Financial Literacy
Mock Exam
Course Introduction
Financial Literacy is an essential course designed to equip students with the fundamental knowledge and skills needed to make informed financial decisions throughout their lives. This course covers a wide range of topics including budgeting, saving, investing, credit management, debt reduction, insurance, and retirement planning. Students will explore real-world financial scenarios, learn to interpret financial documents, and gain practical strategies for managing personal finances responsibly. By the end of the course, students will have the confidence and capability to effectively navigate financial challenges and pursue long-term financial well-being.
Recommended Textbook
Personal Finance 4th Edition by Jeff Madura
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21 Chapters
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Page 2
Chapter 1: Overview of a Financial Plan
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Q1) Which of the following is not a step in developing a financial plan?
A)Establish your financial goals
B)Consider your current financial position
C)Identify and evaluate alternative plans that could achieve your goals
D)Put your plan away for six months to a year and then review it for accuracy
Answer: D
Q2) Most Americans will never be able to understand and develop a personal financial plan.
A)True
B)False Answer: False
Q3) If you do not have access to money to cover cash needs,you may have insufficient liquidity.
A)True
B)False
Answer: True
Q4) Liquidity cannot be enhanced using sound money and credit management.
A)True
B)False
Answer: False
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Chapter 2: Planning With Personal Financial Statements
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Q1) The current financial position of an individual or family is best presented with the use of a
A)budget.
B)cash flow statement.
C)balance sheet.
D)bank statement.
Answer: C
Q2) If spending exceeds the amount of your income over a period of time,your best option is probably to
A)reduce your spending.
B)sell some of your assets.
C)increase your work hours.
D)get a second job.
Answer: A
Q3) Your net worth can change even if your net cash flows are zero.
A)True
B)False
Answer: True
Q4) A(n)________ is a forecast of your future cash inflows and outflows.
Answer: budget
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Chapter 3: Applying Time Value Concepts
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Q1) The future value of your savings and debt affect all except which of the following?
A)Financial planning tools
B)Protecting your wealth
C)Liquidity management
D)Marketing management
Answer: D
Q2) Which of the following decisions would involve the use of the future value of $1?
A)Your brother buys your car and offers to pay you $500 now or $1,500 in two years
B)You win a lawsuit and are offered a lump sum payment today of $100,000 or $15,000 a year for 20 years
C)Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college in 4 years
D)You want to have $1,000,000 in order to retire at age 55,but need to know how much you will need to deposit each year from now until your 55th birthday
Answer: A
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Chapter 4: Using Tax Concepts for Planning
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Q1) If you own stock that has increased in price,it would be best to sell it after you have owned it for at least
A)6 months and one day.
B)12 months and one day.
C)18 months and one day.
D)24 months and one day.
Q2) Enrico and his wife have combined salaries of $85,000.They have interest and dividends on their investments of $1,000 and annually contribute $3,000 to a traditional IRA.The interest on their home mortgage is $2,500,they contributed $1,000 to their church,and incurred medical expenses not covered by insurance of $1,800.Assuming they can claim two personal exemptions of $3,200 each and file joint tax returns,compute their tax liability for the year.
(a)$11,606
(b)$10,056
(c)$11,131
(d)$9,981
Q3) Tax credits amount to the same savings as tax deductions.
A)True
B)False
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Page 6
Chapter 5: Banking and Interest Rates
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Q1) The one-year loan rate for individuals is usually about the same as the one-year CD rate.
A)True
B)False
Q2) A ________ is a check 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.
A)cashier's check
B)money order
C)traveler's check
D)personal check
Q3) A(n)________ card allows you to pay for a purchase directly from your checking account without writing a check.
A)credit
B)debit
C)expense
D)travel
Q4) An example of a depository financial institution is an insurance company.
A)True
B)False
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Chapter 6: Managing Your Money
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Q1) Which of the following does money management not involve?
A)A series of decisions
B)A long-term time period
C)Cash inflows
D)Cash outflows
Q2) For relatively safe investments such as savings accounts,CDs,MMDAs,and T-bills,liquidity is rarely a concern.
A)True
B)False
Q3) If a $10,000 T-bill is purchased for $9,600 and matures in 270 days,what will be the annualized return? (Round to the nearest one hundredth of a percent.)
(a)4 percent
(b)4.17 percent
(c)5.63 percent
(d)2.85 percent
Q4) In general,the more liquid an asset,the higher its return.
A)True
B)False
Q5) Describe three types of risk associated with various money market instruments.
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Chapter 7: Assessing and Securing Your Credit
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Sample Questions
Q1) The ability to save funds is ________ when credit payments are ________.
A)increased; small
B)reduced; small
C)reduced; large
D)Both A and C are correct.
Q2) Which of the following items should not be removed from your wallet?
A)Social Security card
B)Birth certificate
C)Infrequently used credit cards
D)Drivers license
Q3) Discuss at least two ways that you can protect yourself from identity theft.
Q4) If you refrain from using any credit,it will assure you the lowest possible interest rate when you decide to use it.
A)True
B)False
Q5) You can begin to build a credit history by having telephone service.
