Personal Finance Appendix

Personal Finance Appendix
1. One key provision of the Dodd-Frank Act was the establishment of the Consumer Financial Protection Bureau.
a. True
b. False
ANSWER: True
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: BUSN.KELL.15.A.01.
NATIONAL STANDARDS: United States - BUSPROG: Analytic
TOPICS: A-Head: Your Budget
KEYWORDS: Bloom's: Knowledge
2. You can use your budget to develop your financial plan and to monitor your progress toward achieving your financial
goals.
a. True
b. False
ANSWER: True
3. The difference between discretionary costs and nondiscretionary costs is that discretionary costs are less
controllable.
a. True
b. False
ANSWER: False
B-Head: How Do I Get Started?
KEYWORDS: Bloom's: Comprehension
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4. Candice purchased an iced coffee from the local coffee shop. Candice’s purchase is an example of a
nondiscretionary payment.
a. True
b. False
ANSWER: False
DIFFICULTY: Difficulty: Moderate
KEYWORDS: Bloom's: Application
5. Nondiscretionary payments include your monthly rent or car payment, which are set by contract.
a. True
b. False
ANSWER: True
LEARNING OBJECTIVES: BUSN.KELL.15.A.01
6. A checking account is often referred to as a person's “safety net.”
a. True
b. False
ANSWER: False
TOPICS: A-Head: Your Savings: Building a Safety Net

7. The FDIC insures individual deposits up to $250,000 per account in FDIC-insured banks.
a. True
b. False
ANSWER: True
8. Credit history is the study of financial markets and their impact on interest rates.
a. True
b. False
ANSWER: False
TOPICS: A-Head: Your Credit: Handle With Care!
9. Your credit score is a numerical indicator that determines how much credit you should be able to obtain.
a. True
b. False
ANSWER: True
10. Currently, the most commonly used credit scoring system is the Fair, Isaac and Company (FICO) scale.
a. True
b. False
ANSWER: True

11. Your ability to purchase goods or resources without making immediate payment is known as an investment.
a. True
b. False
ANSWER: False
12. The benefits of having a credit card include not having to carry cash and the ability to track expenditures.
a. True
b. False
ANSWER: True
B-Head: Credit Cards: Boon or Bane?
13. A grace period is the period of time you have to pay your credit card balance before interest or fees are assessed.
a. True
b. False
ANSWER: True
BHead: The Devil in the Details—Understanding Your Credit Card Agreement!

14. Federal law allows credit card companies to charge as much as they want for late fees.
a. True
b. False
ANSWER: False
15. The higher the annual percentage rate, the lesser your interest expense on unpaid balances.
a. True
b. False
ANSWER: False
16. The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 requires issuers to give a 5-day notice
before making significant changes to credit agreements.
a. True
b. False
ANSWER: False
B-Head: Protection for Consumers: New Laws and Regulations

17. A debit card allows you to make “cashlike” purchases, because your bank balance is reduced immediately each
time your card is used.
a. True
b. False
ANSWER: True
B-Head: Using Credit Cards Wisely: The Need for Discipline
18. Investing involves reducing consumption today in order to acquire assets that build future wealth.
a. True
b. False
ANSWER: True
TOPICS: A-Head: Your Investments: Building for the Future
19. The largest single asset for many households is the equity they have in their home.
a. True
b. False
ANSWER: True
BHead: Building Wealth: The Key Is Consistency—and an Early Start!

20. You recently purchased 100 shares of Sand Box Software. One benefit of buying and owning these shares is that
you are sure to receive dividends.
a. True
b. False
ANSWER: False
KEYWORDS: Bloom's: Analysis
21. When you purchase common stock it represents your ownership in the corporation.
a. True
b. False
ANSWER: True
22. Dividends are a distribution of profits paid out to shareholders of a corporation.

a. True
b. False
ANSWER: True

23. Companies are legally required to pay dividends on corporate stock.

a. True
b. False
ANSWER: False
24. If a company declares to pay dividends to stockholders, common stockholders cannot receive a dividend until all
preferred dividend are paid in full.
a. True
b. False
ANSWER: True
25. A corporate bond is a formal IOU issued by a corporation.

