Chapter 12
Multiple-Choice Questions
and
Answers
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1. The amount of loan that a bank is willing to lend
an individual depends on which of the following
reasons?
(a)
(b)
(c)
(d)
(e)
The person’s employment income
The value of collateral available
The amount of other debt outstanding
(a) and (b)
(a), (b), and (c)
The answer is (e).
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2. On which of the following loans will the bank
charge the highest rate of interest?
(a)
(b)
(c)
(d)
(e)
Home equity credit line
Investment loan
Home mortgage
Unsecured credit line
Uncertain
The answer is (d).
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3. Which of the following statements concerning
investment loans is true?
(a)
(b)
(c)
(d)
(e)
The interest expense on the loan is not tax
deductible.
The rate of interest charged on an investment loan
is lower than that of a consumer loan.
Investment loan does not depend on the
borrower’s income.
(b) and (c).
None of the above.
The answer is (b).
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4. Mr. Harris has $2,000. He wants to borrow
another $1,000 from the bank at 5% interest so
that he can invest $3,000 in a mutual fund that
has an expected rate of return of 11%. What is
the expected rate of return on investment?
(a)
(b)
(c)
(d)
(e)
11%
6%
14%
8%
None of the above
The answer is (c).
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Why?
3,000(.11)  1,000(.05)
E(r ) 
2,000
 .14
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5. Eddie and Cecelia have an annual gross
income of $55,000. Their monthly mortgage
payment is $1,150. If their GDS ratio is 0.28,
what is the annual property tax on their
condominium?
(a)
(b)
(c)
(d)
(e)
$1,450
$1,500
$1,600
$1,800
None of the above
The answer is (c).
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Why?
1,150(12)  Tax
 .28
55,000
Tax  .28(55,000)  13,800
 15400  13,800
 1,600
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