Deck 6: Making Automobile and Housing Decisions

Question 1

The first step in making consumer purchase decisions is to

A) determine what you can afford.
B) research your alternatives.
C) determine what you need.
D) negotiate the best price.

Answer 1

determine what you need.

Question 2

Whenever you decide to buy something, you're also deciding not to

A) spend the money on something else.
B) save those funds.
C) invest those funds.
D) All of the choices are correct.

Answer 2

All of the choices are correct.

Question 3

Which of the following is not a luxury?

A) New convertible
B) Home theater system
C) Studio apartment
D) Spring break trip

Answer 3

Studio apartment

Question 4

Which of the following is not a necessity?

A) Groceries
B) Clothing
C) Existing car used for commute
D) Existing ski cabin

Question 5

Consumer purchase decisions should be directly related to your

A) future standard of living.
B) financial goals.
C) personal feelings.
D) aspirational lifestyle.

Question 6

When analyzing excess spending, it is recommended that you

A) ignore the small dollar item purchases.
B) ignore the large dollar item purchases.
C) look carefully at frequent small purchases that are easy to overlook.
D) only focus on the large purchases.

Question 7

Which of the following is a variable operating expense of an automobile?

A) Taxes
B) Insurance premiums
C) Finance charges
D) Gasoline

Question 8

What is depreciation?

A) The increase in the value of an asset due to wear and tear and other factors
B) The proportion of an asset that will not decline in value for any reason
C) The result of all expenses incurred while using an asset
D) The decline in the value of an asset over time as a result of normal wear and tear

Question 9

The dealer's invoice price is the price that the dealer

A) uses when selling the car to a buyer.
B) pays to purchase a new vehicle from the manufacturer.
C) uses as the beginning negotiating price with the buyer.
D) puts on a car after purchasing it from the manufacturer.

Question 10

When you buy a new car, you can afford to finance the car loan over a _______repayment term to reduce your overall interest expenses if your down payment is _______.

A) shorter; greater
B) longer; smaller
C) shorter; smaller
D) longer; greater

Question 11

Sarah has saved $3,000 for a down payment on a car. She has determined that she can afford a monthly payment up to $350 per month for an auto loan. Her credit union has quoted her a 6% rate on a 60-month car loan. What is the maximum amount Sarah can afford to finance? (Round to the nearest $100.)

A) $14,900
B) $17,900
C) $18,100
D) $21,100

Question 12

Extended warranties are also often called

A) unlimited warranties.
B) service contracts.
C) added services.
D) lifetime warranties.

Question 13

If a product does not come with an express warranty,

A) there is no warranty made by the seller with respect to the qualities of the vehicle being sold.
B) there is no warranty made by the seller with respect to the qualities of the vehicle being sold or the seller's obligation to repair or service the vehicle.
C) there is an implied warranty that it will work as intended.
D) it was sold "as is."

Question 14

When estimating the cost of automobile ownership, the only relevant costs are

A) the lease or loan payments.
B) the lease or loan payments and insurance.
C) the lease or loan payments, insurance, taxes, and registration.
D) the lease or loan payments, insurance, taxes, registration, fuel, and maintenance.

Question 15

The ______ on an auto loan is an example of a ____ expense of auto ownership.

A) loan payment; fixed
B) loan payment; variable
C) insurance requirement; variable
D) APR; variable

Question 16

Depreciation causes a(n) _____ in the value of an automobile and, therefore, a _____ in one's wealth.

A) increase; increase
B) decrease; decrease
C) decrease; increase
D) increase; decrease

Question 17

______ is a _______ expense of owning a car.

A) Gasoline; fixed
B) Gasoline; variable
C) Insurance; variable
D) Maintenance; fixed

Question 18

The total cost per mile of automobile ownership _____ with the _________.

A) increases; mileage driven
B) decreases; mileage driven
C) decreases; rise in fuel prices
D) increases; decline in fuel prices

Question 19

Jacob purchased a car for $14,000. If the loan amount is $12,000, term is 4 years, and the APR is 8%, what is his monthly loan payment (rounded to the nearest dollar)?