a. True
b. False
ANSWER: True

26. Your Aunt wants advice on how to invest $10,000. During the course of the conversation, she mentions that she is
looking for maximum level of financial security. Based on this information, the best suggestion would most likely be
for her to invest the $10,000 in corporate stock.
a. True
b. False
ANSWER: False
DIFFICULTY: Difficulty: Challenging
KEYWORDS: Bloom's: Synthesis
27. The federal government requires mutual funds be invested exclusively in government securities.
a. True
b. False
ANSWER: False
28. A treasury bill or T-bill is a government security that matures after four years.
a. True
b. False
ANSWER: False

29. It is never a good idea to have a diversified portfolio because your investments are spread out and can result in
increased risk.
a. True
b. False
ANSWER: False
B-Head: Building a Portfolio: A Few Words about Diversification, Risk, and Return
30. Studies show that students who have internship experience are offered higher starting salaries.
a. True
b. False
ANSWER: True
B-Head: But What Is My Best Investment? (Hint: Look in the Mirror!)
31. Higher education not only increases your income, it also gives you more job security.
a. True
b. False
ANSWER: True

32. A Roth IRA is an example of a 403(b) plan and is not tax deductible.
a. True
b. False
ANSWER: False
B-Head: Investing for the Long Term: Planning for Your Retirement
33. When you contribute to a traditional IRA, the contributions you make reduce your taxable income in the same year.
a. True
b. False
ANSWER: True
34. In 2012, traditional and Roth IRAs had a maximum yearly contribution rate of $5,000.
a. True
b. False
ANSWER: True

35. Like a Roth IRA, the contributions made to a 401(k) plan are not tax-deductible.
a. True
b. False
ANSWER: False
36. A(n) _____ is a detailed forecast of your expected cash inflows (income) and cash outflows (expenditures), which
helps control your financial situation.
a. allowance
b. budget
c. working capital
d. inventory
ANSWER: b
37. The first step in developing a budget is to analyze:

a. your current interest rates.
b. your revenues and expenses.
c. how you stand financially compared to others your age.
d. your credit card receipts.
ANSWER: b

38. One benefit of utilizing commercial personal finance software packages such as Quicken or Moneydance is that
these packages:
a. automatically complete and file your annual tax return.
b. alert you when interest rates on your credit cards increases.
c. provide a wide range of features such as online banking services, financial calculators, and stock quotes.
d. provide a discount on online purchases and credit card bills.
ANSWER: c
39. Bernard is concerned about his current financial condition. In order to handle his finances better, he should:
a. apply for a credit card.
b. borrow money from his friends.
c. ask his rich uncle for a short-term loan.
d. develop a budget.
ANSWER: d
40. You have a budget for your personal finances. Which of the following statements best explains this statement?
a. You use your budget to show the difference between what you earn (income) and what you spend
(expenditures).
b. Budgets are for poor individuals.
c. You use your budget to measure your creditworthiness.
d. Budgets are a tool students use to figure out whether or not they can afford the next semester.
ANSWER: a

41. The payments you have the most control over are called your _____ payments.
a. credit
b. alternative
c. discretionary
d. planned
ANSWER: c
42. Kenneth, a college student, is addicted to playing video games, and buys new games every other week. He calls his
dad asking him to increase his weekly allowance. His dad refuses and tells him to manage his expenses with the
agreed upon amount he currently receives. Which of the following would best help Kenneth manage his finances?
a. Applying for a credit card
b. Buying his games on credit
c. Creating a budget
d. Applying for loans from banks
ANSWER: c
43. A _____ account is an interest-earning account that is intended to satisfy obligations that your checking account
cannot handle.
a. debit
b. savings
c. joint
d. correspondent
ANSWER: b

44. One key to establishing a sizable savings balance is to:

a. use the “pay yourself last” approach.
b. automatically deposit a percentage of each paycheck into a savings account.
c. pay the minimum on each credit card bill.
d. use traditional banks instead of online savings banks, since they typically pay higher rates of interest.
ANSWER: b
45. Financial experts have some good advice about savings. Which answer best describes this?
a. Pay your credit cards off first--they have the highest interest.
b. Pay yourself first--let the credit cards worry about themselves.
c. Open savings accounts in traditional banks and avoid opening accounts in online savings banks.
d. Experts recommend saving up about six months of income in the event you lose your job or some other
emergency occurs.
ANSWER: d
46. _____ refers to your ability to obtain goods or resources without having to make immediate payment.
a. Debit
b. Income
c. Credit
d. Expense
ANSWER: c

