12th Edition Nickels Test Bank Docx

Understanding Business, 12e (Nickels)

Bonus Chapter D Managing Personal Finances

1) The value of education is often exaggerated when searching for a good job.

2) The U.S. government provides several types of financial incentives to encourage people to attend college.

3) The first step in getting control of your finances is to prepare a budget.

4) Your personal balance sheet will reflect the same fundamental accounting equation as the balance sheet for a business: assets = liabilities + owners' equity.

5) On your personal balance sheet, your assets should include anything of value that you own.

6) If your personal liabilities exceed your assets, you are on the road to financial security.

7) Your computer and car should both be listed on the asset side of your personal balance sheet.

8) Credit-card debt represents an asset on a consumer's balance sheet.

9) A major source of revenue on your personal income statement is your salary or wages from your job.

10) One step toward the goal of taking control of your finances is to keep track of all your expenses.

11) If you find yourself regularly running out of cash, your only real option is to focus your attention on finding ways to increase your income.

12) Once you have evaluated your current financial situation and know your sources of income and expenses, you have reached the point where you can establish a personal budget.

13) Managing the finances of a household is similar to managing the finances of a small business.

14) With respect to personal financial planning, the first thing to do with any extra money you have is to start a savings plan.

15) In order to get in the habit of saving, personal financial advisors suggest that you save first and wait to pay off any debts until you've accumulated at least $10,000 in cash, savings accounts, CDs, and other liquid assets.

16) It is usually better to use any money left after paying monthly bills to pay off debts that carry high interest rates rather than putting that money into a savings account.

17) Financial planners regularly suggest that you borrow money to pay for large purchases.

18) The best way to save money is to pay yourself first.

19) Most financial experts will tell you to save about one month's earnings for contingency purposes.

20) Borrowing money for ordinary expenses is a necessary part of life.

21) Your big-screen HDTV would be listed as an asset on your personal balance sheet. However, the loan you took out to buy the TV would be listed as a personal liability.

22) Listing all of your personal assets is the first step in preparing your own income statement.

23) Tracking business and personal spending by categories is an important technique to control expenditures.

24) Your personal budget is the same thing as your personal income statement.

25) Financial planners encourage individuals to borrow only to cover immediate expenses.

26) For individuals, budgets are usually more trouble than they are worth.

27) A good way to save money is to spend all of your regular income, but have a strict rule to put any money from unexpected or unusual sources (such as overtime pay, bonuses, gifts, gambling payouts, or contest prizes) into a savings account.

28) You should never borrow to cover regular expenses, but it makes perfectly good sense to use credit to cover unexpected expenses such as car or home repairs.

29) Serena is attending her local community college with the goal of getting a good job someday. She knows that financial planning begins first with making money.

30) Luke wants to get better control of his personal finances. He should begin by setting up a personal balance sheet and a personal income statement.

31) Even though they are in debt, most of today's college graduates are capital-rich.

32) Most people find it relatively easy to live frugally.

33) In order to accumulate enough wealth to get started toward achieving their goals, many people have to make significant sacrifices in their standard of living for several years.

34) Once they've accumulated enough money, buying a low-priced home is often a good investment for young adults.

35) Personal financial planners recommend renting a home, rather than incurring the cost of buying a home.

36) Before getting married, a couple should discuss and agree upon a financial strategy.

37) After marriage, one great financial strategy is to live on one income and to save the other.

38) If possible, it is almost always better to buy a single home rather than an attached home.

39) One drawback to buying a home compared to renting is that your monthly mortgage payments will increase, while rental payments are fixed.

40) When you buy a home, the monthly payments for the home may remain relatively fixed, but your payments for taxes and utilities are likely to increase.

41) Interest paid on a home loan is deductible from taxable income.

42) The federal government discourages home ownership through high tax rates.

43) The three keys that have the greatest influence on how the value of your home increases over time are: (1) size (square feet), (2) age, and (3) design features.

44) From an investment viewpoint, it is a good idea to buy a large home in an area of town where homes are less expensive.

45) Historically, the best place to invest has been in U.S. government savings bonds.

46) Most financial experts believe that the stock market is likely to grow more slowly in the future than it did in the last 50 years.

47) Though stock prices do sometimes go down, investing in the stock market has generally provided very attractive returns over the long run.

48) A contrarian would advise you to buy stock when stock prices are falling and most other people are selling.

49) Funds invested in savings accounts and certificates of deposit (CDs) have traditionally outperformed stocks as a means of generating long-term financial gains.

50) A person using a credit card to make a purchase may end up paying much more than if he or she had paid cash.

51) A good manager of personal finances, like a good businessperson, uses borrowed funds whenever possible.

52) If you use a credit card to make purchases, you should make a strong effort to pay off the balance in full each month.

53) Credit cards can be used to categorize and track your purchases.

54) Excessive debt is as much a problem of young consumers as it is of other age groups.

55) More than half of all debtors seeking help at the National Foundation for Credit were between the ages of 18 and 32.

56) One danger of a credit card is that consumers often buy items they wouldn't normally buy if they had to pay cash.

57) Accumulating money through savings allows you to participate in the growth of a capitalist society.

58) Buying an attached home and living in one side, while renting the other side, generally turns out to be more trouble than it is worth, since you have to satisfy not only your own needs, but also the needs of the renters.

59) When young people decide to buy a house, the best approach is to buy a house in an inexpensive part of town so they can get a larger house for less money.

