SET 1 Alicia has a tax credit of $100 and a marginal tax rate of 28%. Alicia's income tax will be reduced by how much as a result of the credit? $28. $128. $100. None of the above; her taxes will increase by $100. An ordinary annuity assumes _____-of-period payments, while an annuity due assumes _____-of-period payments. end; beginning beginning; end end; middle beginning; middle Anita sold for $60,000 her home that she purchased ten years ago for $20,000. She then purchased another home a month later for $70,000. The taxable amount of her capital gain is: $60,000. $40,000. $30,000. $0. At the end of 1999, Phil had a net worth of $10,000. During 2000, he plans to save $2,000 and he also expects the market value of his assets to increase by 5%. If Phil's total liabilities were $4,000 at December 31, 1999, his December 31, 2000 net worth will be: $12,000. $12,500. $12,700. $12,800. Evan, who has a 28% marginal tax rate, is considering giving securities to his son, Todd, who is under fourteen years of age. The securities will yield $500 of income each year. If Evan makes the gift, then: Todd must pay a gift tax based on $500. family income after taxes will increase by $140 each year, assuming Todd would have no other taxable income. the family could deduct $500 from its income each year, assuming Evan's wife agrees to the gift. there will be no change in taxes, assuming the family files a joint return. For higher-income individuals the marginal tax rate will be: greater than the average tax rate. equal to the average tax rate. less than the average tax rate. above, equal to, or less than the average tax rate. It is impossible to know given the present information. From a budgeting view, which of the following statements is not true concerning variances? A favorable expense variance means the budgeted amount was more than the actual amount. Cumulative variance = current month's variance + variances of previous months. Ideally, cumulative variances for the year will equal zero. Ideally, cumulative variances for the year should have a positive value. Future value calculations are also referred to as: discounting. add-on interest. compounding. simple interest. If a person deposited $50 a month for 6 years earning 8 percent, this would involve what type of computation? Future value of a single amount. Future value of a series of deposits. Present value of a single amount. Present value of a series of deposits. In extending an expense item for the current budget year, an often-used and useful approach is to: use last year's figure. use the average of the last three years. use last year's figure plus a usual 10% "fudge factor". adjust last year's figure upwards by this year's expected inflation. In relation to the balance sheet, an income statement shows: net worth, not the period's savings or dissavings. the period's savings or dissavings, not net worth. activities at a point in time, not over a period of time. financial position, not financial performance. In relation to the balance sheet or income statement, the budget: requires greater accuracy. requires greater concern for financial goals. is less concerned with planning. is less important. Individuals with above average amounts of mortgage interest, medical expenses and property taxes are likely to: take both itemized deductions and the standard deduction. take only the standard deduction. take only itemized deductions. take the alternative minimum tax. John Smith has a debt ratio of 0.25, which tells us that John: is insolvent since the ratio is less than 1.0. could have $10,000 in total assets and $7,500 in net worth. has 25% of his income allocated to reducing debt. might have $2,500 in liquid assets and $10,000 in current debts. Life-cycle financial planning means: that life-long goals are recognized and attended to at each phase in the life cycle. attending to life-long goals sequentially through life--buy insurance when you are young, plan retirement when you are old, etc. planning an estate to pass to your heirs so that the family's life cycle never ends. gearing life-long financial decisions to minimize your total income tax liability. Opportunity cost refers to: money needed for major consumer purchases. benefits given up when one alternative is chosen over another. the amount paid for taxes when a purchase is made. current interest rates. Present value calculations are also referred to as: discounting. add-on interest. compounding. simple interest. Taxpayers should claim itemized deductions only if: itemized deductions exceed the standard deduction. they are also claiming a standard deduction. itemized deductions exceed tax credits. they use the tax rate tables to calculate their taxes. The current average savings rate for all U.S. families is approximately: 20%. 10%. 4%. -5%. The first phase of goal planning involves all steps, except: identifying particular goals. setting the future years when the goals are to be achieved. establishing an initial dollar amount for each goal. borrow funds for future use. The future value of a $500 ordinary annuity received for three years is $_____, assuming an investment rate of 10%. 