FINANCIAL
LITERACY
SAMPLE EXAM QUESTIONS
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SAMPLE FINANCIAL LITERACY EXAM
1. In order to get spending under control, a person should first
A. seek help on investing from a financial planner.
B. consult a credit counseling service.
C. create a budget of current income and expenses.
D. subscribe to financial newsletters and magazines.
2.
Comparison shopping for a car is necessary because
A. each dealer sells cars with different colors.
B. lenders want to be sure consumers get the best price.
C. the price for the car can vary a great deal.
D. it is a requirement to qualify for car insurance.
3. Financial planners generally stress the importance of starting to save and invest early because
A. a person can stop saving at age 40.
B. of the power of compounding and appreciation.
C. there are fewer bills to pay when a person is young.
D. a person will not need insurance.
4. An important feature of a good financial goal is that the goal
A. has a specific time frame.
B. is appropriate for the person’s age.
C. can last throughout the person’s life.
D. will take at least ten years for the person to achieve.
5. Purchasing power decreases and it costs more money to buy goods when there is
A. a bear market.
B. inflation.
C. deflation.
D. a bull market.
6. What strategy can help a person achieve her goal to buy a house?
A. Using credit cards to pay for expenses.
B. Paying for large purchases in cash.
C. Following a budget that allows for savings.
D. Applying for more credit cards to increase her credit score.
7. A college student has to live on a tight budget. Before making a decision to buy the newest cell
phone, which question should he ask himself first?
A. Is the new cell phone cheaper than the one being used?
B. Is the new cell phone on sale?
C. Is the new cell phone a need or a want?
D. Will my friends like the new cell phone?
8. Which of the following quotes is sound financial advice?
A. “He who hesitates is lost.”
B. “A penny saved is a penny earned.”
C. “Don’t put off today what can be done tomorrow.”
D. “The window of opportunity may only open once.”
9. Fixed expenses include
A. food.
B. vacations.
C. entertainment.
D. rent.
Copyright © 2015 by Working in Support of Education (w!se)®, New York, NY
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SAMPLE FINANCIAL LITERACY EXAM
10. Mandatory deductions from a person’s paycheck include
A. federal withholding tax and FICA.
B. school taxes and contributions to a retirement account.
C. regressive taxes and employee automatic savings.
D. property taxes and employee benefits.
11. When should a person begin contributing to a retirement plan?
A. Before deciding to start a family.
B. As young as possible.
C. At age 50.
D. Upon collecting Social Security.
12. Which of the following is the source of income for most people aged 20-35?
A. Dividends.
B. Wages/salary.
C. Rent.
D. Mortgage payments.
13. The U.S. government agency responsible for the collection and enforcement of federal taxes is
known as
A. Federal Reserve System (Fed).
B. Securities and Exchange Commission (SEC).
C. U.S. Internal Revenue Service (IRS).
D. Consumer Financial Protection Bureau (CFPB).
14. When a person has a balanced budget that includes savings then
A. net income = discretionary income.
B. total expenses = savings.
C. total income = total expenses – savings.
D. total expenses + savings = total income.
15. Why do financial advisors recommend that a person save at least 10% of each paycheck?
A. To have more money for wants not needs.
B. To build wealth.
C. To be able to pay bills on time.
D. To be able to support worthwhile charities.
16. The “time value of money” means that
A. money paid out today has less value than if the money is paid out in the future.
B. money received today is worth more than the same amount of money received in the
future.
C. the more time a person has to save, the lower the return on the money.
D. the longer money is held, the less likely it will be spent.
17. When a person receives a book store gift card, she can use it to
A. buy a book at any store.
B. buy a book from that store.
C. pay for her rent.
D. make a deposit into her savings account.
18. A person who dies will have his assets distributed as he wanted as long as he has
A. a will.
B. a doctor.
C. an accountant.
D. a financial plan.
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SAMPLE FINANCIAL LITERACY EXAM
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19. A person has assets worth $15,000 and loans totaling $5,000. Her net worth is
A. $ 5,000.
B. $10,000.
C. $15,000.
D. $20,000.
20. Don and Bill work together in the finance department of the same company and earn the same
salary. Bill spends his free time taking work-related classes to improve his computer skills. Don
spends his free time socializing with friends or watching TV. After five years, what is most likely to
be true?
