Introduction to Personal Finance Study Guide Questions
Course Introduction
Introduction to Personal Finance offers students a practical foundation in managing their financial resources throughout their lives. The course covers essential topics such as budgeting, saving, banking, credit management, investing, taxes, insurance, and retirement planning. Through real-life scenarios and interactive activities, students will develop skills to make informed financial decisions, set attainable goals, and understand the implications of different financial choices. This course is designed to empower students with the knowledge and tools necessary to achieve financial stability and security in both their personal and professional lives.
Recommended Textbook
Personal Finance 6th Edition by Jeff Madura
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21 Chapters
2466 Verified Questions
2466 Flashcards
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Page 2
Chapter 1: Overview of a Financial Plan
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Sample Questions
Q1) An understanding of personal finance is not necessary to judge the quality of advice that a financial adviser may give.
A)True
B)False
Answer: False
Q2) A budget does not
A) require thinking and planning.
B) require an evaluation of your current financial position.
C) help you account for all your income and expenses.
D) require the preparation of a will.
Answer: D
Q3) Which of the following is not a way that insurance is designed to protect your wealth?
A) Protecting the assets that you own
B) Limiting your exposure to potential liabilities
C) Protecting your income
D) Protecting your investments from downturns in the stock market
Answer: D
Q4) ________ is the uncertainty surrounding the potential return on an investment. Answer: Risk
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Chapter 2: Planning With Personal Financial Statements
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Sample Questions
Q1) net cash flows
A)a summary of assets, liabilities and net worth
B)the difference between cash inflows and outflows
C)items owned by a household such as a home or car
D)a financial statement that measures cash inflows and outflows
Answer: B
Q2) Paying cash for an Alaskan cruise would
A) increase assets.
B) decrease assets.
C) increase net worth.
D) decrease liabilities.
Answer: B
Q3) A document that shows your cash inflows and cash outflows is called a(n)________.
Answer: personal cash flow statement
Q4) A personal cash flow statement is usually the starting point for an individual's or family's budget.
A)True
B)False
Answer: True
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Chapter 3: Applying Time Value Concepts
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Sample Questions
Q1) present value interest factor
A)the process of obtaining present values
B)a factor multiplied by a future value to get the present value of that amount
Answer: B
Q2) financial calculator
A)the process of earning interest on interest
B)a series of equal payments received or paid at equal intervals
C)a factor multiplied by today's savings to determine how the savings will accumulate over time
D)a business calculator that performs PV/FV calculations
Answer: D
Q3) Carol would like to have $500,000 saved in her retirement account in 30 years. Assuming an interest rate of 10%,how much should she contribute each year?
A) $2,182.00
B) $2,000.00
C) $1,956.20
D) $3,039.70
Answer: D
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5
Chapter 4: Using Tax Concepts for Planning
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Sample Questions
Q1) Enrico and his wife have combined salaries of $85,000.They have interest and dividends on their investments of $1,000 and annually contribute a combined $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 $4,000 each and file joint tax returns,compute their tax liability for 2015.
A) $11,606
B) $10,056
C) $9,981
D) $8,287
Q2) You should claim itemized deductions if
A) itemized deductions exceed the standard deduction.
B) the standard deduction exceeds itemized deductions.
C) itemized deductions exceed exemptions.
D) itemized deductions exceed tax credits.
Q3) Gross income includes all of the following except
A) salary or wages.
B) interest or dividends received.
C) employer's current contribution to 401(k).
D) capital gains realized.
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Chapter 5: Banking and Interest Rates
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Sample Questions
Q1) When borrowing money from a ban for a home mortgage,30 year interest rates are generally
A) the same as 15 year and 20 year rates.
B) between .5% and 1% lower than 15 year rates.
C) between .5% and 1% higher than 15 year rates.
D) The term of the mortgage has no bearing on rates; only the borrower's credit rating matters.
Q2) In saving or investing,the ________ the risk,the ________ the potential return.
