Deck 21: Integrating the Components of a Financial Plan

Question 1

Stocks of smaller firms are more volatile than those of larger firms and, therefore, are not as liquid.

Answer 1

True

Question 2

You should maintain just enough money in liquid assets to satisfy your liquidity needs so you can earn a higher return on your other assets.

Answer 2

True

Question 3

A budget is not intended to help you determine

A) how much money you will have at the end of each month.
B) a plan for spending all of your income on current needs.
C) how much you can allocate for the future.
D) how to prevent excessive spending to achieve financial goals.

Answer 3

a plan for spending all of your income on current needs.

Question 4

Which of the following best explains why some consumers have difficulty creating and sticking to a budget?

A) They don't make enough money.
B) They can't determine their cash outflows.
C) They spend excessively due to the need for immediate satisfaction.
D) They have difficulty making decisions about their financing.

Question 5

One disadvantage of investing in retirement accounts is that these funds are typically not very liquid.

Question 6

You may want to make additional loan payments to pay off your loan faster if the interest rate you are paying is higher than you could obtain from an investment.

Question 7

It is not possible to have too much insurance coverage.

Question 8

Budgeting decisions involve a tradeoff between spending today and allocating funds for the future.

Question 9

Budgeting allows you to forecast how much money you will have at the end of each month so that you can determine how much you will be able to invest in assets.

Question 10

You should make investments only after you have sufficient liquidity and sufficient insurance to protect your existing assets.

Question 11

Investing in stocks of large, well-known firms may enhance your liquidity, but typically these investments do not generate as high a return as stocks of smaller firms.

Question 12

To monitor your financial plan over time, it is important to store finance-related documents in a safe and accessible place.

Question 13

Personal financing can be beneficial because it allows you to make purchases now without the full amount of cash on hand.

Question 14

If you have enough liquidity, you should either obtain short-term financing or sell assets.

Question 15

Some retirement plans, such as Roth IRAs, are more liquid than other plans.

Question 16

Careful budgeting lets you spend more to achieve your short-term financial goals.

Question 17

The idea of having adequate insurance is to protect against events that could reduce your income or wealth.

Question 18

Loans restrict your spending or saving in future months and, therefore, can prevent you from achieving financial goals.

Question 19

The more you spend, the less money you will have available for liquidity purposes or to make investments or to save for retirement.

Question 20

There is a cost/benefit relationship for insurance protection which means you could be under-insured or over-insured.

Question 21

________ insurance provides financial support if you are injured and unable to work.

A) Liability
B) Disability
C) Compensatory
D) Medical reimbursement

Question 22

Your liquid assets do not include your

A) bank account balances.
B) money market securities.
C) certificates of deposit.
D) bond mutual funds.

Question 23

If you own personal property, which type of insurance are you most likely to budget for first?

A) Property and casualty insurance
B) Disability insurance
C) Health insurance
D) Flood insurance

Question 24

Which of the following assets will not increase your liquidity?

A) Checking account
B) Money market mutual fund
C) Cash in a traditional IRA
D) Cash in your wallet

Question 25

Purposes of managing liquidity include all of the following, except

A) determining how to keep the majority of your assets in liquid form.
B) having enough liquid assets to cover cash shortages.
C) maintaining adequate liquidity to avoid borrowing every time you need money.
D) maintaining just enough liquid assets to meet your needs.

Question 26

One disadvantage of financing is

A) interest payments are tax-deductible.
B) it allows you to make purchases without having adequate cash available.
C) it can cause budgeting problems.
D) it allows you to have more money in the future.

Question 27

Which of the following should you do first?

A) Invest in liquid assets
B) Pay off loans
C) Buy insurance
D) Make investments

Question 28

If you want periodic income, which of the following investments should you purchase?

A) Bonds
B) Stocks that pay cash dividends
C) Mutual funds
D) Both A and B are correct

Question 29

If you are a high-income individual, investing in ________ will reduce your tax bill.

A) stocks that pay cash dividends
B) growth stocks
C) municipal bonds
D) global mutual funds

Question 30

Which component of a financial plan affects all the other components of the financial plan?