A)True
B)False
Q6) ________,________,and ________ are the three major credit bureaus.
Q7) You should review your credit report at least ________.
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Chapter 8: Managing Your Credit
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Q1) All of the following are true of the grace period on credit cards except it
A)is usually about 20 days.
B)applies only to cash advances.
C)is the time in between the time the statement is "closed" and the time the bill is due.
D)amounts to free credit time.
Q2) On a credit card,a finance charge is applied to
A)any purchase.
B)any balance not previously paid.
C)current purchases.
D)future purchases.
Q3) Credit cards with a tiered interest rate charge cardholders who
A)carry large balances a lower rate.
B)pay off their balance monthly a higher rate.
C)make early payments a higher rate.
D)make late payments a higher rate.
Q4) Advantages of using credit include the ability to make purchases when cash inflow is low and the convenience of not carrying cash or checks.
A)True
B)False
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Chapter 9: Personal Loans
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Q1) Personal preferences for a car include all of the following except
A)considering what kind of car you really want,regardless of what you need.
B)the size of the car.
C)the price of the car.
D)the size of the engine and fuel economy.
Q2) The Truth-in-Lending Act (1969)requires which of the following?
A)Adherence to the interest rates established by the Federal Reserve
B)Specifying a standard loan rate
C)Disclosure of only interest charges but no other fee
D)All of the above
Q3) In the past you have purchased cars that you have driven for over 10 years or more.The mileage on these vehicles usually exceeded 100,000 and therefore you just give them to one of your teenage nieces/nephews or your grandchildren.Based on this history,your primary financial selection criteria will be
A)resale value.
B)financing rate.
C)repair expense.
D)personal preference.
Q4) ________ is a method of computing interest based on the existing principal amount of the loan.
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Chapter 10: Purchasing and Financing a Home
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Q1) Of the following fees involved in the purchase of a house,which is usually not borne by the purchaser?
A)Title search and insurance
B)Appraisal fee
C)Realtor's commission
D)Loan application fee
Q2) Which of the following is true about condominiums?
A)Each person owns a portion of the land on which a condominium is located
B)Maintenance fees of common areas are shared
C)They have more privacy than single family homes
D)All of the above
Q3) A good way to estimate the market value of a home is to multiply the number of square feet by the average price per square foot of similar homes in the area.
A)True
B)False
Q4) If you think interest rates will rise in the near future,you should seek an adjustable rate mortgage (ARM).
A)True
B)False
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Chapter 11: Auto and Homeowners Insurance
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Q1) 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.
A)True
B)False
Q2) Your home insurance provides for replacement value for personal property losses.Your china hutch was vandalized and completely destroyed.Your hutch cost $400 four years ago,but a new one will cost you $600.How much will the insurance company pay?
A)$400
B)$200
C)$600
D)Nothing,vandalism is not covered.
Q3) The coverage that is designed to protect you if you cause an accident where the driver or passenger of the other car sustains injuries and sues you is called ________.
Q4) Once drivers are labeled as "high risk," they will not be able to get automobile insurance at any price.
A)True
B)False
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Chapter 12: Health and Disability Insurance
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Q1) Part D of Medicare represents a combination of Part A and Part B provided through private insurance companies.
A)True
B)False
Q2) Which of the following is an advantage of a PPO compared to an HMO?
A)The premiums are lower.
B)There are more choices of specialized health care providers.
C)There are no out-of-pocket expenses.
D)No approval is needed to see a specialist.
Q3) Which of the following statements is not true of disability insurance?
A)You should have it even if you are retired and living on a pension.
B)The amount of coverage should equal your disposable income.
C)If you are self-employed you should have disability insurance.
D)All of the above are true of disability insurance.
Q4) Which of the following is not true as it relates to the cost of health care?
A)Fraudulent claims by patients and health care providers add to the cost.
B)People are living longer and their health care costs are higher.
C)Better claim handling and processing has helped reduce the cost of health care.
D)Technology used in medicine is very expensive and has added to the cost.
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Chapter 13: Life Insurance
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Q1) If your life follows the pattern of college-marriage-kids-retirement,your need for life insurance will
A)steadily increase.
B)steadily decrease.
C)stay the same.
D)peak and then decline.
Q2) Whole life insurance has a ________ premium and has ________ cash value build up over the life of the policy.
A)fixed; no
B)variable; a
C)fixed; a
D)variable; no
Q3) ________ life insurance can only by used to pay off a home in the event of the policyholder's death.
A)Mortgage
B)Decreasing-term
C)Universal life
D)Homeowner
Q4) What are three types of settlement options?
Q5) What are the three most popular types of life insurance?
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Chapter 14: Investing Fundamentals
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Q1) A company has a choice of whether to distribute dividends to common shareholders or to keep their profits in the company as retained earnings.
A)True
B)False
Q2) Real estate is a good investment option for individuals and it offers the same liquidity as stocks or bonds.
A)True
B)False
Q3) Bonds are certificates representing partial ownership of a firm.
A)True
B)False
Q4) It is December 10th and you have a stock you purchased last January 5th,which has increased in value by more than $3,000.You think the stock will not significantly increase or decrease in value over the next month or so,and you would like to take your gain.What should you do?