60) House payments tend to rise at a faster rate than do rent payments on a similar sized house.

61) The tax shelter offered by home ownership increases the overall cost of owning your home.

62) Investors who desire a very stable and predictable income from their investments (such as people who are nearing retirement) would be reluctant to invest heavily in the stock market.

63) During the first few years of a home mortgage, almost all the payments go for interest on the loan. This high interest is a reason it is better for young people to rent rather than buy.

64) One of the keys to financial success is never to apply for a credit card.

65) The best strategy to follow in using credit cards is to pay only the minimum amount required each month.

66) If you are in the 25 percent tax bracket and your home mortgage interest is $1,000 per month, then your after-tax mortgage interest cost is $750 per month.

67) Shulei graduated from college two years ago. She has already accumulated enough money in her savings account and money market to meet her basic needs, and now wants to begin investing a portion of each paycheck to earn a high rate of return over the long run. Shulei's best choice as a young woman would be to put money into a bank savings account regularly.

68) During a recent drop in the stock market, Damon took the opportunity to buy a wide variety of stocks even though many of his friends and relatives were selling. His investment strategy appears to be consistent with contrarian views.

69) Term life insurance is a combination insurance plan and savings plan.

70) Term life insurance offers pure insurance with no savings feature.

71) The younger you are when you buy term life insurance, the lower the premiums tend to be.

72) Multiyear level-premium insurance is a form of term insurance with fixed premiums for the life of the policy.

73) Whole life insurance premiums provide the insured with both pure insurance and a savings plan.

74) Unlike whole life policies, a universal life insurance policy typically invests part of the premium in very aggressive, high-risk assets.

75) The death benefits of a variable life insurance policy vary depending upon the performance of the investment.

76) An annuity is a contract to make regular payments to a person for life or for a fixed period.

77) Fixed annuities have become much more popular than variable annuities.

78) Variable annuities offer investment choices identical to mutual funds.

79) People who have health insurance seldom need disability insurance.

80) If you are relatively healthy, there is no real reason to buy disability insurance.

81) Everything else constant, the higher the deductible on your car insurance policy, the higher the premium for your car insurance.

82) Many employers offer health insurance coverage for their full-time employees.

83) Disability insurance provides a relatively low-cost way of protecting against lost income due to an accident or illness that prevents you from working for an extended period of time.

84) Due to the high cost of the insurance premiums, many people have found that it makes financial sense to carry medical insurance only if their employer provides it.

85) The chances of becoming disabled at an early age are much higher than your chances of dying from an accident.

86) Guaranteed replacement cost insurance coverage provides the insured with the depreciated cost of assets.

87) Most homeowner's insurance policies do not cover certain types of expensive items unless you purchase a rider for the additional coverage.

88) An umbrella policy is an inexpensive policy that provides financial protection only in the event of clearly defined major catastrophes such as hurricanes or earthquakes—events which are referred to in the insurance industry as "rainy days."

89) One strategy used to lower car insurance premiums is to choose a policy with a large deductible.

90) Mike is young and newly married. He and his wife plan to have children in the near future, and Mike wants to get a significant amount of life insurance coverage at as low a cost as possible. He would be well advised to purchase a term insurance policy.

91) Casey wants to obtain life insurance at the lowest possible cost, but is leery of term insurance because she has heard the premiums tend to go up every few years. One way for her to avoid this concern would be to purchase multiyear level-premium insurance.

92) Cynthia is trying to find a way to reduce her car insurance premium. She would be well advised to decrease her insurance policy's deductible.

93) Joe wants life insurance to provide benefits for his family if he were to die. He also wants part of his premium to go into a savings plan that he will need if he lives to retirement age. His best strategy to achieve insurance and savings with one premium is term insurance.

94) As a recent college graduate just starting out on his own, Tyrone needs health, disability, home, and auto insurance. He may be able to save money by obtaining an umbrella policy.

95) About half of the U.S. population accumulates enough money to afford a comfortable retirement.

96) About 35% of U.S. households do not have a retirement account.

97) Social Security is the term used to describe the Old Age, Survivors, and Disability Insurance Program.

98) One problem with the Social Security system is that the number of people retiring and living longer is declining dramatically.

99) It is likely that young adults today will benefit from the recent trend in the Social Security system to increase benefits and expand the cost-of-living adjustments.

100) The number of workers paying into Social Security per retired individual receiving benefits is decreasing.

101) Regardless of potential changes, you can count on Social Security to provide you with a comfortable retirement.

102) An individual retirement account (IRA) is a tax-deferred investment plan that encourages workers to save for retirement.

103) A traditional IRA affords workers who qualify the opportunity to deduct from their reported income the money they put into a qualified retirement account.

104) Both the Roth and traditional IRA allow individuals to put as much money as they want into their retirement account.

105) A Roth IRA allows workers who qualify to get an up-front deduction for any money they invest in the plan.

106) An advantage of both traditional and Roth IRAs is that both the income invested and the earnings from these investments are never taxed.

107) The benefit of opening an IRA while you're young is the compounding of the money invested tax-free over your working lifetime.

108) Funds deposited into an IRA cannot be withdrawn until you retire.

109) In order to qualify as a tax shelter, IRA saving plans must be invested in mutual funds.

110) Withdrawals from an IRA prior to age 59½ generally are subject to taxes and a penalty.

111) Earnings from traditional IRA investments are taxable at the time they are earned.

112) A simple IRA, which allows workers to contribute larger amounts than a regular IRA, is available to employees who work for firms with fewer than 100 employees.