A) Budgeting
B) Retirement planning
C) Investing
D) Estate planning

Question 31

One advantage of financing with a mortgage or using a home equity loan to make improvements on your home is that the interest payments are

A) at below market rates.
B) tax-deductible.
C) an asset.
D) the largest part of the payment.

Question 32

Personal financing can do all of the following, except

A) allow you to make purchases without having the full amount of cash on hand.
B) increase the amount of your assets.
C) prove useful for large purchases.
D) help in increasing your ability to save.

Question 33

The purpose of insurance is to protect your

A) liabilities and expenses.
B) assets and liabilities.
C) assets and net worth.
D) income and expenses.

Question 34

Monitoring financing includes evaluating all of the following balances, except

A) credit cards.
B) mortgage loans.
C) personal loans.
D) Roth IRA.

Question 35

Liquid assets usually generate

A) high returns.
B) returns like stocks.
C) returns like bonds.
D) lower returns.

Question 36

A home equity loan may do all of the following, except

A) give you a tax deduction if you itemize and use the proceeds for home improvement.
B) increase your current purchasing power.
C) increase your spending in the future.
D) prevent you from achieving your financial goals.

Question 37

Which of the following statements about insurance is not true?

A) It protects you from events that could reduce your wealth.
B) Money used to buy insurance is not available for investing.
C) You cannot have too much insurance.
D) All of the above are true about insurance.

Question 38

Which of the following statements is not true?

A) You should use all of your liquid assets to pay off loans.
B) Paying off loans is appropriate when the interest rate is relatively high.
C) Paying off loans is wise when the expected rate you will earn on investments is lower than the interest rate on the loan.
D) Loan payments you make restrict your spending and saving and may prevent you from achieving financial goals.

Question 39

Insurance protects against events that could reduce

A) your income.
B) your chances of an accident.
C) your wealth.
D) Both A and C are correct.

Question 40

Which of the following investments achieves the greatest diversification?

A) Stocks
B) Bonds
C) Mutual funds
D) Savings accounts

Question 41

Use the following two columns of items to answer the matching questions below:
insurance

A)a place to store your financial documents
B)a loan to purchase a home or condominium
C)amount saved for the future
D)asset and income protection

Question 42

Use the following two columns of items to answer the matching questions below:
retirement account

A)a place to store your financial documents
B)a loan to purchase a home or condominium
C)amount saved for the future
D)asset and income protection

Question 43

If your goal is to save for retirement, which of the following investments would you not consider?

A) 401(k) plan
B) Traditional IRA
C) Profit-sharing plan
D) Intermediate term certificate of deposit

Question 44

If you are on a limited fixed income, you should not invest in

A) bonds.
B) stocks that pay cash dividends.
C) growth stocks.
D) certificates of deposit.

Question 45

Financial documents should be

A) kept in a desk drawer in your home for easy access.
B) kept in a safety deposit box.
C) kept at your parents' house in their desk.
D) None of the above.

Question 46

________ should be kept in a safe at home or in a safety deposit box at a bank.

Question 47

Maintaining a "rainy day fund" is another way of making sure you have adequate

A) liquidity.
B) life insurance.
C) property insurance.
D) foul weather gear.

Question 48

Use the following two columns of items to answer the matching questions below:
safety deposit box

A)a place to store your financial documents
B)a loan to purchase a home or condominium
C)amount saved for the future
D)asset and income protection

Question 49

Compared to the stocks of larger firms, the stocks of smaller firms are

A) less volatile.
B) more volatile.
C) more liquid.
D) safer.

Question 50

As a result of the ________, the more you spend the less money you will have for liquidity or investments.

Question 51

Which of the following key documents should not be kept in a safety deposit box?

A) The only copy of your will
B) Your monthly bank statements
C) Original copies of life insurance policies
D) Deed to your house

Question 52

It is easier to make monthly loan payments if you select financing that has relatively ________ maturities.

Question 53

List five areas that affect your financial plan.

Question 54

You should invest in ________ if you need periodic income.

Question 55

By investing in stock of ________, ________ firms, you may enhance your liquidity because you will receive dividend income.

A) small; well-known
B) small; unknown
C) large; unknown
D) large; well-known

Question 56

What are three types of financing you have studied?