1,655.00 665.50 1,820.50 335.65 The socioeconomic system that is likely in the near future will be one where: government plays a greater role in solving financial problems. employers provide greater retirement benefits for their employees. families will be more self-reliant for their financial futures. huge increases in family savings eliminate the need for financial planning. To be considered an investment asset, an item: must be purchased for the specific purpose of providing additional income or increasing net worth. must be a stock, a bond, or a savings account. must be intangible. must be owned free and unencumbered by a loan. When choosing a career: consult sources of information, such as the Occupational Outlook Handbook. consider your potential salary. consider your potential fringe benefits. All of the above should be considered when choosing a career. Which alternative below is not true of current consumption? It refers to goods and services used in the current time period. Generally, more of it leads to greater levels of satisfaction. It can be increased by current borrowing. It is usually less desirable than future consumption. Which of the following is true regarding the building-block approach to financial planning? You begin with the highest blocks. You proceed to the first investment level before the lowest blocks are secure. You go to riskier investments as quickly as possible. You start with a low-risk foundation and then move to riskier investments. Which of the following would NOT be a characteristic of a qualifying educational expense? The education must be required by your employer and serve to maintain or improve your skills in your present work. The education must enable you to meet the minimum skills for your present job. It reduces your taxable income only if you itemized. For it to reduce your taxable income, your job related income must exceed 2 percent of your adjusted gross income. Which statement is not true of state and local taxes? They do not vary much from one part of the country to another. Most of the states have state income taxes. Most of the states have state sales taxes. Most local governments rely upon property taxes for most of their tax revenues. Which type of computation would a person use to determine current value of a desired amount for the future? Future value of a single amount. Future value of a series of deposits. Present value of a single amount. Present value of a series of deposits. With an interest rate of 9 percent, your investment would double in about: 4 years. 6 years. 8 years. 10 years. You are considering buying a home. A pertinent action plan would not include: your anticipated enjoyment of the home. when the home will be purchased. how much must be saved each year to accumulate a down payment. how the annual savings will be invested until the down payment is made. You are deciding whether to start a 40-year retirement investing plan now, or ten years from now. You think rates of return will be about the same in the future as they are now. Discussion in the text of this decision shows: very little difference in the future value of an investment made now versus one made 10 years from now. an investment made now will accumulate about 20% more (at a 10% rate of interest, compounded annually) than the investment made later. the same facts as in response b, but the accumulation is only 10% greater. that you will accumulate more in the additional 10 years than you do for the first 30 years. You are planning a vacation tour to Florida and trying to choose between the 5- day and 7-day package. You are using marginal analysis when: you decide the benefits from either package are worth their respective costs. you compare the added benefits of the 7-day package to its added cost. you select one package over the other. you had the foresight to plan your vacation. You can receive an automatic four month extension for filing your federal tax return: only if you are out of country. only if you are in the armed services. only if you are physically or mentally incapacitated. under most circumstances. You have just put $1,000 in an investment that offers a 12% annual yield, using a simple interest calculation. At the end of two years your interest earned will be: $120.00. $144.00. $240.00. $254.40. SET 2 A closed-end credit account: is limited to purchases of less than $1,000. establishes an ongoing line of credit covering future purchases. must be fully repaid by the end of the billing cycle. covers a single purchase with a set repayment schedule. A grace period on revolving charge accounts: is required under the Fair Credit Reporting Act. is equal to the time between when an installment payment is missed and the remaining balance on the loan becomes due. can eliminate all interest charges if the loan balance is fully paid each month. is usually equal to two billing periods. A listing agreement is: a contract between you and a local newspaper for publicity on the sale of your home. a contract between you and a real estate agent concerning the sale of your home. a contract between you and a potential buyer giving the signer first rights on the sale of your home. a contract between you and the buyer specifying that the title on the home is free of all defects. A money market deposit account (MMDA) is: a limited-access savings account with a minimum balance requirement offering money market rates. the statement a money market mutual fund sends you showing activity in your account. any savings account at a federally insured financial institution that offers higher rates but is not insured. similar to a CD since you pay a penalty for early withdrawals. A "payment cap": limits interest rate increases and decreases on an adjustable-rate loan. limits interest rate increases on adjustable-rate loans. limits interest rate decreases on adjustable-rate loans. limits neither an increase nor a decrease in the interest rate on adjustable-rate mortgages. A promissory note and a security agreement: must go together on any consumer loan. are actually the same things--one is used with a credit card while the other applies to a cash loan. are different--the promissory note shows details of the loan while the security agreement gives the creditor an interest in the collateral supporting the loan. are parts of the loan agreement--the borrower gives a promissory note and in return receives a security. A single taxpayer may: not exclude from current income any of the capital gain on the sale of a home. exclude up to $250,000 of the capital gain every time he or she sells a home as long as they have lived in the home for a period of two years. exclude up to $250,000 of the capital gain every time he or she sells a home only if they are at least 55 years of age. exclude all of the capital gain on the sale of a home; however, this exclusion may only be taken once in a lifetime. A warranty of merchantability means that: the buyer has the right to expect that the good is of the same quality as similar goods in its class. the good should prove suitable for the purpose it was purchased. the buyer should pay no more for the good than must be paid for similar goods in its class. within a period of time immediately following the sale of the good there is a money-back guarantee if not fully satisfied. Car rental leases are either "open-end" or "closed-end." The basic difference between the two is that: monthly payments are variable under the closed-end lease, but fixed under the open-end lease. monthly payments are variable under the open-end lease, but fixed under the closed-end lease. with a closed-end lease you may be liable for additional payments if the resale price of the auto is less than estimated in the lease agreement. with an open-end lease you may be liable for additional payments if the resale price of the auto is less than estimated in the lease agreement. Closing costs are also termed: settlement costs. recognition costs. listing costs. buyer costs. From a federal income tax perspective, interest on U.S. Series EE bonds: may be deferred until redemption. may be deferred until redemption and may be avoided if it is used for a child’s college or vocation expenses. may be neither deferred nor avoided. may be avoided only if the bonds are exchanged for Series HH bonds. If a new car loan and a home equity loan carry identical interest rates and the borrower itemizes deductions: the home equity loan is preferred because the interest payment is tax- deductible. the auto loan is preferred because the interest payment is tax-deductible. neither is preferred because the interest payments on both are tax-deductible. neither is preferred because neither has deductible interest payments. If spouses open a bank account with the right of survivorship and one spouse dies, the funds in the account: are immediately frozen until the will is probated. pass in total and immediately to the remaining spouse. pass immediately in a proportionate share to the surviving spouse. automatically assume the status “tenants in common.” If you and a creditor have an unsettled dispute, the creditor can: add finance charges to your unpaid bill if it is subsequently determined a charge was not in error. choose to take legal action to collect the bill. notify the credit bureau that you have failed to pay your bill. do all of the above. If you are an antiques hobbyist and want to have a large liquid balance to take advantage of an occasional bargain at a flea market, the most appropriate account is probably a: money market mutual fund. passbook savings account. certificate of deposit. U.S. Series HH bond. If you expect interest rates to rise in the future, which type of mortgage loan (shown below) would you prefer? Graduated payment Adjustable rate Shared appreciation Fixed rate Interest on a twelve-month installment loan is to be calculated using the discount method. If the purchase to be financed is $1,000 and the discount rate is 6%, then your monthly payment is about: $76.67. $86.07. $88.33. $88.65. Lenny, who lives in New York City, deposited in his checking account a check from his mother, who also lives in New York City. The bank must make the funds available: immediately. on the next business day. two days after the deposit day. after the check clears the Federal Reserve System. Lou Hinton’s savings account (offering 12% simple interest) showed the following activity for the month of June: Opening balance $2,000 6/10 Deposit 1,000 6/20 Withdrawal (800) 6/30 Ending Balance 2,200 Interest earned in June with the FIFO method would be: $24.00. $12.00. $18.67. $21.33. Many financial planners recommend that you hold emergency reserve assets equal to _____ months of after tax income. 