds gives you the possibility of A) capital gains and interest income.

B) guaranteed income with no capital risk.

C) capital gains and dividend income.

D) deferring taxes on accrued interest.

Answer: A Diff: 2 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 12) Investors are willing to purchase bonds with a call feature only if the bonds offer a A) slightly lower return than similar bonds without a call feature.

B) slightly higher number of shares of the issuer's stock.

C) slightly higher interest rate than similar bonds without a call feature.

D) sinking fund provision.

Answer: C Diff: 3 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 13) Which of the following features of a bond could result in the company never paying out cash to redeem the bonds?

A) Extendibility B) Callability C) Convertibility D) Defaultation Answer: C Diff: 3 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 14) If a company anticipates a substantive decline in interest rates during the term of the bond, which feature is likely to be included in its bond offering?

A) Extendible B) Callable C) Convertible D) retractable Answer: B Diff: 2 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall

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15) Bonds that may be exchanged for common stock at the option of the bondholders are called A) option bonds.

B) convertible bonds.

C) callable bonds.

D) stock bonds.

Answer: B Diff: 2 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 16) One difference between a regular bond and a convertible bond is that a regular bond has A) a higher interest rate.

B) a lower interest rate.

C) a shorter maturity.

D) a longer maturity.

Answer: B Diff: 2 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 17) If a company's stock price is expected to increase substantially over the next few years, which of the following may entice potential bondholders to accept a lower coupon rate?

A) Extendibility B) Call feature C) Convertibility D) A put feature Answer: C Diff: 2 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 18) If you held a bond with face value of $10 000 maturity in 12 years, semi-annual coupon of 6 percent, and the coupons on par value bonds with the same maturity today are 3 percent, how much would your bond be worth now on the secondary market?

A) $10 000 B) $13 005 C) $19 781 D) $14 908 Answer: B Diff: 3 Type: MC Categories: Valuing a Bond Financial Type: Quantitative Skill Type: Applied 10 © 2019 Pearson Canada Inc.

19) The total return on a 5 year bond with par value and an annual coupon rate of 6 percent will be most favourable if interest rates A) increase to 8 percent.

B) decrease to 4 percent.

C) increase to 7 percent.

D) decrease to 5 percent.

Answer: B Diff: 2 Type: MC Categories: Return From Investing in Bonds Financial Type: Qualitative Skill Type: Applied 20) What is the yield to maturity on the following bond: 5 percent, maturing in six years and currently trading for A) 3.54 B) 4.20 C) 5.00 D) 4.64 Answer: A Diff: 3 Type: MC Categories: Valuing a Bond Financial Type: Quantitative Skill Type: Applied

par value, semi-annual coupon of ?

21) The contractual rate of interest on a bond is always stated as a(n) A) daily rate.

B) monthly rate.

C) semi-annual rate.

D) annual rate.

Answer: D Diff: 2 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 22) On the secondary bond market A) only new bonds can be sold.

B) bonds are guaranteed to bring at least par value.

C) bond prices vary with interest rate movement.

D) bond prices remain constant but yields vary with interest rate movement.

Answer: C Diff: 2 Type: MC Categories: Valuing a Bond Financial Type: Qualitative Skill Type: Recall

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23) Which of the following government of Canada bonds (with all other features the same) would have the most interest rate risk?

A) A 3% coupon bond maturing in ten years B) A 6% coupon bond maturing in ten years C) A 3% coupon bond maturing in five years D) A 6% coupon bond maturing in five years Answer: A Diff: 3 Type: MC Categories: Risk from Investing in Bonds Financial Type: Quantitative Skill Type: Applied 24) The normal yield curve suggests A) that reinvestment risk is higher for higher coupon rates.

B) that selecting short-term maturities for borrowing and long term for investing will be profitable.

C) that interest rate risk is lowest for longer-term bonds.

D) that short-term bonds give the best risk return trade-off.

Answer: B Diff: 3 Type: MC Categories: Return From Investing in Bonds Financial Type: Quantitative Skill Type: Applied 25) Which of the following is the greatest risk in holding a Provincial bond with face value which matures in five years, has a semi-annual 7% coupon, which you purchased for ?

A) The inflation risk because the real return may not beat inflation of two percent B) Reinvestment risk that the coupons may not be able to be reinvested at the same return C) Default risk if interest rates rise by two percent D) Interest rate risk because interest rates may increase by one percent Answer: D Diff: 3 Type: MC Categories: Risk from Investing in Bonds Financial Type: Qualitative Skill Type: Applied 26) What is a disadvantage of issuing bonds compared to shares?