Question 57

Use the following two columns of items to answer the matching questions below:
mortgage loan

A)a place to store your financial documents
B)a loan to purchase a home or condominium
C)amount saved for the future
D)asset and income protection

Question 58

________ is a means of protecting your assets and income.

Question 59

Key documents for managing investments include all of the following, except

A) retirement plan balances.
B) account balance showing the market value of mutual funds.
C) insurance policies.
D) stock certificates.

Question 60

Name three ways to protect and maintain your wealth and assets and maintain your standard of living.

Question 61

One disadvantage of financing a new car with a 15-year home equity loan is

A) the interest is tax-deductible.
B) the interest is not tax-deductible.
C) you are mismatching the asset life with the term of the loan.
D) There are no disadvantages of borrowing on a home equity loan.

Question 62

As time passes, your financial position and goals are likely to change so you will need to revise your financial plan.

Question 63

You have a car loan at an 8% per year interest, school loans averaging 3% per year interest, credit card debt at 14% per year interest, and you are investing in a fund in which you are earning 7% per year. If you have excess cash flow of $200 per month, prioritize where you should make accelerated payments or invest the cash to optimize the financial result.

A) Credit card debt, car loan, investment, school loan
B) Investment, car loan, school loan, credit card debt
C) Investment, school loan, credit card debt, car loan
D) Always put excess cash to use in an investment.

Question 64

Which of the following does not increase your net worth?

A) An increase in your retirement balance
B) An increase in your home value
C) An increase in your mutual funds
D) The purchase of a new car

Question 65

To increase your net worth, you should

A) pay off bills.
B) spend your money carefully.
C) invest in appreciating assets.
D) Both A and C are correct.

Question 66

Use the following two columns of items to answer the matching questions below:
liquid assets

A)planning for insurance, investing, financing, and retirement
B)amounts owed that are due in less than one year
C)cash, checking account, and money market account
D)stocks, bonds and mutual funds
E)home, car, furniture
F)assets less liabilities

Question 67

Which of the following will not improve your net worth?

A) Increasing your income
B) Decreasing your expenses
C) Increasing your assets
D) Increasing your liabilities

Question 68

Financial statements include all of the following, except a(n)

A) balance sheet.
B) income statement.
C) cash flow statement.
D) asset allocation statement.

Question 69

You are 25 years old and saving for an early retirement. Assuming you have a high risk tolerance, which of the following can best help you reach your goal of retiring early?

A) Municipal bond fund
B) Money market securities
C) Common stock
D) Certificates of deposit

Question 70

You are single and live in a furnished apartment. Which of the following are you most likely to need?

A) Stockbroker
B) Life insurance
C) A will
D) A budget

Question 71

When you borrow on a mortgage to buy a new home, the lender will require you to purchase

A) life insurance.
B) homeowner's insurance.
C) disability insurance.
D) The lender will require you to purchase all three types of insurance to protect their loan.

Question 72

Key documents for managing personal financing include all, except

A) credit card statements.
B) retirement account balances.
C) personal loans, such as automobile loans.
D) mortgage loan agreement.

Question 73

If you save monthly for retirement, which of the following would be used to determine how much you would ultimately have in your retirement account?

A) Present value of an annuity
B) Future value of an annuity
C) Present value of $1
D) Standard deviation

Question 74

Even average people can accumulate wealth by

A) spending less than they make.
B) spending more than they make.
C) following hot investment tips found on the Internet.
D) playing the lottery.

Question 75

Most people set financial goals early in life and these goals rarely change.

Question 76

Which of the following investments generally reduces pre-tax income?

A) Stocks
B) Retirement account contributions
C) Mutual funds
D) Bonds

Question 77

What is the disadvantage of investments in retirement accounts compared to other investments?

A) Low returns
B) Low liquidity
C) High risk
D) Low risk

Question 78

To ensure adequate liquidity for a "rainy day fund", you should keep those funds in

A) high quality stocks.
B) municipal bonds to minimize federal taxes.
C) money market fund accounts.
D) gold since it can be a storehouse of value.

Question 79

In deciding how much to contribute to your retirement account, which of the following should you least consider?

A) Anticipated inheritances
B) Other financial goals
C) Liquidity needs
D) Current expenses

Question 80

Which of the following will increase your net worth over time?

A) Leasing a car
B) Renting a house
C) Buying a house
D) All of the above