A) $293
B) $302
C) $342
D) $352

Question 20

If you drive 10,000 miles per year, your car gets 22 miles per gallon, and the average cost of gasoline is $4 per gallon, how much will you spend on gasoline per year (rounded to the nearest dollar)?

A) $455
B) $1,818
C) $2,500
D) $2,955

Question 21

Jacob purchased a car in January for $14,000. Given the following information, what is his total cost of ownership for the first year (rounded to the nearest $100)?
.Monthly loan payment: $293
.Gasoline: $1,818
.First-year depreciation: $3,000
.Auto insurance annual cost: $1,200
.Registration and license: $250
.Sales tax: 5% of sales price
.Regular oil changes: $120

A) $7,380
B) $7,600
C) $9,900
D) $10,600

Question 22

You are deciding between a car that gets 40 miles per gallon and one that gets 20 miles per gallon. If gasoline costs $4 per gallon and you typically drive 15,000 miles per year, how much will you save each year by choosing the more fuel-efficient vehicle?

A) $750
B) $1,500
C) $2,250
D) $3,000

Question 23

In evaluating vehicle choices, which of the following factors is least important from a financial perspective?

A) Reliability
B) Sportiness
C) Size
D) Fuel efficiency

Question 24

How long will it take to recoup the $1,800 price difference between a hybrid and a regular sedan assuming gas costs $3 per gallon, you drive 12,000 miles per year, and the hybrid gets 45 miles per gallon (MPG) on the highway and the regular sedan gets 30 MPG on the highway?

A) 1 year
B) 4 years
C) 4.5 years
D) 6 years

Question 25

An express warranty _________ by the seller in order to be enforceable.

A) must be in writing
B) must be verbal
C) can be verbal
D) can be verbal or in writing

Question 26

Bumper-to-bumper warranties on new cars cover all

A) mechanical problems.
B) routine maintenance.
C) mechanical problems and most routine maintenance
D) mechanical problems, most routine maintenance, and accident damage.

Question 27

The decline in value of an asset over time is known as

A) depreciation.
B) minimization.
C) amortization.
D) discounting.

Question 28

What is normally referred to as the "sticker price" on a new car is actually the

A) dealer's invoice.
B) manufacturer's invoice.
C) manufacturer's suggested retail price.
D) dealer's retail price.

Question 29

Jim owns a truck that gets approximately 18 miles per gallon. If Jim drives 13,000 miles in a year and the average cost of a gallon of gasoline is $2.50, what is Jim's approximate annual gasoline cost?

A) $289
B) $1,806
C) $2,137
D) $9,360

Question 30

What is a hybrid car?

A) Electric-powered car
B) Gasoline-powered and electric-powered car
C) Diesel-powered and gasoline-powered car
D) Part car and part SUV

Question 31

Which of the following statements concerning extended warranties is true?

A) They often cost more than expected costs of covered repairs.
B) They can only be purchased from manufacturers.
C) They generally are more comprehensive in coverage than original warranties.
D) They are not transferable.

Question 32

Which of the following factors is true when considering a 48-month loan at 6% APR and a 36-month loan at 5% APR?

A) You will pay less interest for the shorter-term loan.
B) The longer-term loan has a higher monthly payment.
C) You will pay less in total for the longer-term loan.
D) The shorter-term loan has a lower monthly payment.

Question 33

Generally, the __________ costs associated with buying a car are higher than the costs of leasing.

A) up-front
B) monthly
C) back-end
D) up-front and monthly

Question 34

A lessee is a person who

A) owns property and charges someone money to use that property for a period of time.
B) purchases property from another person but sells it back after a period of time.
C) sells property to another person with the intention of purchasing it back after a period of time.
D) pays money for the privilege of using someone else's property for a period of time.

Question 35

A closed-end lease is a lease in which the

A) lessee takes the risk that the resale value of the car at the end of the term will be less than what was originally assumed.
B) lessor takes the risk that the resale value of the car at the end of the term will be less than what was originally assumed.
C) terms of the lease contract are nonnegotiable by the lessee.
D) terms of the lease contract are nonnegotiable by the lessor or lessee.