113) MyRA is a Roth IRA-type retirement savings plan for low and middle-income individuals.

114) The money a worker invests in a 401(k) retirement account reduces that worker's present taxable income.

115) Employers often match part of the contribution of their employees into a 401(k) retirement plan.

116) Only large corporations with at least 500 employees can offer their employees a simple 401(k) retirement plan that allows for greater contribution maximums.

117) Many small-business owners invest in 401(k) plans for their retirement.

118) The best way to invest in a 401(k) plan is to use all of the money to buy stock in the company where you work.

119) Keogh plans are intended to help small business owners save for retirement.

120) Keogh plans are most useful for stockholders of major corporations who earn most of their income from dividends rather than wages or salaries.

121) Employees of small businesses can contribute to a Keogh plan.

122) IRAs, 401(k), and Keogh plans all include incentives to encourage saving for retirement.

123) Earnings of Keogh plans are not taxed until the funds are withdrawn from the retirement account.

124) The best financial planners are actually insurance salespeople.

125) If you have minor children, the first step in estate planning is to select their guardian.

126) The person who is named in your will to assemble the assets in your estate, handle taxes, and distribute the assets is called your proxy.

127) The reason you would prepare a durable power of attorney is to make sure that someone was named to take over your finances if you become incapacitated.

128) Recent demographic trends suggest that the financial condition of the Social Security program soon will begin to improve.

129) An individual retirement account (IRA) is a tax-deferred investment plan designed to encourage workers to save for retirement.

130) IRA funds are not available for withdrawal until you are 59½ years old.

131) A person in the 25 percent tax bracket who invests $1,000 in a traditional IRA immediately postpones $250 in taxes.

132) Bree expects to be in a much higher tax bracket when she retires than she is now, so she wants to invest in a retirement account in which her withdrawals will be tax-free. One way for her to achieve this is through a traditional IRA.

133) Ricky wants to decrease his current taxable income and save for retirement. He should consider a traditional IRA.

134) Elizabeth has just opened a 401(k) retirement plan. The money she invests in this plan will reduce her present taxable income.

135) Carlton owns a small sports memorabilia shop. He can participate in a Keogh plan to save for his retirement.

136) Ryan is in need of advice regarding investments, taxes, and insurance for himself and his family. He would be well advised to seek the advice of an insurance salesperson.

137) Arlene has just made out a will. The will names her brother Aaron as the executor. This means that Aaron will have the authority to take over Arlene's finances if she becomes incapacitated.

138) Financial planning begins with

A) spending money wisely.

B) earning money.

C) insuring your assets against an unexpected loss.

D) saving money.

139) Throughout history an investment in ________ has yielded an excellent return, regardless of the state of the economy or political changes.

A) antiques

B) a good education

C) government bonds

D) savings accounts

140) The only way to accumulate enough money to do all of the things you want to do late in life is to

A) take an inventory of your financial assets.

B) make more than you spend.

C) avoid bankruptcy.

D) satisfy the demands of your creditors.

141) Which of the following would be included as an asset in the preparation of a personal balance sheet?

A) credit-card debt

B) home mortgage

C) your salary from a part-time job

D) your computer

142) In preparing an income statement for yourself, the wages from your job would be shown as

A) your revenue.

B) an expense.

C) an asset.

D) your owner's equity.

143) When you prepare your personal balance sheet, remember that your ________ is equal to your total assets minus any liabilities you have.

A) net income

B) net worth

C) tax base

D) cash equivalent value

144) The first step you would take to get control of your personal finances is to

A) keep track of all your expenses.

B) prepare a budget.

C) take inventory of your assets.

D) start a savings program.

145) Personal financial planners often encourage their clients to write down every single penny they spend each day. The main purpose of this is to

A) focus attention on the spending levels for each item.

B) eliminate the need for accountants.

C) do a better job of tax planning.

D) accumulate data needed to prepare a personal balance sheet.

146) A(n) ________ is a personal financial plan that allows you to take control of future spending.

A) expense tracker

B) revenue sheet

C) budget

D) debt manager

147) Budgets are

A) useful for businesses, but too restrictive to be used by individuals or households.

B) a financial plan of projected revenues and expenses.

C) just another name for cash flow statements.

D) only helpful to people who earn more than $50,000 per year.

148) Preparing and living with a personal budget is

A) not necessary if you have sufficient income.

B) similar to activities needed to handle the finances of a small business.

C) often more trouble than the benefits justify.

D) an excellent technique to prepare for a career in accounting.

149) A financial planner would encourage you to borrow money

A) only to buy assets that are likely to generate income or increase in value.

B) to pay your day-to-day expenses and then to invest your income.

C) only when facing bankruptcy.

D) in order to reduce your debt level.

150) Many financial experts advise that you set up a contingency fund equal to about ________ of your earnings and keep these funds in highly liquid accounts.

A) two months

B) six months

C) one year

D) three years

151) Once you have set up a budget and handled your ordinary expenses, the first thing to do with any extra money you have is to

A) start a savings plan.

B) pay off your debts.

C) start your own business.

D) spend it on the things you would like but that aren't included in your budget.

152) Which of the following accounting statements would assist an individual in taking inventory of personal assets and liabilities?

A) income statement

B) balance sheet

C) budget

D) statement of cash flows

153) Young married couples that find themselves running out of money at the end of the month might be well advised to

A) keep track of all of their expenses.