A)Sell the stock today and take the gain
B)Wait until December 30th and sell the stock then
C)Sell the stock on January 6th or later
D)Do not sell the stock until it starts to go down in value
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Chapter 15: Investing in Stocks
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Q1) 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.
A)True
B)False
Q2) The daily stock quotations found in most large newspapers will not tell you the annual dividends paid per share of stock.
A)True
B)False
Q3) Floor traders on the NYSE are willing to trade stocks for others and earn a commission for doing so.
A)True
B)False
Q4) The two parts of a company's balance sheet: (1)assets and (2)liabilities and shareholder's equity,must be equal or in balance.
A)True
B)False
Q5) Compare and contrast a full-service brokerage firm to a discount brokerage firm.
Q6) Is investing on margin what the average investor should do?
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Chapter 16: Investing in Bonds
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Q1) The maturity matching strategy involves selecting bonds that will generate payments to match future expenses.
A)True
B)False
Q2) Convertible bonds tend to offer a(n)________ return than non-convertible bonds.
A)higher
B)lower
C)similar
D)indexed
Q3) Bonds that may be exchanged for common stock at the option of the bondholders are called A)options.
B)convertible bonds.
C)callable bonds.
D)stock bonds.
Q4) Another name for high-yield bonds is
A)corporate bonds.
B)federal agency bonds.
C)T-bills.
D)junk bonds.
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Chapter 17: Investing in Mutual Funds
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Q1) Mutual funds that receive dividends and capital gains must distribute these to investors in the same year.
A)True
B)False
Q2) An open-end mutual fund may do all of the following except
A)charge no fee to buy or sell shares.
B)charge a fee to buy but not sell shares.
C)charge a fee to sell but not buy shares.
D)charge a fee to both buy and sell shares.
Q3) A small-cap fund focuses on firms that are relatively small and somewhat overlap capital appreciation funds.
A)True
B)False
Q4) A breakdown of the fees and expenses of a mutual fund is not one of the items addressed in a prospectus.
A)True
B)False
Q5) On average,mutual funds have an expense ratio of about 3 percent.
A)True
B)False
19
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Chapter 18: Asset Allocation
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Q1) If you are willing to accept a moderate level of risk,you should invest in A)savings accounts.
B)individual stocks.
C)a stock mutual fund.
D)T-bills.
Q2) Asset allocation is the process of dividing money across financial assets which include all of the following except A)stocks. B)bonds.
C)mutual funds.
D)real estate.
Q3) Asset allocation is the process of allocating money across financial assets,such as stocks,bonds,and mutual funds,with the objective of eliminating risk altogether. A)True B)False
Q4) The returns from investing in stocks and from investing in bonds are not highly correlated.
A)True B)False
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Chapter 19: Retirement Planning
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Q1) You can elect to receive Social Security retirement benefits
A)at the normal retirement age,which is being raised from 65 to 69.
B)at age 62 and take a reduced amount.
C)and limit your ability to keep on working and earning income.
D)and not be taxed on them,no matter how much money you make.
Q2) When deciding whether to invest in a Traditional IRA or a Roth IRA one would consider all except
A)the amount of income you expect to make at retirement.
B)whether you are covered by an employer-sponsored retirement plan and,if so,how much income you earn.
C)if you want to start drawing out the money at 70-1/2 or not.
D)whether you want the money to accumulate tax-free or not.
Q3) All of the following is good advice on retirement planning and savings except A)start early.
B)take advantage of employer plans.
C)take advantage of tax savings.
D)if you are eligible for Social Security,you will not need to worry about additional savings.
Q4) Describe two types of annuities.
Q5) Name two types of retirement plans available to the self-employed.
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Chapter 20: Estate Planning
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Q1) A will could be written to distribute assets in terms of the following except A)percentages.
B)a specific dollar amount.
C)percentages and a remainder portion.
D)the discretion of the probate judge.
Q2) A large portion of an estate is exempt from estate taxes.The portion over the next few years is
A)decreasing.
B)increasing.
C)staying the same.
D)being eliminated.
Q3) An estate represents a deceased person's assets after all debts are paid.
A)True
B)False
Q4) Which of the following is not required to be an executor of an estate?
A)U)S.citizenship
B)Blood relationship
C)Legal age
D)Not a convicted felon
Q5) Estate planning decisions are affected by what five areas?
Page 22
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Chapter 21: Integrating the Components of a Financial Plan
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Q1) List five areas that affect your financial plan.
Q2) Even average people can accumulate wealth by
A)spending less than they make.
B)spending more than they make.
C)eating out less often.
D)winning the lottery.
Q3) Financial documents should be
A)kept in a desk drawer in your home for easy access.
B)kept in a safety deposit box.
C)kept at your parent's house in their desk.
D)None of the above.
Q4) Financial statements include all of the following except a(n) A)balance sheet.
B)income statement.
C)cash flow statement.
D)asset allocation statement.
Q5) What are four types of financial investment balances that you should monitor?
Q6) Some retirement plans,such as Roth IRAs,are more liquid than other plans.
A)True
B)False
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