A) higher; higher
B) lower; lower
C) higher; lower
D) Both A and B are correct
Q3) The ________ is the return on an investment that is guaranteed for a specified period.
A) risk-free rate
B) risk premium
C) specific return
D) fair market return
Q4) The risk-free rate on borrowed funds is determined by the ________ and ________ of funds.
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Chapter 6: Managing Your Money
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Sample Questions
Q1) Some investments are subject to credit risk.This means that the borrowers may not repay on a timely basis.
A)True
B)False
Q2) Because most regular checking accounts do not pay interest,you should keep only enough funds in your account to cover anticipated expenses with a small reserve for unanticipated expenses.
A)True
B)False
Q3) ________ risk is the potential loss from converting an investment into cash.
A) Credit
B) Interest rate
C) Liquidity
D) Asset
Q4) You should attempt to have a sufficient amount of funds in liquid assets to draw on when your cash outflows exceed your cash inflows.
A)True
B)False
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) A ________ extends credit by providing a service and billing for the service at the end of the time period.
Q2) The Credit CARD Act of 2009 made it easier for college students to obtain credit cards.
A)True
B)False
Q3) Name and briefly discuss three tactics that an identity thief may use.
Q4) According to the Federal Trade Commission,the average individual loss as a result of identity theft is about
A) $10,500.
B) $47,500.
C) $1,500.
D) $500.
Q5) All of the following situations are valid reasons to borrow funds except A) a medical emergency.
B) a college education.
C) purchasing a car in order to return to the workforce.
D) borrowing for every day living expenses.
Q6) ________,________,and ________ are the three major credit bureaus.
Q7) Discuss at least two ways that you can protect yourself from identity theft.
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Chapter 8: Managing Your Credit
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Sample Questions
Q1) Even if you cannot pay your credit card bill in full,you should still attempt to pay as much as possible so that you can minimize finance charges.
A)True
B)False
Q2) A personal credit card statement does not contain which of the following?
A) Previous balance
B) Current balance
C) Account number
D) Who purchased the item
Q3) Which of the following is not true regarding cash advances on credit cards?
A) They are treated just like other charges on your credit card.
B) There is a charge for interest from the time you take the advance to the time you pay it off.
C) There is also a transaction fee on most cash advances.
D) The grace period does not apply to cash advances.
Q4) Prestige cards always charge higher interest rates,but offer extra benefits such as access to private jet programs and concierge service at hotels.
A)True
B)False
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Chapter 9: Personal Loans
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Sample Questions
Q1) A personal loan is different from a credit card in all of the following except it A) is normally used to finance one large purchase. B) has a specific repayment schedule. C) can be used only once. D) has a longer grace period.
Q2) What does the Truth-in-Lending Act of 1969 require lenders to do? What is the APR,and how does it fulfill the purpose of the Act?
Q3) You obtain a loan of $3,000 based on simple interest with an annual interest rate of 12%.At the end of the first month,the interest owed on $3,000 is A) $30.
B) $36.
C) $300.
D) $360.
Q4) When applying for a personal loan,you will be required to fill out a loan application but you will seldom need a personal balance sheet or a personal cash flow statement. A)True B)False
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Chapter 10: Purchasing and Financing a Home
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Sample Questions
Q1) Purchasing a condominium is an alternative to purchasing a detached house but also requires careful consideration of selection criteria.
A)True
B)False
Q2) Of the following criteria for selecting a home,which would probably be least important for buyers older than 55?
A) Price
B) Convenient location
C) School system
D) Taxes
Q3) fixed-rate mortgage
A)schedule of payments, interest expense, and balance
B)fixed interest rate until maturity
Q4) Is purchasing a home an expense,an investment,or both?
Q5) When choosing a home,a convenient location can save you considerable travel time and expenses.
A)True
B)False
Q6) List four key components of closing costs.
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Chapter 11: Auto and Homeowners Insurance
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Sample Questions
Q1) In the context of insurance,the term liability is used to mean that you may be required to pay other individuals for damages that you caused to them or their property.