B) keep track of cash spent on major purchases.

C) prepare a balance sheet.

D) apply for additional credit cards.

154) The best way to save money is to

A) pay yourself first by taking out money for savings from each paycheck before deciding what to do with the remaining money.

B) start your own business designed to create business tax deductions.

C) prepare a balance sheet.

D) pay yourself last.

155) Alvin's credit card charges him 18% interest on his unpaid balance. His bank is offering him 1% interest on a savings account. The first thing Alvin should do with any extra money he may have is to

A) invest in the stock market.

B) open a savings account at the bank.

C) pre-pay for necessities, like rent and utilities.

D) pay off the credit card balance.

156) Recent college graduates, Jason and Elizabeth, are newlyweds. Although they acquired a significant amount of debt during college, both recently got good-paying jobs and appear to have promising careers. Given their situation, down the road Jason and Elizabeth

A) are almost certain to be able to retire comfortably when the time comes, given the high level of income they are likely to earn.

B) could be able to retire comfortably, but doing so will take planning and discipline on their part.

C) have little chance of enjoying a comfortable retirement because the college debts will take years to repay and become a major burden.

D) will probably find that Social Security will provide an adequate retirement, but that they may need to supplement this with a modest pension if they really want to enjoy the fine life in their golden years.

157) Brad and Tori are experiencing marriage difficulties regarding money. One technique to help them control and forecast their future financial situation, as well as allow them to achieve their financial goals, would be to prepare a(n)

A) income statement.

B) balance sheet.

C) budget.

D) asset inventory.

158) Dani has prepared her personal balance sheet and found that her total assets are $54,000 and her total liabilities (largely college loans) are $48,000. What does this show for Dani?

A) Her net income is only $6,000.

B) Her net worth is $6,000.

C) Her cash flow will not be sufficient to repay her college loans.

D) Her balance sheet is out of balance.

159) Denny plans to start his business program this semester at a local university. Denny will likely find that

A) his time would be better spent pursuing a career after high school.

B) he will have more fun and excitement than his friends that don't attend college.

C) his choice of a business major will virtually guarantee him a comfortable retirement income if he sticks with it.

D) his investment in his education will be important in his future.

160) The path to success in a capitalist system is to

A) spend more on capital goods than you do on consumer goods.

B) have access to debt markets.

C) have money to invest.

D) work hard with the goal of moving up in the management of your employer.

161) In order to accumulate capital, young adults are likely to have to

A) accept a lifestyle that sacrifices some amenities.

B) live beyond their means.

C) rely on credit cards for basic purchases in order to conserve on cash.

D) borrow funds from a bank.

162) The key to generating enough capital for investment for many individuals is to

A) obtain as many credit cards as possible in order to maximize spending power.

B) live frugally.

C) borrow money from friends and family.

D) buy only high-quality consumer goods.

163) Investing in a home is generally considered a

A) poor choice when compared to renting.

B) wise investment.

C) luxury that should be postponed as long as possible.

D) good decision, but only if you've saved enough to pay in full with cash.

164) Which of the following is a benefit of buying a home rather than renting?

A) Real estate taxes and utilities will be fixed.

B) It reduces the need to carry insurance.

C) Paying for a home is a good way to force yourself to save.

D) The entire purchase price of the home can be deducted from taxable income, but this deduction must be spread over at least 15 years.

165) Buying ________ is often an attractive strategy for young couples, since they can live in one unit and rent the other half to supplement their income, while taking tax deductions on interest and real estate taxes.

A) a semiprivate housing unit

B) a ranch apartment

C) a biplex

D) attached homes

166) The goal of accumulating capital is to allow an individual to

A) buy the things that satisfy present wants and needs.

B) have funds available to invest.

C) buy now, pay later.

D) establish a good credit rating.

167) Real estate professionals agree that the key to getting the optimum return on the purchase of a home is

A) construction quality.

B) location.

C) tax advantages.

D) design features.

168) About ________ of all U.S. households own stock in corporations.

A) 16 percent

B) 30 percent

C) half

D) three-fourths

169) According to contrarians, the big decline in the stock market during the Great Recession was

A) a great opportunity to invest in stocks.

B) proof that the stock market was not as sound an investment as most people thought.

C) a sign that more government regulation was needed to prevent big losses.

D) proof that the future of capitalism should rely more on small, unincorporated businesses rather than big corporations.

170) Real estate taxes and mortgage interest payments are both

A) expenses of home ownership on which the government levies a tax.

B) tax deductible for renters.

C) tax deductible for homeowners.

D) taxable income for renters and homeowners.

171) The total cost of purchasing a sound system or HDTV with cash is ________ the cost when using credit cards to finance the same assets.

A) the same as

B) greater than

C) less than

D) less stable than

172) A benefit of using credit cards is that they

A) have lower interest rates than other forms of credit.

B) provide a record that makes it possible to keep track of purchases easily.

C) help consumers be more disciplined when it comes to spending decisions.

D) allow the consumer to spread out payments and reduce overall costs.

173) When purchasing with a credit card, it's important to remember that ________ if you do not pay the balance in full within a stated time period.

A) the credit limit is reduced

B) no returns are allowed

C) interest is charged on the remaining balance

D) discounts are available

174) One disadvantage of having credit cards for personal use is that

A) they offer no protection if they are stolen.

B) they are less convenient than other forms of credit.

C) many companies have a policy that prevents employees from having both personal credit cards and credit cards for business use.