47. One of the most important determinants of the amount of credit you can obtain is your _____, which is a numerical
indicator of your creditworthiness.
a. credit interest
b. credit score
c. credit history
d. debit score
ANSWER: b
48. You recently had a conversation with your neighbor, Ruth Theobald, about her problems with getting a loan. She
mentioned in the course of the conversation that she had been turned down at least five times. Based on this
information you can conclude:
a. her credit history is neither positive or negative.
b. she has either high credit balances or unpaid credit.
c. she has not tried hard enough to secure a loan.
d. she has an excellent credit history.
ANSWER: b
49. A _____ allows you to make purchases now and to defer the payment into the future.
a. credit card
b. debt card
c. cashless card
d. debit card
ANSWER: a

50. Which of the following is a disadvantage of using a credit card?

a. It is always safer to carry cash than to carry credit cards, because losing the card can cause the issuer to file
a case against the card holder.
b. Credit cards make it difficult for users to track their expenditures.
c. The “buy now, pay later” aspect of credit card use makes it hard for some people to maintain financial
discipline.
d. Many retailers do not offer warranty for products purchased with credit cards.
ANSWER: c
51. The Dodd-Frank Act:

a. requires issuers to give a 45-day notice before making significant changes to credit agreements.
b. requires lenders, insurance companies, and others to provide a free copy of the credit score of applicants
whose credit card applications have been rejected.
c. requires anyone under the age of 21 who applies for a credit card to either verify proof of income or have an
older adult cosign the application.
d. created the Federal Financial Institutions Examination Council (FFIEC).
ANSWER: b
B-Head: Protection for Consumers: New Laws and Regulations
52. The first rule when you have credit card difficulties is to:
a. put the card down.
b. take loans from the bank.
c. use the card for essential items or grocery purchases.
d. cancel your debit card.
ANSWER: a
53. After a review of your friend’s current financial situation, you discovered she was carrying a $4,500 credit card
balance with an APR of 12%. The best advice you can give to your friend is to:
a. eliminate using her debit card for nonessential purchases.
b. switch credit card companies, since many companies offer benefits like frequent-flier miles.
c. keep using the card and not to worry about the balance, since all interest is tax deductible.
d. place a high priority on eliminating her credit card balance.
ANSWER: d
54. _____ refers to the interest you earn not only on the money you directly invest but also on the interest you’ve
earned in previous years.
a. Compound interest
b. Return on investment
c. Simple interest
d. Default interest
ANSWER: a
55. Why is investing earlier in life preferable?

a. You can avoid any financial risks that the future market conditions might bring..
b. Your compounding effect becomes more powerful.
c. You become richer quicker, as investors younger than 25 enjoy tax benefits.
d. You can retire when you’re 40 years old.
ANSWER: b

56. A _____ is a distribution of profits paid out to stockholders by a corporation.

a. capital appreciation
b. capital gain
c. liability
d. dividend
ANSWER: d
57. Ownership of stock offers the possibility, but not the guarantee, of two types of financial returns:
a. dividends and capital rate of return.
b. capital gains and dividends.
c. capital gains and credit.
d. dividends and credit.
ANSWER: b
58. The most important distinction between preferred stock and common stock is that:
a. owners of common stock are more likely to receive a dividend than owners of preferred stock.
b. owners of preferred stock are more likely to receive a dividend than owners of common stock.
c. while preferred stockholders are owners of a corporation, common stockholders are its creditors.
d. while common stockholders are owners of a corporation, preferred stockholders are its creditors.
ANSWER: b

59. A financial instrument that allows the stockholders to receive their dividend first, if one is paid by the company, is
known as _____.
a. a corporate bond
b. preferred stock
c. common stock
d. a government security
ANSWER: b
60. As a conservative investor, you are concerned about the preservation of capital and much less concerned with
capital gains. Based on this information, you should consider investing in _____, since they are considered very safe
investments.
a. government securities
b. corporate bonds
c. corporate stock
d. mutual funds
ANSWER: a
61. _____ are professionally-managed funds that pool the contributions of thousands of investors.
a. Mutual funds
b. Exchange Traded Notes (ETN)
c. T-bills
d. Certificates of deposit funds
ANSWER: a