A) The dividends must be paid indefinitely.

B) Bond interest expense is not tax deductible.

C) Interest must be paid on a periodic basis regardless of earnings.

D) Bondholders may require early repayment.

Answer: C Diff: 1 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall 12 © 2019 Pearson Canada Inc.

27) Which of the following should be the highest yield bonds?

A) Standard and Poor's rated C bonds B) Moody's rated C bonds C) Standard and Poor's rated CCC bonds D) Moody's rated Ca bonds Answer: B Diff: 2 Type: MC Categories: Risk from Investing in Bonds Financial Type: Qualitative Skill Type: Recall 28) Given the following ATT Ltd. bond information: par value, maturity Dec 22, 2023, semi-annual coupon 7.75 percent, price 105.50 and yield 7.4 percent. How much interest does it pay annually?

A) $7.50 B) $77.50 C) $7.40 D) $74.00 Answer: B Diff: 2 Type: MC Categories: Return From Investing in Bonds Financial Type: Quantitative Skill Type: Applied 29) Given the following ATT Ltd. bond information: $1000 par value, maturity Dec 22, 2023, semi-annual coupon 7.75 percent, price 105.50 and yield 7.4 percent. How much would a $1000 par value ATT Ltd. bond cost as of the day of this listing?

A) $105.50 B) $740 C) $1000 D) $1055 Answer: D Diff: 2 Type: MC Categories: Background on Bonds Financial Type: Quantitative Skill Type: Applied

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30) Given the following bond quotations: Issuer Ontario Bombardier

coupon 3.150 7.350

maturity 2022-Jun-02 2024-Dec-22

price 99.00 107.00

yield 3.28 6.56

Which of the following statements is true?

A) The Bombardier bond appears to have a higher risk premium.

B) The Ontario bond has a 6.3 percent annual coupon rate.

C) The yields on these bonds illustrate the liquidity preference theory.

D) The Ontario bond is a better price.

Answer: A Diff: 3 Type: MC Categories: Risk from Investing in Bonds Financial Type: Qualitative Skill Type: Applied 31) Given the following bond information: Issuer Ontario

coupon 3.150

maturity 2022-Jun-02

price 99.00

yield 3.28

What would be the taxable income on this bond if it were purchased at this price on June 1st and sold December 1st for a price of 103.00 and has face value of $20 000 and a semi-annual coupon payment?

A) Taxable capital gain of $800 and interest of $630.

B) Taxable capital gain of $400 and interest of $315.

C) Taxable capital gain of $1600 and interest of $656.

D) Taxable capital gain of $200 and interest of $157.50.

Answer: B Diff: 3 Type: MC Categories: Return From Investing in Bonds Financial Type: Quantitative Skill Type: Applied

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32) Given the following bond information: Issuer Bombardier

coupon 7.350

maturity 2024-Dec-22

price 107.00

yield 6.56

What would be the taxable income on this bond if it were purchased at this price on December 20th and sold a year later for a price of 103.00? Assume face value of $10 000 and a semi-annual coupon payment.

A) Taxable capital gain of $400 and interest of $735 B) Taxable capital loss of $400 and interest of $735 C) Taxable capital loss of $200 and interest of $735 D) Taxable capital gain of $200 and interest of $656 Answer: C Diff: 3 Type: MC Categories: Return From Investing in Bonds Financial Type: Quantitative Skill Type: Applied 33) Investors who buy bonds that are callable A) have a higher chance of default risk.

B) risk reinvesting at lower rates if called.

C) have very little interest rate risk.

D) pay a premium for the feature.

Answer: B Diff: 2 Type: MC Categories: Risk from Investing in Bonds Financial Type: Qualitative Skill Type: Recall 34) Investing in bonds based on interest rate expectations A) can be a reliable strategy to enhance bond yields.

B) can be costly if predictions on interest rates are incorrect.

C) increases bond values if you move to long-term bonds when interest rates rise.

D) works well when the yield curve is inverted.

Answer: B Diff: 3 Type: MC Categories: Bond Investment Strategies Financial Type: Qualitative Skill Type: Recall

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35) If you buy a corporate bond for $9700 and sell it six months later for A) interest income of $800.

B) a capital gain of $800.

C) a taxable capital gain of $800.

D) non-taxable income of $800.

Answer: B Diff: 2 Type: MC Categories: Return From Investing in Bonds Financial Type: Quantitative Skill Type: Applied

, you will have

36) Bonds with a high degree of default risk are most susceptible to default when economic conditions are A) strong.

B) weak.

C) stable.