A)True
B)False
Q2) Which of the following is not covered by renter's insurance?
A) Medical expenses for injuries to visitors
B) Replacement of personal items such as clothing
C) Fire damage to the building's roof
D) Cost of legal action due to personal liability claims
Q3) Auto insurance fraud is not a problem in states that have implemented no-fault insurance programs.
A)True
B)False
Q4) The amount of damage that you will be required to cover if your car is involved in an accident that is your fault is your
A) deductible.
B) co-payment.
C) premium.
D) fair share.
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Chapter 12: Health and Disability Insurance
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107 Flashcards
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Sample Questions
Q1) Disability income is
A) taxed at the long-term capital gains rate.
B) taxed as ordinary income.
C) tax-free if you pay the disability insurance premiums.
D) taxed at the short-term capital gains rate.
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) How much would be owed by the patient on a $3,000 bill if a PPO uses a discount on charge arrangement wherein the percentage paid to the provider is 70% and the patient's co-pay,as specified by the PPO,is 20 percent?
A) $600
B) $700
C) $420
D) $200
Q4) Most people obtain health insurance through group plans offered by employers.
A)True
B)False
Page 14
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Chapter 13: Life Insurance
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Sample Questions
Q1) Which of the following will increase your need for life insurance?
A) Your spouse graduates from college
B) You receive a large inheritance
C) Your only child graduates from college
D) You get married
Q2) Which of the following statements is false concerning term life insurance?
A) The premiums increase as you renew the policy.
B) It will expire and be of no value if not renewed.
C) It has a cash value or savings feature as long as you keep the policy active.
D) It provides the same amount of cash to a beneficiary as whole life policies.
Q3) A lump-sum insurance settlement would be most appropriate for
A) a surviving spouse with small children.
B) parents living in a nursing home.
C) a disciplined beneficiary.
D) a former spouse.
Q4) Which of the following is not a type of life insurance covered in the text?
A) Term
B) Dependent life
C) Whole life
D) Universal life
Page 15
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Chapter 14: Investing Fundamentals
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Sample Questions
Q1) The timing on the sale of a stock could make a big difference in the amount of taxes that are due on the profits.
A)True
B)False
Q2) Common stockholders have the right to vote on key corporate issues,but also have the last right to the assets or profits of a company.
A)True
B)False
Q3) If you purchase 100 shares of XYZ Corporation for $50 per share,receive a dividend check for $200,and then sell the stock for $62 per share,what will your return on the stock be?
A) 4%
B) 424%
C) 24%
D) 28%
Q4) Because dividends are fixed,the prices of preferred stock are not as volatile as those of common stock.
A)True B)False
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Chapter 15: Investing in Stocks
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Sample Questions
Q1) In the early 1980's President Reagan and Congress made sweeping changes to the income tax system,lowering both individual and corporate income tax rates significantly.These changes were an example of
A) monetary policy.
B) tax policy.
C) fiscal policy.
D) both tax and fiscal policy.
Q2) You made a $10,000 stock purchase on margin (50%).You put $5,000 into your account initially to cover the purchase.Your stock has declined in value to $7,000 and you receive a margin call.How much cash must you put into your account as a result of the margin call?
A) $1,500
B) $3,000
C) $5,000
D) None-you already have $5,000 in your account.
Q3) Before buying a stock,you should estimate its future market value,just as you would the future value of a car or a home.
A)True
B)False
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Page 17
Chapter 16: Investing in Bonds
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Sample Questions
Q1) A bond from Ginnie Mae is an example of a bond issued by
A) a corporation.
B) the U.S. Treasury.
C) a municipality.
D) an agency of the federal government.
Q2) As interest rates go up,bond prices
A) also go up.
B) go down.
C) remain the same.
D) may go up or down.
Q3) ________ bonds do not contain a risk premium because they are free from default risk.