3-6 5-7 7-12 12-15 The add-on clause on a consumer loan: allows you to add on additional loans at the existing rate on your current loans. allows the creditor to add on additional interest when the market rate of interest rises. allows the lender to repossess all goods purchased with the original loan even though your total payments may have been enough to cover an earlier purchase. allows you to extend the term of the loan by adding on additional installments. The contract rate: takes into account all finance charges including points. is greater than the APR. cannot change over the life of the loan. is the interest rate applied to the unpaid mortgage balance. The greatest annual depreciation in the market value of new cars occurs in the: first year of ownership. third year of ownership. sixth to seventh year of ownership. tenth year of ownership when the market value drops to zero. The least effective method of protecting against overdrafts is to: maintain a larger-than-normal account balance. arrange for automatic transfers from a savings account. arrange for a credit card loan to cover the overdraft. ignore them since banks do not charge for overdrafts. The price that the manufacturer charges the dealer for a car is the: invoice price. base price. sticker price. dealer price. The "Rule of 78" tends to favor: the borrower over the lender if there is not an early repayment of the loan. the lender over the borrower if there is not an early repayment of the loan. the borrower over the lender if there is an early repayment of the loan. the lender over the borrower if there is an early repayment of the loan. The rule of thumb for determining how much rent you can afford is that you should not spend more than a certain percentage of your after-tax income on rent and utilities. This percentage is: 15%. 25%. 35%. 45%. Under a "secret warranty" the owner receives reimbursement for defects only if he or she: promises not to tell other owners. complains to the dealer or manufacturer. enters arbitration over the defect. brings the dealer or manufacturer to court. Under the Fair Debt Collection Practices Act (FDCPA), a debt collector: can continue collection efforts until you pay off your debts in total. must give you a written notice describing your debt in detail and what to do if you feel you do not owe the debt. cannot use abusive tactics to force you to pay a debt, but can contact your employer and seek his/her help. is permitted all forms of communication with you until the debt is resolved. When a potential buyer makes an offer to purchase, he or she places a deposit on the home. This is known as: an advance payment. earnest money. closing costs. buyer’s insurance. When you purchase a product that is sold "as is," the product is: subject to the guarantees as stated in a written document. not covered by either an implied nor express warranty. only covered by an implied warranty. provided lemon protection. Which item below would most likely not favor buying (versus renting) a personal residence? You expect inflation to increase. You expect an increase in income taxes. You expect mortgage rates to rise. You anticipate relocating frequently because of your job. Which item listed below is probably irrelevant (or poor) advice if you are trying to begin a credit record? Have a telephone installed. Open a checking or savings account. Establish a record of paying all bills promptly with cash. Take out a small installment loan even if you don’t need the funds. Which lender below most likely would offer the lowest interest rate on the loan indicated? Insurance company (a policy loan). Pawnshop (using your guitar for collateral). Commercial bank (automobile loan). Finance company (automobile loan). Which method of determining interest provides the least interest amount? LIFO. FIFO. Day-of-deposit-day-of-withdrawal. You can’t tell without more information. Which of the following statements concerning auto lemon laws is false? Nearly all states have auto lemon laws. A few states have lemon laws regulating the sale of used cars. The owner usually is entitled to protection under the lemon laws if the defects cannot be repaired within 30 days of the initial complaint. Possible remedies under lemon laws include a new car or a full refund. Which of the following statements is not true of condominium housing? The condominium association holds the mortgages on the individual condominium units. The individual owners have a shared interest in the common areas. The owners are able to vote for the directors of the condominium association. The owners of individual units are assessed charges for the maintenance and upkeep of the common areas. Written warranties are regulated by Congress under the: Consumer Protection Act of 1970. Magnuson-Moss Warranty Act of 1975. Antitrust Improvements Act of 1978. Robinson-Patman Act of 1936. You deposit $1,000 in an account offering an 8% yield, compounded semi- annually. At the end of one year, your total earned interest is: $40.00. $40.80. $80.00. $81.60.