D) they can make it easy to pile up a large amount of debt quickly.

175) Which of the following is a benefit unique to buying two attached homes, as opposed to the purchase of a single-family home?

A) Real estate taxes are tax deductible.

B) The rent income will help make the mortgage payment.

C) Mortgage interest payments are tax deductible.

D) The value of the home may increase over time.

176) The factor likely to have the greatest impact on how fast the value of a home appreciates over time is the

A) interest rate on the mortgage.

B) style and design features built into the home.

C) location of the home.

D) size of the home.

177) Mortgage interest payments and property taxes are

A) tax deductible for homeowners.

B) expenses that make home ownership less attractive than renting.

C) both likely to increase each year at a faster rate than your income.

D) both likely to decline the longer you own the home.

178) The greatest return over a period of several years is likely to be earned by investing in a

A) small home in a great location.

B) savings account in a bank.

C) large home in a deteriorating neighborhood.

D) moderate size home in a rural setting.

179) For a young person, one of the worst places to invest money for the long-term is:

A) a duplex.

B) a bank savings account.

C) a home.

D) the stock market.

180) From a financial viewpoint, it is best to buy a

A) large home in a good neighborhood.

B) very large home in a neighborhood where homes are relatively inexpensive.

C) medium-sized home in a neighborhood where homes are the least expensive.

D) small home in an excellent neighborhood.

181) Which of the following is true of credit cards?

A) They are a cheaper way to finance your education.

B) They are an efficient way to keep track of purchases.

C) They are an effective way of controlling the amount of debt the consumer incurs.

D) They are less convenient than carrying cash or writing a check.

182) Which of the following is an advantage of home ownership?

A) Home ownership is a good way to control the costs of utilities, maintenance, and insurance.

B) Mortgage interest and real estate taxes are tax deductible.

C) Money invested in a house is a highly liquid investment.

D) Home ownership provides a guaranteed rate of return that is more stable than the return earned by investing in the stock market.

183) Which of the following is the best advice about the use of credit cards?

A) Except for very small purchases, credit cards should always be used instead of cash.

B) The best approach to credit cards is never even to apply for one.

C) Credit cards are an important part of a personal financial system, but pay the balance in full during the period when no interest is charged.

D) Credit cards are most useful when making large purchases (over $500), because they allow you to spread out the payments to fit into your budget.

184) Dmitry emigrated to the United States from a formerly communist country. He is looking to you for advice on how to succeed in a capitalist system. He would be well advised to

A) find a job and live frugally in order to save money to invest.

B) rely heavily on government assistance programs to maintain a relatively comfortable life style.

C) get a credit card, even if it has a very low credit limit, and use it to establish a good credit rating.

D) follow the buy now, pay later rule of personal finance.

185) Joe and Megan are newly married college graduates. Both have jobs with bright futures. One strategy that they could use to accumulate capital for investment purposes, would be to

A) borrow heavily to buy a house.

B) use their credit cards to acquire assets while prices are relatively low.

C) live on just one of their incomes and save the other.

D) quit their jobs and return to school to earn graduate degrees.

186) During her sophomore year in college Carrie received an email from First Bank telling her she was eligible for a credit card along with a free gift. Carrie was excited until she remembered that any cash she has usually "burns a hole" in her pocket, and she spends it quickly. Carrie would likely not be successful with a credit card because

A) she has difficulty in getting access to credit.

B) she would use it to make impulse purchases that she could not afford.

C) she would not spend up to the limit immediately.

D) her dad would not agree to cosign for her.

187) Given a 25% tax bracket, the after-tax cost of a house mortgage interest payment of $1,000 would be:

A) $ 250.

B) $ 750.

C) $1,000.

D) $1,250.

188) Dylan and Wyatt are good friends who have similar jobs that pay them well. Both have established budgets that allow them to invest several hundred dollars each month. Dylan has a strategy of putting most of his money in bank CDs and a savings account. Wyatt has opted for a strategy of investing in the stock market. According to the evidence of the past 50 years, it is likely that over the long run

A) Dylan and Wyatt will experience very similar rates of return.

B) Dylan will experience a significantly higher return than Wyatt.

C) Wyatt will experience a significantly higher return on his investments than Dylan, but will also experience more ups and downs over the years.

D) Dylan will experience a slightly higher return, but Wyatt's return will be more stable and predictable.

189) Nancy has been following the stock market, and has noticed that it has been declining for the last several weeks. While many of her friends and family have sold stock, Nancy looks at this situation as a good opportunity to buy. Nancy's views are consistent with the ________ approach to investing in the stock market.

A) contrarian

B) revisionist

C) arbitrarian

D) negativist

190) Quinn is excited about getting her first credit card. However, she should be aware of the fact that

A) credit cards are no longer accepted in many places as a valid source of credit.

B) credit cards require that at least 25% of the balance be paid each month.

C) there will be a finance charge even if Hannah pays her entire credit card balance in full and on time.

D) the convenience of credit cards can lead to excessive debt.

191) Patrick is in the habit of using his credit card for expenditures made on business trips. The most likely reason he does this is to

A) lower his business expenses.

B) take a deduction on the interest he pays on his credit card balance.

C) pad his expense account.

D) keep track of his purchases.

192) ________ life insurance offers pure insurance protection for a given period of time.

A) Term

B) Temporary

C) Managed premium

D) Equity-based

193) One disadvantage of term life insurance is that

A) when renewed it usually is at a higher premium.

B) the risk of lost income from the death of the insured is shifted to the insurance company.