62. As a small investor, Bernie has decided to invest in the Alpha Fund. This mutual fund only invests in the common
stock of companies located in the United States. One benefit of investing in mutual funds is:
a. all capital gains are guaranteed tax free.
b. they usually offer more diversification.
c. these funds are passive investments.
d. they are guaranteed by the SEC.
ANSWER: b
63. Karen wants to begin building her retirement fund, but she is very apprehensive about the stock market and wants
nothing to do with it. She wants something that, historically, has been very stable. Which of the following would you
recommend that she invest in?
a. Mutual funds
b. Corporate bonds
c. Government securities
d. Exchange traded funds
ANSWER: c
64. A full-service broker:

a. provides financial planning services exclusively.
b. provides only tax advice.
c. charges a flat fee per trade.
d. identifies good investment opportunities.
ANSWER: d
B-Head: Acquiring Financial Assets: The Role of a Broker

65. As a college graduate, Allen can expect:

a. to earn more during his lifetime than his friend who only earned a high school diploma.
b. to always have a professional job.
c. to accumulate a lot of wealth and be respected.
d. that his path to financial independence will be easy.
ANSWER: a
66. An example of an employee-contribution retirement plan is a:

a. Roth IRA.
b. 401(k).
c. traditional IRA.
d. mutual fund.
ANSWER: b
67. The benefit of a(n) _____ is that the contributions you make reduce your taxable income in the same tax year, and
the earnings on your contributions are tax deferred, allowing them to grow more rapidly.
a. mutual fund
b. Roth IRA
c. exchange traded fund
d. traditional IRA
ANSWER: d

68. Alleciana has a 457 retirement plan. What does this mean?
a. She receives a 50 percent tax deduction on the income she invests in the plan.
b. She has to pay higher taxes on the earnings received from these investments.
c. She is vested in her company.
d. She likely works for state government.
ANSWER: d
69. All contributions to a Roth IRA are:

a. tax-free but earnings are taxable.
b. taxable but earnings are tax-free.
c. passive but withdrawals are tax-free.
d. tax-free but withdrawals are subject only to state taxes.
ANSWER: b
70. One advantage of participating in a company-sponsored retirement plan is:

a. you pay taxes on these contributions only during the year you contribute.
b. you are allowed to contribute only half as much as you would contribute to an IRA, so you get to keep more
of your earnings.
c. time value of money does not apply.
d. companies will often participate in a matching process, where they will contribute a percentage of the amount
you contribute.
ANSWER: d

71. What is a budget? How can you apply the principles of budgeting to your own finances?
ANSWER: One of the first steps in getting control over your financial situation is to develop a
budget, which is a detailed forecast of your expected cash inflows (income) and cash
outflows (expenditures).
Personal financial management issues affect everyone. Successful individuals are able
to effectively budget, build up adequate savings, manage credit, and make sound
investments. The creation of a budget documents the difference between what you
expect to earn and what you expect to spend. A budget is a tool to develop a financial
plan and to monitor your progress toward achieving your financial goals.
72. Evaluate strategies to help build a sufficient savings and emergency fund.
ANSWER: A savings account is an interest-earning account that is intended to satisfy obligations
that your checking account cannot handle. Savings account is like a “safety net” for
unexpected financial challenges, such as a major plumbing repair, the need to replace
the car’s transmission, or even the loss of a job. Many financial experts suggest that
one should have enough money in his/her savings to cover six months of expenses.
One technique for establishing a sizable savings balance is to “pay yourself first.” This
concept, popularized by David Bach, suggests that one should have a predetermined
amount from each paycheck automatically deposited into his/her savings account.
Once they’ve accumulated enough in their savings account to provide an adequate
safety net, they can use the “pay yourself first” approach to achieve other financial
goals.

