Question 1

All of the following are TRUE about purchasing a home EXCEPT

Accepted Answer

A home is probably the largest purchase you will ever make in your life, and it is one of the best investments you can make. With a small up-front investment (your down payment) and relatively low borrowing costs, modest appreciation in the home's value can generate a large return on investment. This return benefits from the tax deductibility of home mortgage interest and capital gains tax relief at the point of sale. To top it off, you have a place to live and thus save any additional rental costs you would incur if you invested your money elsewhere. However, owning a home is not necessarily the best choice for everyone. The decision on when and how to buy a house and how much to spend must be made based on a careful examination of your ability to pay the mortgage and to cover the time and expense of maintenance and repair.

Question 2

Which statement is TRUE regarding mortgage interest rates?

Accepted Answer

Mortgage interest rates in the past decade have ranged from 5 to 10 percent per year, depending on the terms and creditworthiness of the borrower. Interest is the amount that the mortgage lender charges for your use of its money. Some mortgages lock in an interest rate for the full term of the loan, while others allow the rate to vary with market rates of interest. In low-interest-rate economic circumstances, it makes sense to lock in the mortgage at favorable low rates.

Question 3

Joanna is preparing to buy her first home by applying for a mortgage. All of the following are items lenders will look at to determine Joanna's ability and willingness to repay the loan EXCEPT

Accepted Answer

Several measures are commonly applied to assess your ability to repay the loan. In addition to requiring some work history, most lenders will apply two ratio tests. First, the ratio of your total mortgage payment (including principal, interest, property taxes, and homeowners insurance) to your gross monthly income can rarely be greater than 28 percent. Second, the ratio of your credit payments (including credit cards, car loan or lease payments, and mortgage payment) to your gross monthly income is limited to no more than 36 percent. Lenders also look at your willingness to repay the loan by looking at how you have managed debt obligations in the past. The primary source of this information is your credit report.

Question 4

Beth is a recent college graduate who has just entered the job market. She is trying to determine the right amount to invest in her retirement. Which factor of investing in retirement plans might convince her to invest a relatively higher amount?

Accepted Answer

A factor that may encourage Beth to invest more in her retirement plan is the fact that contributions to qualified retirement plans can be made before tax. This will allow her to deter the payment of taxes until she retires many years from now. Since earnings on retirement plan assets are tax deterred, they will significantly increase her ending accumulation in comparison with nonretirement vehicles, which require her to pay state and federal taxes on her earnings.

Question 5

If your employer offers a defined?contribution plan, this means that your employer promises

Accepted Answer

Defined benefit plans promise a specific benefit at retirement. More commonly, firms offer defined?contribution plans, where they promise to put a certain amount of money into the plan in your name every pay period.

Question 6

Michelle works for a company that offers a defined?contribution plan. What is a simple rule Michelle should follow regarding this plan?

Accepted Answer

Some simple rules Michelle should follow with respect to employer plans are: (1) If your employer offers you the opportunity to participate in a retirement plan, you should do so. (2) If your employer offers to match your contributions, you should contribute as much as is necessary to get the maximum match, if you can afford to. Every dollar that the employer matches is like getting a 100 percent return on your investment in the first year. (3) If your plan allows you to select your investment allocation, do not be too conservative in your choices if you still have many years until retirement.

Question 7

What is the difference between Roth IRAs and traditional IRAs?

Accepted Answer

Roth IRA contributions are taxable, but the withdrawals are tax-free. Traditional IRA contributions are deductible, but the withdrawals are taxable. Both types impose a penalty of 10 percent for withdrawal before the qualified retirement age of 59½, subject to a few exceptions.

Question 8

Choose the FALSE statement regarding Social Security.

Accepted Answer

Social Security is a public pension plan sponsored by the federal government and paid for by payroll taxes equally split between employers and employees. In addition to funding the retirement part of the plan, Social Security payroll taxes pay for Medicare insurance, disability insurance, and survivors benefits for the families of those who die prematurely. Social Security has traditionally been a pay-as-you-go program, with current payroll taxes going out to pay current retiree benefits. In the beginning, there were 17 workers for every retiree receiving benefits, but there are currently fewer than 4 workers per beneficiary. It is likely that the current system will be revised to help it balance.

Question 9

Aaron owns a car that he drives to work every day. Which statement is most likely TRUE regarding Aaron's experience with automobile insurance?

Accepted Answer

Since Aaron owns a car and drives regularly, he is required by law to purchase a minimum amount of auto liability insurance. If he is in a car accident, this coverage promises to pay claims against him for injuries to persons or property, as well as his own medical costs. If he wants to insure against damage to his own vehicle, he must purchase an additional type of coverage called auto physical damage insurance. This is only required for people who have car loans. The minimum insurance limits in most states are too low to cover typical claim levels. Good financial planning requires that people pay for insurance coverage with much higher limits. Auto physical damage insurance coverage is always subject to a deductible, or an amount that the person must pay before the insurance company will pay.