D) expanding.

Answer: B Diff: 1 Type: MC Categories: Risk from Investing in Bonds Financial Type: Qualitative Skill Type: Recall 37) The risk that you will be forced to sell your bond back to the issuer prior to maturity is the A) call risk.

B) default risk.

C) interest rate risk.

D) economic risk.

Answer: A Diff: 1 Type: MC Categories: Risk from Investing in Bonds Financial Type: Qualitative Skill Type: Recall 38) When there is an element of default risk on a bond, the interest rate will include A) additional premium.

B) risk premium.

C) default premium.

D) nominal premium.

Answer: B Diff: 1 Type: MC Categories: Risk from Investing in Bonds Financial Type: Qualitative Skill Type: Recall

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39) You expect interest rates to rise in the short term. Your best strategy would be to A) buy T-bills and keep rolling them over.

B) buy long bonds and use interest income to purchase higher yields.

C) buy short bonds only and keep rolling them over.

D) buy T-bills in anticipation of locking in higher rates after the increase.

Answer: D Diff: 2 Type: MC Categories: Risk from Investing in Bonds Financial Type: Qualitative Skill Type: Applied 40) Your son will be ready for college in 10 years and your daughter in 14 years. Which of the following bond strategies would be best suited to your goal of financing your children's education?

A) Interest rate B) Passive C) Maturity matching D) Active Answer: C Diff: 2 Type: MC Categories: Bond Investment Strategies Financial Type: Qualitative Skill Type: Applied 41) If interest rates are rising, which of the following bonds would you would want to hold?

(Ignore default risk factors.)

A) Government of Canada 3.5 percent due 04/33 B) CN Rail 3.75 percent due 06/21 C) Province of Ontario 4 percent due 09/31 D) Maple Leaf Foods 3.5 percent due 11/26 Answer: B Diff: 3 Type: MC Categories: Risk from Investing in Bonds Financial Type: Quantitative Skill Type: Applied 42) Which of the following bond quotes might indicate a bond has a high default risk?

A) GM 6 percent due 11/19 with a current yield of 7.5 percent B) Cott Beverages 6.5 percent due 09/19 with a current yield of 7.75 percent C) Eaglecrest Explorations 5.75 percent due 06/19 with a current yield of 7.60 percent D) Abitibi Price 7.0 percent due 09/19 with a current yield of 9.85 percent Answer: D Diff: 3 Type: MC Categories: Valuing a Bond Financial Type: Quantitative Skill Type: Applied 17 © 2019 Pearson Canada Inc.

43) A Government of Canada bond has a 6 percent coupon which pays semi-annually and matures in 11 years. If interest rates have declined to 5.4 percent for similar bonds, what should be the price for this bond? (Assume $1000 par value) A) $1006.99 B) $1048.81 C) $1031.62 D) $1049.28 Answer: D Diff: 3 Type: MC Categories: Valuing a Bond Financial Type: Quantitative Skill Type: Applied 44) Jan buys a $1000 10 percent semi-annual coupon bond for a price of $1094 and holds it to maturity in six years. What is the bond's yield to maturity?

A) 10 percent B) 8.0 percent C) 8.6 percent D) 9.0 percent Answer: B Diff: 3 Type: MC Categories: Valuing a Bond Financial Type: Quantitative Skill Type: Applied 45) Michael decided to buy a strip bond for his RRSP. He purchased a three year $5000 face bond for $3777. What is the annualized return on this investment?

A) 7.80 percent B) 9.80 percent C) 9.36 percent D) 8.15 percent Answer: B Diff: 3 Type: MC Categories: Other Fixed Income Products Financial Type: Quantitative Skill Type: Applied 46) Mortgage-backed securities are A) issued by the Government of Canada for individual mortgages on residential homes.

B) backed by a pool of mortgages guaranteed by CMHC. C) a pool of mortgages issued and guaranteed by banks.

D) a pool of CMHC mortgages not available on the secondary market.

Answer: B Diff: 2 Type: MC Categories: Other Fixed Income Products Financial Type: Qualitative Skill Type: Recall 18 © 2019 Pearson Canada Inc.

47) If the bond market expects a 10 percent yield, and ABC Ltd. pays coupon interest on its $1000 par value bond at eight percent semi-annually, the discount rate that investors should apply in the calculation of ABC Ltd. bond price should be A) 4 percent.

B) 10 percent.

C) 8 percent.

D) 5 percent.

Answer: B Diff: 2 Type: MC Categories: Valuing a Bond Financial Type: Quantitative Skill Type: Applied 48) Other things being equal, in general, which of the following bonds is the lowest-risk bond?