Question 36

Gross capitalized cost in an automobile lease is equivalent to the _______ for a new car.

A) down payment
B) price you negotiate
C) finance charge
D) depreciation

Question 37

Which of the following is a reason why consumers lease cars?

A) Ability to get a new car every two or three years
B) Lower up-front costs in leasing than in financing a purchase
C) Lower monthly costs in leasing than in financing a purchase
D) All the choices are correct.

Question 38

In a _____ lease, the _____ bears the risk that the resale value of the car at the end of the term is less than originally assumed.

A) closed-end; lessee
B) closed-end; lessor
C) open-end; lessor
D) open-end; bank

Question 39

The most common type of auto lease is the _______.

A) closed-end lease
B) open-end lease
C) closed-end credit
D) open-end credit

Question 40

Up-front fees on an auto lease include (select any two)

A)Insurance.
B) credit report.
C) application processing fee.
D) delivery charge.
E)sales tax.

Question 41

What is the equity in the car?

A) The difference between the car's purchase price and the amount of the loan
B) The difference between the car's purchase price and the remaining amount of the loan
C) The difference between the car's market value and the remaining amount of the loan
D) The difference between the car's market value and the resale value

Question 42

A walk-away lease is a(n)

A) closed-end lease.
B) open-end lease.
C) contingent lease.
D) capitalized lease.

Question 43

If you must pay a fee at the end of the lease term if you choose not to purchase the vehicle, this is known as a

A) capitalized cost reduction.
B) purchase fee.
C) back-end fee.
D) disposition fee.

Question 44

Which is not a component of the total cost of car ownership?

A) Dealer profit
B) Finance charges
C) Fuel efficiency
D) Insurance

Question 45

Which of the following is not one of the main sources of auto dealer profits?

A) Licensing fees
B) Profit on vehicles traded in for less than resale value
C) Manufacturer incentives
D) Service contracts

Question 46

State laws that protect consumers against defective vehicles are known as

A) blue laws
B) red laws
C) lemon laws
D) orange laws

Question 47

Generally, a person should consider leasing a car under a closed-end lease contract rather than purchasing a new car with a car loan if

A) he or she wants to have a lower monthly payment.
B) he or she does not want to take the risk of residual value fluctuation.
C) he or she does not drive a lot of miles annually.
D) All of these are true.

Question 48

Ginny has researched several cars, and she has narrowed down her choices to two cars. The car on the top of her list can be purchased with a bank loan or leased through the manufacturer's program. Ginny had a bad experience with her previous car, which gave her a lot of mechanical trouble and quickly lost its value at the time of trade-in. Ginny does not want to go through a similar experience again. She normally changes her cars every three to four years. Ginny should consider

A) leasing her next car under an open-end lease.
B) leasing her next car under a closed-end lease.
C) buying her next car with cash.
D) buying her next car with a bank loan.

Question 49

Michael is considering getting a closed-end lease on a car for 48 months. The car dealer quotes him a monthly payment of $349. If Michael were to buy the car with the same down payment, his monthly payment would be $465 a month. Michael's lease payment is lower because

A) car dealers make a lower profit on leased cars.
B) leased cars do not come with a manufacturer's warranty.
C) he is not paying for the residual value of the car at the end of the lease.
D) he is paying finance charges only on the amount of the car that will be depreciated over four years.

Question 50

Janelle is debating whether to buy or lease her favorite car. Under a closed-end lease, Janelle will

A) have to purchase the car at lease end.
B) not be required to compensate the lessor for fluctuations in the resale value at lease end.
C) be required to compensate the lessor for fluctuations in the resale value of the car at lease end.
D) be able to walk away from her lease no matter the condition of the car.