C) it is pure insurance protection for a given time period.

D) it is generally not available to young people.

194) Which of the following is a form of term insurance that guarantees fixed premiums for the life of the policy?

A) universal life insurance

B) planned annuity life insurance

C) declining coverage, fixed payment insurance

D) multiyear level-premium insurance

195) ________ is a form of life insurance that provides both a savings plan and pure insurance coverage.

A) Term life insurance

B) Growth-centered life insurance

C) Whole life insurance

D) Multiyear level-premium insurance

196) Which of the following is a form of whole life insurance that provides a death benefit that varies with the performance of the investments of the insurance company?

A) flexible whole life insurance

B) variable life insurance

C) adjustable benefit insurance

D) multiyear level-premium insurance

197) A contract that calls for regular payments to an individual for life or for a fixed period of time is called a(n)

A) annuity.

B) fixed dividend plan.

C) mutual fund.

D) level premium agreement.

198) Your chances of becoming disabled at an early age are ________ than your chance of dying from an accident.

A) the same

B) much less

C) much greater

D) slightly less

199) Purchasing ________ insurance is a relatively low cost way of protecting yourself from lost income due to an accident or prolonged illness.

A) flexible term

B) health

C) contingent annuity

D) disability

200) ________ insurance provides protection from the cost of medical care for illnesses and injuries.

A) Term

B) Health

C) Renters

D) Homeowner's

201) ________ insurance provides protection from losses of furniture, appliances, and clothes.

A) Term

B) Health

C) Disability

D) Homeowner's

202) A homeowner's insurance policy that includes a provision for ________ would provide the homeowner with enough cash to replace the items lost with new items.

A) actual book value protection

B) cash in lieu of coverage

C) guaranteed replacement cost

D) full collateral damage protection

203) One strategy to lower the cost of automobile insurance is to purchase a policy with a

A) low deductible.

B) high deductible.

C) liability coverage rider.

D) health coverage rider.

204) A(n) ________ can be added to a homeowner's insurance policy that provides for coverage at a reasonable cost for items that the policy otherwise would not cover.

A) rider

B) opener

C) extender

D) modifier

205) Many insurance providers offer ________ policies that give a discount to families who buy several types of insurance coverage from them.

A) umbrella

B) universal

C) multi-use

D) rider-enhanced

206) A comparison of variable life insurance to a standard whole life plan would reveal that

A) they are essentially identical.

B) variable life offers only pure insurance but does so at a very low cost, while a standard whole life plan costs more but offers both insurance and a savings plan.

C) both a standard whole life and variable life insurance offer both life insurance and savings, but variable life invests the savings more aggressively than whole life.

D) variable life is only available to people who want at least $1 million in coverage—and are willing to pay for it.

207) A common purpose of a rider added to a homeowner's policy is to

A) provide coverage for items that the standard policy does not cover.

B) limit the insurance company's liability for certain types of losses.

C) waive the provision that requires the owners to get a health exam.

D) allow the policy holder to obtain health, disability, and auto insurance under their homeowner's plan.

208) Which of the following deductible levels would result in the lowest premium for automobile insurance?

A) $ 200

B) $ 500

C) $ 750

D) $1,000

209) Nate and Audrey are married and have careers in business. If one of the two were to die, there would be a sudden drop in income. To provide protection from this risk the couple should purchase

A) disability insurance.

B) life insurance.

C) health insurance.

D) car insurance.

210) Mateo and Maya have decided to take out an umbrella policy from an insurance company. The main reason they would probably want to do this would be to

A) protect against major disasters, which are known as "rainy days."

B) ensure that any children they have will be guaranteed the right to buy insurance at some future date.

C) save money by having one company provide a variety of different types of coverage.

D) take out one life insurance policy that covers both of them.

211) Although he has a good health insurance policy, Shaun is concerned that a serious accident or lengthy illness would still be devastating to his family because of the lost income and other expenses not covered by his policy. Shaun would probably be interested in obtaining

A) disability insurance.

B) a premium waiver provision.

C) health extension coverage.

D) a rider on his homeowner's policy.

212) Henry and Mila are newlyweds and received some very expensive wedding gifts, including some beautiful silverware and jewelry. Their homeowner's policy

A) automatically covers these items.

B) does not automatically cover such items and they must take out a separate policy specifically for those types of items.

C) does not automatically cover these items, but a rider can be used to add this coverage.

D) automatically covers these items from theft, but not from damage due to fire, explosion, or vandalism.

213) Almost ________ U.S. adults has accumulated enough money by retirement age to live comfortably.

A) 1 in 10

B) 1 in 4

C) 1 in 2

D) 8 in 10

214) The Social Security program was established in

A) 1889.

B) 1935.

C) 1953.

D) 1976.

215) The number of workers paying into Social Security for each retiree receiving Social Security benefits is

A) fixed by law.

B) increasing.

C) decreasing.

D) not fixed by law, but has remained relatively constant for several decades.

216) In the future, the Social Security system is likely to

A) raise taxes and reduce benefits.

B) increase cost-of-living adjustments.

C) establish a younger retirement age.

D) adequately provide for all the retirement income the typical retiree needs to live comfortably.

217) Trends in the number of workers contributing to the Social Security system and the number of workers drawing benefits from the system suggest that future generations will

A) have more frequent cost-of-living adjustments.

B) see significant improvements in the level of benefits.

C) face a later retirement age in order to qualify for full Social Security benefits.