A) Treasury
B) Municipal
C) Corporate
D) City
Q4) A convertible bond allows the investor to exchange that bond for another issue of bonds within the convertible period.
A)True
B)False
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Chapter 17: Investing in Mutual Funds
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Sample Questions
Q1) Which of the following is not a source of profits for owners of a stock mutual fund?
A) Dividends distributed by the mutual fund
B) Interest distributed by the mutual fund
C) Capital gains distributed by the mutual fund
D) Capital gains from the sale of their shares in the mutual fund
Q2) While not all mutual funds have loads or commissions,they all have management fees and expenses that are charged to the mutual fund shareholders.
A)True
B)False
Q3) Of the management,advertising,and administrative fees charged by mutual funds,normally the management fee is the smallest.
A)True
B)False
Q4) Index mutual funds tend to have lower expenses than other types of mutual funds.
A)True
B)False
Q5) List five considerations or characteristics when purchasing a mutual fund.
Q6) The price of shares in a mutual fund is referred to as the ________.
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Chapter 18: Asset Allocation
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Sample Questions
Q1) Which of the following statements regarding put options is not true?
A) You buy a put option when you expect the stock's price to increase.
B) You place an order for a put option in the same way you place an order for a call option.
C) Put options have an expiration date.
D) Put options allow an investor to lock in a price.
Q2) When you compile a portfolio,you should include investments that exhibit a high positive correlation.
A)True
B)False
Q3) Selling options on stock you already own
A) is illegal under federal law.
B) cannot benefit you financially.
C) is called a covered call strategy.
D) is not a very good idea.
Q4) The price you pay when purchasing an option is referred to as an advance.
A)True
B)False
Q5) Asset allocation uses what to reduce your risk from investing?
Q6) List two considerations that affect your asset allocation decision.
Page 20
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Chapter 19: Retirement Planning
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Sample Questions
Q1) Name two types of retirement plans available to the self-employed.
Q2) In an employer-sponsored retirement plan,you should contribute at least A) the amount the employer will match.
B) 3% of your gross income in middle age.
C) 1% of your net income in your early working years.
D) 15% of your income in the last few working years.
Q3) If a person who qualified for Social Security benefits dies,all of the following are benefits provided to the survivors except A) a one-time payment to the spouse.
B) monthly income payments to the spouse with eligible children or if the spouse is at least age 60.
C) monthly income payments to children.
D) tuition reimbursement for a child attending college.
Q4) An annuity is similar to an IRA in that money accumulates tax-free during the build-up period.
A)True
B)False
Q5) If you are allowed to change investments in your retirement plan over time,you have a(n)________ plan.
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Chapter 20: Estate Planning
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Q1) executor
A)a legal request for how your estate should be distributed upon your death
B)a document that specifies changes in an existing will
C)dying without a will
D)persons specified in a will to receive part of an estate
E)a will suitable for a smaller estate distributed to the spouse
F)the legal process that declares a will valid and ensures orderly distribution of assets
G)the person designated in a will to execute instructions regarding the distribution of your assets
Q2) The assets less liabilities of a deceased individual are called a(n)________.
Q3) Once your net worth exceeds the tax-free limit of estate taxes,you should carefully plan your estate to minimize any potential tax liability.
A)True
B)False
Q4) Probate is the legal process that ensures assets are distributed and guardians of children are appointed as the person who died wished it.
A)True
B)False
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22
Chapter 21: Integrating the Components of a Financial Plan
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Sample Questions
Q1) Some retirement plans,such as Roth IRAs,are more liquid than other plans.
A)True
B)False
Q2) To monitor your financial plan over time,it is important to store finance-related documents in a safe and accessible place.
A)True
B)False
Q3) ________ insurance provides financial support if you are injured and unable to work.
A) Liability
B) Disability
C) Compensatory
D) Medical reimbursement
Q4) Assume that you set aside $500 per year,and invest that money over the next five years in an account earning 6%.What is the amount of interest you will earn on this investment?
A) $300
B) $319
C) $263
D) $250
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