Question 10

Nora owns a house and has homeowners insurance. All of the following are things the insurance company will do for Nora EXCEPT

Accepted Answer

Homeowners insurance provides coverage for liability and property damage in Nora's home. For example, if someone slips and falls on her front steps and sues her for medical expenses, this insurance policy will pay the claim or defend her against the claim if the insurer thinks it is not justified. If her house and/or property is damaged in a fire, the insurance will pay for lost property and the costs of repair. However, unless she pays extra for replacement cost insurance, the insurance company is only obligated to pay her the depreciated value, which won't be enough to replace her belongings.

Question 11

Which statement is TRUE regarding insurance needs for people who rent apartments?

Accepted Answer

People who rent apartments should get renters insurance to cover them for liability on their premises and for damage to their personal property. Since they don't own the house, their landlords need to carry separate insurance for the building. Renters insurance is very cheap and is well worth the cost because the landlords' insurance will not pay anything to renters in the event that the building burns down and they lose all their belongings.

Question 12

Dawn's company provides her with a life insurance policy. Which statement is FALSE?

Accepted Answer

As compared with other types of insurance, the primary purpose of life insurance is to provide protection for others. Dawn's life insurance policy will pay a benefit to her designated beneficiary in the event that she dies during the coverage period. Her premium will depend on the face amount of the policy, her age and health, her habits, and the type of policy. It may also include an investment component.

Question 13

Which statement is accurate when comparing term life insurance and permanent life insurance?

Accepted Answer

Term insurance is usually for one year and the insurer promises to pay your designated beneficiary only the face amount of the policy in the event that you die during the year of coverage. Because the probability of dying at a young age is very small, premiums are fairly low for younger buyers, and it becomes more expensive at older ages. On the other hand, permanent insurance is designed to provide you with insurance protection over your lifetime. To provide this protection at a reasonable cost, premiums will include an investment component. Typically, in the early years of the policy, you are paying a lot more than the actual cost of providing the death protection. The insurer invests this extra cost, so that when you are older, the company has sufficient funds to cover your death risk.

Question 14

Pat has always worked for companies that provided her with health insurance. However, she has recently lost her job, so she needs to buy an individual insurance policy. What statement can she expect to be TRUE of this policy?

Accepted Answer

Pat can expect that her individual policy will be very expensive and subject to exclusions, high coinsurance (the percentage of each dollar of expenses that she pays out of pocket), and deductibles (the amount she must pay in full before the insurance pays). At a minimum, she should plan to get a policy that covers hospitalization and care for major disease or injury. This can be accomplished at a relatively low cost by contracting for a large deductible.

Question 15

Ashley's company provides her with three health insurance plan options. In the first option, the insurer simply pays for whatever covered medical costs she incurs, subject to the deductible and coinsurance. The second option is an HMO and the third option is a PPO. Which statement accurately describes Ashley's options?

Accepted Answer

In this scenario, the first option is a fee-for-service arrangement, in which the insurer simply pays for whatever covered medical costs Ashley incurs, subject to the deductible and coinsurance. The second and third options are managed care arrangements, in which the health insurer pays all Ashley's costs (subject sometimes to small co-pays for office visits), but the care she receives is determined by her physician, who has contracted with the health insurer and has incentives to control overall costs.

Question 16

All of the following are essential components of an estate plan EXCEPT

Accepted Answer

The essential components of an estate plan are your will, including a plan for guardianship of your children; minimization of taxes on your estate; and protection of estate assets. Estate planning is a complicated subject that is mired in legal issues. As such, appropriate design and implementation of an estate plan requires the assistance of a qualified professional.

Question 17

All of the following scenarios necessitate having a will EXCEPT

Accepted Answer

In these scenarios, Sarah, Francis, Walt, and Mandy would require wills, while Miranda would not. If you have a spouse and/or dependent children, if you have substantial assets, or if you have specific assets that you would like to give to certain individuals in the event of your death, you should have a will. Additionally, having a valid will makes the estate settlement simpler. If your children are left parentless, will provisions specify who will take guardianship of the children and direct funds for their support. On the other hand, if you are single with no assets or obligations, a will is probably not necessary yet.

Question 18

Briefly discuss the eight steps involved in financial planning.

Accepted Answer

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Question 19

Why is managing credit wisely one of the cornerstones of a financial plan?

Accepted Answer

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Question 20

How do gender differences create special financial planning concerns?

Accepted Answer

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Quiz 17: Personal Financial Planning and Legal and Regulatory Environment