D) not be allowed to invest in private pension plans.

218) The tax-deferred investment plan that allows employees to save part of their income for retirement is called a(n)

A) 60/40 plan.

B) individual retirement account (IRA).

C) 704(i) plan.

D) Keogh plan.

219) The earnings on a traditional IRA are

A) never taxed, in order to encourage people to invest for their retirement.

B) tax-free until the Social Security system is improved.

C) taxed as income when they are withdrawn after retirement.

D) available to the investor without a penalty.

220) A Roth IRA offers employees an incentive to save for their retirement by

A) deferring taxes on income contributed to the IRA.

B) eliminating taxes on the withdrawals from the IRA.

C) eliminating taxes on the income contributed to the IRA.

D) allowing employers to match the employee's contribution to the IRA.

221) Investments in IRA accounts

A) are limited to money market funds and government bonds.

B) can be in stocks, bonds, mutual funds, or even precious metals.

C) are matched by the employer.

D) are taxed at the lowest individual tax rate regardless of the actual tax bracket of the investor.

222) One benefit of a simple IRA is that it allows

A) employees of small companies to save more than a regular IRA.

B) employees to invest in the corporate bonds of their employers.

C) business owners to use employee retirement funds to help finance their small business.

D) employees to withdraw funds from the IRA prior to retirement without penalty.

223) A retirement plan where employers often match part of an employee's contribution is known as a

A) simple IRA.

B) Roth IRA.

C) Keogh plan.

D) 401(k) plan.

224) Withdrawals from a traditional IRA prior to the age of 59½ are

A) tax deferred until you reach 65 years of age.

B) tax-free.

C) normally subject to a penalty and taxes on the income that is withdrawn from the IRA.

D) subject to a possible denial after review by the Internal Revenue Service.

225) The simple IRA plans allow employees of ________ companies to contribute larger amounts than the traditional IRA.

A) nonprofit

B) small

C) big

D) international

226) The tax-sheltered program to encourage self-employed people to accumulate retirement funds is called a(n)

A) 401(k) plan.

B) IRA plan.

C) COLA plan.

D) Keogh plan.

227) The people who assist families in developing a comprehensive program that covers investments, taxes, insurance, and retirement plans are called

A) insurance salespeople.

B) financial planners.

C) portfolio managers.

D) stockbrokers.

228) For someone with a family that includes young children, the first step in estate planning should be to

A) establish a will.

B) set up a trust fund for each child.

C) select a guardian for the children.

D) give each child his or her own savings account.

229) A ________ is a document that names a guardian for your children, states how you want your assets distributed, and names an executor to handle your estate when you die.

A) trust arrangement

B) durable power of attorney

C) proxy sheet

D) will

230) A(n) ________ is the person named in a will to assemble and value the assets of the deceased, handle tax matters, and distribute the assets.

A) executor

B) guardian

C) arbiter

D) intermediator

231) The earnings of a traditional individual retirement account (IRA) are

A) taxed at the time they are earned.

B) not taxed.

C) taxed when the funds are withdrawn.

D) subject to the double taxation of all dividends.

232) The biggest advantage of the Roth IRA is that

A) income contributed to the retirement plan is tax-free.

B) withdrawals from the retirement plan are tax-free.

C) taxes on the income contributed to the retirement plan are deferred until the funds are withdrawn.

D) withdrawals from the retirement plan are tax-deferred until the individual reaches 59½ years of age.

233) The increase in the number of retirement plans approved by the federal government likely indicates that

A) the government budget is approaching a surplus.

B) most people have faith in the troubled Social Security system.

C) Social Security cannot be counted on to provide an individual with ample funds for retirement.

D) as a nation our values have shifted so that we now enjoy the value of saving more and consuming less.

234) For workers who qualify, the earnings from income invested in a traditional IRA are

A) not taxed until the funds are withdrawn.

B) never taxed.

C) taxed at the time they are earned, but at the lowest individual rate.

D) taxed both at the time the money is earned and at the time the earnings are withdrawn.

235) A Keogh retirement plan would be used by a(n)

A) self-employed engineering consultant.

B) employee at a small manufacturing firm.

C) CEO of a major corporation.

D) librarian at a city library.

236) Financial planners encourage individuals to begin contributing funds into an IRA as early as possible. The major benefit of early and regular contributions is that

A) the earnings will be able to grow over a longer time span, which can result in major financial gains.

B) the financial planners will earn a commission for a longer period of time.

C) the inflation rate is very low now and will probably rise in the future, thus reducing the real value of future contributions.

D) the tax rates are likely to be lower in the future, so higher tax savings on contributions will be maximized by making the contributions now.

237) Which of the following is an indication that the government recognizes Social Security money will not provide you with ample funds for retirement?

A) The government has provided cost-of-living adjustments to Social Security recipients.

B) The government has invested the contributions in high-yielding investment securities.

C) The government has established incentives for workers to save their own money for retirement.

D) The government has passed legislation to require Social Security to maintain a balanced budget.

238) John is thinking about preparing a durable power of attorney. This indicates that he wants to

A) ensure that a single lawyer will be able to handle all of his legal needs.

B) declare that his current will is invalid.

C) eliminate the taxes on his estate when he dies.

D) appoint someone to take over his finances if he should become incapacitated.

239) As an employee of Marshall Manufacturing, Sherry has an opportunity to invest pre-tax income in an employer-sponsored retirement plan. Her employer will contribute 50 cents for every dollar that Sherry contributes to this fund. What is this an example of?