Question 51

Mona needs to determine whether to lease or buy a car for 4 years. The purchase price is $30,000 (including taxes and dealer fees). Her bank is offering the most competitive financing deal: 2% APR for a 4-year loan with 10% down payment. The dealer's 4-year lease agreement requires a monthly payment of $299 with a capitalized cost reduction of $2,000 and a $500 security deposit. The mileage allowance is well beneath her annual average. The estimated value of the car at the end of 4 years is $12,000. Without consideration for forgone interest, which will cost you more, leasing or buying?

A) Lease is $2,889 cheaper.
B) Finance purchase is $2,889 cheaper.
C) Lease is $2,765 cheaper.
D) Finance purchase is $2,765 cheaper.

Question 52

By law, housing leases

A) have to be in writing.
B) can be verbal.
C) can be verbal but must be in writing if longer than a year.
D) can be verbal but must be in writing if longer than two years.

Question 53

Mortgage insurance is required if your loan-to-value ratio is

A) more than 70 percent.
B) more than 80 percent.
C) less than 80 percent.
D) less than 70 percent.

Question 54

Mortgage insurance premiums are based on

A) the value of your home.
B) your mortgage loan balance.
C) the equity of your home.
D) the credit history.

Question 55

With the exception of the mega-rich, the percentage of income people spend on housing is ________ income brackets.

A) relatively consistent across
B) greater for people in low
C) greater for people in high
D) lower for people in middle income brackets

Question 56

Housing needs are a function of

A) a household's position in their life cycle.
B) real estate prices.
C) household income.
D) gender.

Question 57

When considering spending on housing needs, if a person is heavily immersed in credit card debt,

A) housing needs should be an independent decision.
B) it would be a good idea to save money by cutting housing expenditures and paying down debt first.
C) they should first satisfy housing needs and then focus on paying down credit card debt.
D) they should continue to borrow against credit cards to maintain a roof over their head.

Question 58

Which is an advantage of owning a home?

A) Lower monthly payments
B) Investment value
C) Mobility
D) Less responsibility

Question 59

When lending money in the form of a mortgage on a home, the lender requires a down payment in order to

A) make sure only those people who have a commitment to owning are qualified.
B) make sure that there is a safety margin in case the value of the house falls and the mortgage exceeds the value of the home.
C) hold it as a security deposit, which is returned when the mortgage is paid off in full.
D) apply it toward the first year's mortgage payments.

Question 60

Mike is applying for a home loan and wants to buy a house worth $350,000. How much of a minimum down payment will he have to make to avoid mortgage insurance?

A) $35,000
B) $52,500
C) $70,000
D) $87,000

Question 61

Joe is shopping for a new home. He is trying to decide how large his down payment should be. Joe is earning 2.5 percent APY in his savings account, whereas his mortgage loan will cost him 5 percent APR. If Joe has the money available in his savings account, he should

A) reduce the down payment on the house.
B) increase his down payment on the house.
C) not buy the house right now.
D) purchase mortgage insurance.

Question 62

Closing costs on the purchase of a house

A) increase the amount of cash available for the down payment.
B) increase the mortgage insurance premium.
C) reduce the amount of cash available for the down payment.
D) are paid by the lender.

Question 63

Mortgage payments (including principal and interest) depend upon the interest rate,

A) down payment, and the length of the mortgage.
B) loan amount, and the length of the mortgage.
C) down payment, and the loan amount.
D) insurance premium, loan amount, and the length of the mortgage.

Question 64

Mary Anne is considering buying a home. She is currently renting and does not have to pay for some utilities, landscaping, taxes, repairs, or maintenance. While she is excited about living in her own home, she is worried about being responsible for many more aspects of ownership. In order to determine the true cost of ownership of a home, Mary Anne should consider

A) the initial purchase price and future appreciation or depreciation.
B) the cost of financing.
C) repairs and maintenance costs.
D) all of these.

Question 65

The Jones have $72,000 in savings available for up-front costs on a home purchase. They qualified for a 30-year mortgage at 5.5% APR. They also expect closing costs to total $3,000. They have budgeted $2,500 per month to allocate to housing costs, including monthly nonfinancing costs of $150 for homeowner's insurance, $585 for property taxes, $130 for repairs, and $60 for maintenance. What is the maximum they can afford to pay for a home?