A) Aa B) AAA C) AA D) These are the same.

Answer: B Diff: 2 Type: MC Categories: Risk from Investing in Bonds Financial Type: Qualitative Skill Type: Applied 49) When you invest in a diversified portfolio of bonds that are held for a long period of time this is referred to as a(n) A) income strategy.

B) risk reduction strategy.

C) passive strategy.

D) interest rate strategy.

Answer: C Diff: 1 Type: MC Categories: Bond Investment Strategies Financial Type: Qualitative Skill Type: Recall

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50) A pool of money that is set aside by a corporation or government to repurchase a set amount of bonds in a set period of time is called a A) sinking fund.

B) redemption fund.

C) guaranteed fund.

D) liquidity fund.

Answer: A Diff: 1 Type: MC Categories: Background on Bonds Financial Type: Qualitative Skill Type: Recall Essay 1) List and describe three strategies to invest in bonds.

Answer: Interest rate strategy is selecting bonds for investment based on interest rate expectations. Passive strategy is investing in a diversified portfolio of bonds that are held for a long period of time. Maturity matching is investing in bonds that will generate payments to match future expenses.

Diff: 2 Type: ES Categories: Bond Investment Strategies Financial Type: Qualitative Skill Type: Recall 2) Allan purchased a five-year strip bond from the Government of Canada with a $100 000 face value. The equivalent yield is 5.91 percent. What interest will the bond earn over the five-year term?

Answer: Keystrokes are: FV = $100 000; PMT = 0; %I = 5.91%; N = 5; CPT PV = $100 000 - 75 043.86 = $24 956.14 Diff: 3 Type: ES Categories: Other Fixed Income Products Financial Type: Quantitative Skill Type: Applied 3) Rejean purchased a 20-year 6 percent real return bond for $15 000 and the CPI has increased by 1.5 percent in the first year. What interest payment will Rejean receive in the second year?

Answer: The return from a real return bond is indexed for inflation by adjusting the face value of the bond to reflect a corresponding change in the CPI. So, both the interest payments and the face amount are indexed to inflation. At the end of the first bond year, the new face amount on Rejean's bond is $15 225, calculated as (1 + 1.5 percent) × $15 000. Therefore, the annual interest payment on the bond during the second bond year is $913.50, calculated as $15 225 × 6 percent.

Diff: 3 Type: ES Categories: Other Fixed Income Products Financial Type: Quantitative Skill Type: Applied 20 © 2019 Pearson Canada Inc.

4) Name and explain five risks involved with investing in bonds and indicate the magnitude of these risks and ways to mitigate them.

Answer: Default risk is the risk that the issuer will not repay the principal. Consider bond agency ratings. Keep up with the news.

Interest rate risk is the risk of a decline in price in response to rising interest rates. This is a very real risk which will certainly happen over a lifetime of investing. It is not very significant if bonds are held to maturity, but can have a large impact on bond holding if interest rates rise and the bonds need to be liquidated for something.

Call risk is the risk that the bond will be called before maturity.

Inflation Risk. This is more significant when investing over the long-term in a passive strategy and could be mitigated by purchasing real return bonds.

Reinvestment risk. In a sense this is more a theoretical risk as often investors are not re-investing the coupon payments, but using that income for other purposes.

Diff: 3 Type: ES Categories: Risk from Investing in Bonds Financial Type: Qualitative Skill Type: Applied 5) Leonardo purchased a bond today with an 8 percent semi-annual coupon and with a face value of . A semi-annual coupon is due in exactly one month and the bond was priced at 94.8.

What was the total price for the bond?

Answer: First, the seller is owed five months' accrued interest. So $15 000 × 0.08 = $1200 divided by 2 = $600.

The seller is entitled to five months' interest: $600 × 5 divided by 6 = $500.

Now the price: $15 000 × 0.948 = $14 220 + $500 = $14 270.

Note: Leonardo will be able to keep the entire coupon payment in one month's time.

Diff: 3 Type: ES Categories: Return From Investing in Bonds Financial Type: Quantitative Skill Type: Applied

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6) The inclusion of real return bonds in the federal government's financing requirements has made them very attractive. Discuss all of the features of a real return bond. What risk is attached to a 25 year real return bond yielding 4 percent?

Answer: The main feature is that they remove inflation risk from the equation, as long as held to maturity, but the coupon does not change if interest rates go higher, so they can still trade at a discount or premium.

Diff: 2 Type: ES Categories: Other Fixed Income Products Financial Type: Qualitative Skill Type: Applied

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