A) individual retirement account (IRA) plan

B) 401(k) plan

C) Keogh plan

D) restricted private investment (RPI) plan

240) Christian quit his job to open his own online consulting business. He now realizes that he no longer has the benefit of a corporate retirement system. He should consider investing in a(n)

A) simple 401(k) plan.

B) simple IRA plan.

C) automated trust account.

D) Keogh plan.

241) Thomas contributed $2,800 to a Roth IRA. He is currently in the 25% tax bracket. How will his contribution affect his income tax for the current year?

A) It will reduce the amount of taxes he owes in the current tax year by $700.

B) It will increase the amount of taxes he owes in the current year by $700.

C) It will reduce the amount of taxes he owes in the current year by $2,100.

D) It will have no effect on the amount of taxes he owes this year.

242) Terrence is in the 30% tax bracket. What is the after-tax cost of a $3,000 contribution to his traditional IRA account?

A) $900

B) $1,440

C) $2,100

D) zero

243) Claire has contributed to a Roth IRA for the last several years. She is now in her late sixties and has just retired. She plans to withdraw $3,000 this year from her Roth IRA. If she is in the 25 percent tax bracket, how much tax will she have to pay on her withdrawal?

A) $ 750

B) $1,000

C) $2,250

D) She will not owe any taxes on this withdrawal.

244) Connor is worried that his health may soon deteriorate to the point where he will no longer be able to take care of his own finances. One way he could ease his mind would be to

A) name an executor to his will.

B) prepare a durable power of attorney.

C) transfer title to all of his real estate and financial assets to a relative he trusts.

D) invest all of his financial assets into a Keogh plan.

245) What advice might a personal financial advisor offer a recent college graduate desiring to become financially secure?

246) What are the advantages of investing in a home?

247) Identify and discuss the six steps that individuals can take to gain control of their personal finances.

248) Compare the basic features of the traditional IRA and Roth IRA.

249) How does term insurance differ from whole life insurance? Describe the newer types of life insurance that have been offered in recent years.

250) Describe the major steps involved in estate planning.

Mini-Case

Ira Roth and Penny Weiss met and married in the early 2000s, during their days at State University. Both came from families with limited financial resources. They had to work at part-time jobs during school, and still needed student loans to help pay for their college education. Ira and Penny shared a strong work ethic and had a great desire to succeed financially and enjoy the good life.

Penny and Ira quickly experienced financial success. Ira used his finance degree and extensive knowledge of computers to obtain a high-paying job in banking. Penny, who cleaned homes to earn money during college, used her experience to start her own business. Her entrepreneurial spirit surprised Ira and their friends, and she built a successful cleaning business with a growing base of residential clients and even a few commercial customers. She soon had to hire several part-time employees to keep up with demand. With money rolling in, Ira and Penny began to live the good life, buying an expensive new car, a state-of-the-art home electronics, and expensive wardrobes. As busy as they were, and as hard as they both worked, they often found it easier to dine at a nice restaurant rather than fix meals at home.

When the Great Recession hit later in the decade, Ira was lucky enough to keep his job, but was forced to take a significant pay cut. The economic downturn forced some of the households and businesses that used Penny's company to cut back on professional cleanings, so her business suffered too. Soon the couple was struggling to pay the rent on their upscale apartment. They began relying on credit cards to cover expenses, but after a few months the credit limits on their cards had been reached. They fell behind in paying off their student loans and started getting some unpleasant calls from bill collectors. The stress and frustration led to arguments that began to threaten their personal relationship. With their personal finances out of control, Ira and Penny knew that they had to make changes to save not only their financial dreams, but also their marriage. However, they were at a loss as to where to start. Family members encouraged them to seek the advice of a financial planner. The couple reluctantly agreed that this was something they needed to do.

251) One of the first things the financial planner is likely to have them do would be to

A) open an individual retirement account (IRA).

B) borrow money to pay for their excess expenses.

C) take inventory of their financial position.

D) return to school and pursue a graduate degree.

252) By using the financial planner's advice, Penny and Ira were able to find ways to cut back on their spending and began to live more modestly. They began to have a few hundred dollars left over each month after handling their normal expenses. Which of the following is the first thing they should do with their extra money?

A) buy one nice household item that they will both enjoy as a reward for their thriftiness

B) pay off their debts, starting with the ones that have the highest finance costs

C) start a savings account at a local bank

D) buy bonds in a major corporation

253) As their situation began to improve, the financial adviser began discussing investment strategies with Penny and Ira. He suggested that they might want to invest in the stock market. He surprised them by saying that they should try to buy stocks during a major downturn in the market—just when most people were trying to sell. This statement suggests that the financial advisor agreed with the

A) ontrarian approach to investing.

B) concept of "buying short."

C) use of leverage in the stock market.

D) random walk theory of investment strategy.

254) Once Ira and Penny achieved a more solid financial foundation, they began to consider the purchase of a home. From a financial standpoint, a sound strategy for them to consider would be to

A) buy a large house in a modest neighborhood.

B) buy a house in one of the best areas of town, even if they can afford only a relatively small house.

C) buy a house that will minimize their total real estate taxes.

D) make sure that their house payments are less than the rent they were paying on their old apartment.

255) In saving for retirement, Penny could take advantage of the unique tax shelter offered only to small-business owners in a

A) 401(k) plan.

B) simple IRA plan.

C) Roth plan.

D) Keogh plan.