A) $346,392
B) $349,392
C) $509,304
D) $672,217

Question 66

Most lenders require that a borrower's mortgage debt service ratio be no more than 28 percent of their

A) equity.
B) income.
C) overall debt.
D) assets.

Question 67

The tax advantages of home ownership include all of the following except

A) tax-deductible maintenance costs up to $50,000.
B) tax-deductible interest on up to $750,000 mortgage.
C) tax-deductible property taxes up to $10,000.
D) tax-free gain on up to $250,000 in profit from the sale of your primary residence.

Question 68

The Sayeds bought a home in January and borrowed $400,000 to finance it. The mortgage interest and principal payment is $2,147 per month. In the first year, they paid $19,799 in interest, $5,965 in principal, and $10,100 in property taxes. They are in the 24% marginal tax bracket. Approximately, how much will they save in federal income taxes from home ownership the first year, if itemizing deductions? (Round to the nearest whole dollar.)

A) $2,424
B) $4,776
C) $7,176
D) $8,607

Question 69

The two ratios most commonly used by mortgage lenders to evaluate the ability to pay a mortgage loan are the

A) current ratio and mortgage debt service ratio.
B) total debt service ratio and total credit utilization ratio.
C) mortgage debt service ratio and debt payment ratio.
D) current ratio and debt payment ratio.

Question 70

Tim's monthly gross income is $2,900. He is buying a house that requires a $660 monthly payment. Property taxes would be $120 per month and insurance premiums of $45 per month. What is Tim's mortgage debt service ratio?

A) 28.45%
B) 17.07%
C) 35.15%
D) 58.59%

Question 71

Sam's mortgage payment is $750 per month. He also has other monthly debt payments of $440. If his monthly after-tax income is $3,950, what is Sam's debt payment ratio?

A) 30.13%
B) 29.14%
C) 8.27%
D) 33.19%

Question 72

Which of the following is a mortgage loan that has a fixed rate, a fixed term, and fixed payments?

A) ARM
B) Equity mortgage
C) Conventional mortgage
D) Reverse annuity mortgage

Question 73

Which of the following statements is true of adjustable rate mortgages?

A) They generally carry higher initial interest rates than conventional mortgages.
B) They usually convert to a fixed-rate loan after a period of time.
C) The interest rate changes are subject to limits.
D) There is no limit to interest rate changes.

Question 74

Which type of mortgage allows homeowners to stay in their homes but receive a stream of cash flow from their homes?

A) Insured mortgage
B) Reverse annuity mortgage
C) Graduated mortgage
D) Shared appreciation mortgage

Question 75

A mortgage is a

A) long-term amortized loan that is secured by real property.
B) long-term amortized loan that is secured by real or financial assets.
C) short-term amortized loan that is secured by financial assets.
D) revolving credit line that is secured by real property or financial assets.

Question 76

If a financial institution makes a home loan and then sells the loan to another financial institution, this is a type of

A) primary mortgage market transaction.
B) secondary mortgage market transaction.
C) mortgage origination.
D) reverse mortgage.

Question 77

Under a (n) ____________ mortgage, the loan balance is paid off more quickly than under a conventional mortgage.

A) adjustable rate
B) fixed-to-adjustable rate
C) graduated payment
D) growing equity

Question 78

In a home purchase, what are discount points?

A) A reduction in the annual interest rate of the mortgage loan because the buyer made a higher-than-required down payment
B) A reduced annual interest rate because of a very high credit score
C) Interest paid up front to the lender in return for a reduced annual interest rate
D) A reduction in the closing costs due to the fact the buyer put up a large amount of earnest money

Question 79

One discount point is equal to ___ percent of the loan amount.

A) 1
B) 10
C) 0.1
D) 0.01

Question 80

Refinancing a home incurs ________ mortgage-related finance charges than a mortgage on a new home purchase.

A) substantially lower
B) substantially higher
C) mostly of the same
D) no