73. List and describe the main conditions to consider when using a credit card.
ANSWER: Before you accept a credit card, make sure you read the credit card agreement and
understand the main conditions for using that card. Some things to look for include:
Grace period is the period time that a person has to pay his or her balance before
interest or fees are assessed. It is important that credit card bills be paid in a timely
manner to avoid the interest and fees.
APR - Annual percentage rate is the percentage financing cost that is charged on
unpaid balances. The higher the APR the more your interest expense will be on the
unpaid balance. APR rates may differ per transaction type.
Late fees are assessed is a payment is not received within the grace period. Late fees
are capped at $25 per first offense and $35 for each additional offense.
Annual fees are a charge you receive just for having the card, whether you use it or
not.
Over-the-credit-limit fee is assessed if you exceed your credit limit.
Balance transfer fee is charged if you transfer the balance from one credit card to
another.
KEYWORDS: Bloom's: Evaluation

74. Discuss the traditional ways to wealth accumulation.

ANSWER: Investments involve reducing consumption today in order to build future wealth. The
key to investing is consistency. It is critical to start investing as early as possible, no
matter what the investment amount is.
One popular way to build wealth is to set up an individual retirement account or IRA.
The two most popular are the traditional IRA and the Roth IRA. Both IRAs are
individual investments and offer tax advantages intended to provide an incentive to
invest in retirement. With a traditional IRA, the contributions you make reduce your
taxable income in the same tax year. While the contributions you make to a Roth IRA
are not tax deductible at the time you make them, the distributions you receive from the
Roth IRA are tax exempt. Other retirement plans are the 401(k), 403(b) and 457 plans.
Each of these employee contribution retirement plans are similar, but the main
difference is in who qualifies for each type of plan. Private sector employees are
offered the 401(k), while 403(b) plans are offered to employees that work for certain
types of nonprofit organizations such as schools and religious organizations, and 457
plans are primarily for state and local government employees and certain nonprofit
organizations.

75. Evaluate various options for investing to build wealth.

ANSWER: One of the most popular investments is common stock, which represents ownership in
a corporation. Ownership of stock offers the possibility, not the guarantee, of either
dividends or capital gains. Dividends are the distribution of profits paid to stockholders.
Capital gains are an increase in the market value of the stock itself.
Corporate bonds are long-term debts or IOUs issued by a corporation. When investors
buy these bonds, they are entitled to receive interest payments every year until the
bond matures. Once the bond matures, the bond issuer or corporation that issued the
bond must pay the bondholder the face value of the bond.
A government security or bond works in the same way as a corporate bond. The
biggest issuer of government bonds is the federal government. The U.S. Treasury
markets a wide variety of securities, from long-term bonds that mature in 30 years to
short-term treasury bills that can mature in as little as four weeks. Many investors like
to invest in the bonds of state and local governments, because the income earned on
these bonds is usually exempt from federal income taxes.
Mutual funds sell shares to investors and pool the resulting funds to invest in financial
instruments such as corporate stocks, corporate bonds, government securities, or other
assets. These funds are usually professionally managed with the fund’s manager
selecting the specific securities that the fund will hold. Investing in mutual funds is a
way for investors to diversify their portfolios.
Exchange traded funds (ETFs) are similar to mutual funds in that they represent
ownership in a broad portfolio of securities, but unlike mutual funds are traded on stock
exchanges just like shares of stock. This makes them easy to buy and sell.
KEYWORDS: Bloom's: Evaluation


Personal Finance Appendix

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22. Dividends are a distribution of profits paid out to shareholders of a corporation.

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23. Companies are legally required to pay dividends on corporate stock.

25. A corporate bond is a formal IOU issued by a corporation.

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37. The first step in developing a budget is to analyze:

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44. One key to establishing a sizable savings balance is to:

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50. Which of the following is a disadvantage of using a credit card?

51. The Dodd-Frank Act:

55. Why is investing earlier in life preferable?

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56. A _____ is a distribution of profits paid out to stockholders by a corporation.

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64. A full-service broker:

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65. As a college graduate, Allen can expect:

66. An example of an employee-contribution retirement plan is a:

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69. All contributions to a Roth IRA are:

70. One advantage of participating in a company-sponsored retirement plan is:

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Over-the-credit-limit fee is assessed if you exceed your credit limit.

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74. Discuss the traditional ways to wealth accumulation.

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75. Evaluate various options for investing to build wealth.

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