A. Don will make more because he is more physically fit.
B. Don will make more because Bill is likely to become over qualified.
C. Bill will likely make more money because he is more valuable to his company.
D. Don and Bill will continue to make the same amount of money.
21. Which of the following is an example of a long-term debt?
A. A student loan.
B. A debit card purchase.
C. A term life insurance policy.
D. A stock portfolio.
22. A person earned a salary of $70,000 last year. Additionally, he had $1,000 in interest income and
$2,000 in dividend income. His total income for this year is
A. $70,000.
B. $71,000.
C. $72,000.
D. $73,000.
23. An example of an opportunity cost is
A. buying a dress at a sale price instead of paying the original price.
B. using coupons when food shopping.
C. buying concert tickets instead of buying a textbook for a course.
D. using a credit card when making a large purchase.
24. A person strongly feels that going into debt is wrong. This is an example of the influence of
A. values on decisions.
B. age and stage in life.
C. marketing and advertising.
D. general economic conditions.
25. Which of the following describes what happens during a depression?
A. Businesses produce more goods and services.
B. Very few individuals are having financial problems.
C. Unemployment is extremely high.
D. More individuals are buying homes.
26. When the amount of income on a budget is greater than the amount actually spent on expenses,
the person has a
A. surplus.
B. deficit.
C. balanced plan.
D. new liability.
27. When interest is computed once on a dollar amount (the principal), it is
A. simple interest.
B. principal interest.
C. the APY.
D. compound interest.
SAMPLE FINANCIAL LITERACY EXAM
28. A person decided to have six months of income in an emergency savings account. Is this a good
decision?
A. No, because he should place the money in a diversified portfolio.
B. No, because emergency accounts are no longer advisable.
C. Yes, because the money can be used as a down payment when buying a used car.
D. Yes, because the money in the emergency account can be used if he loses his job.
29. Students applying for financial aid to attend college usually need to
A. complete a Free Application for Federal Student Aid (FAFSA) form.
B. obtain a transcript.
C. write an essay.
D. send a credit report from one of the three credit reporting agencies.
30. A person choosing a mortgage usually selects a fixed-rate loan because she knows that
A. the interest rate remains the same for the life of the mortgage.
B. her income will increase within the next three years.
C. the interest rates are going down.
D. her homeowners insurance premiums will be lower.
31. Why does a bank pay interest to a depositor?
A. The bank is able to use deposits to earn profits.
B. It is a requirement of the Federal Deposit Insurance Corporation (FDIC).
C. It helps the bank invest in the local community.
D. It is a benefit of having a bank credit card.
32. It is generally better for a person to buy a home that she can afford than to rent an apartment
because she will
A. build equity.
B. have fixed insurance needs.
C. have a lower debt to credit ratio.
D. avoid bankruptcy.
33. Which of the following would be considered an asset?
A. Credit card account.
B. Checking account.
C. Car loan.
D. Student loan.
34. “Paying yourself first” is a strategy to
A. revise goals.
B. make impulse purchases.
C. create a budget.
D. build savings.
35. What kind of income can a person earn from savings accounts at a commercial bank?
A. Wage.
B. Dividend.
C. Interest.
D. Capital gains.
36. Sally won a $200 cash prize at the school science competition. She wants to save the money for
her senior trip in three years. It is best for her to save the money during the three years in a
A. checking account, because it is easy to withdraw funds.
B. drawer at home, because it would be safe.
C. savings account, because it would earn interest.
D. certificate of deposit (CD), because it generally earns higher interest.
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SAMPLE FINANCIAL LITERACY EXAM
37. John needs $3,000. He is withdrawing the money today from a $3,000 certificate of deposit (CD)
which will reach maturity in six months. It is likely that he will have to
A. pay the Internal Revenue Service (IRS) a penalty.
B. pay the bank a penalty for early withdrawal.
C. pay both the IRS and the bank a penalty.
D. wait for the CD to mature.
38. When a check is returned due to insufficient funds, the check is said to have
A. been postdated.
B. been voided.
C. bounced.
D. cleared.
39. A form of payment that is guaranteed to be as good as cash is a
A. personal check.
B. bank check.
C. credit card charge.
D. promissory note.
40. Deposits in bank savings accounts are insured by the Federal Deposit Insurance Corporation
(FDIC) up to
A. $ 50,000.
B. $100,000.
C. $150,000.
D. $250,000.
41. Which one of the following statements is the most accurate about the use of ATM cards?
A. A person can generally get an interest free loan at any bank ATM with no fee.
B. A person can always charge a purchase using an ATM card.
C. A person can get cash anywhere in the world using an ATM with no fee.
D. A person must have a bank account to have an ATM card.
42. Which of the following financial products is good to have so that a person can cover cash needs
today?
A. Bonds.
B. Individual Retirement Account (IRA).
C. Life insurance.
D. Regular checking account.
43. A person writes a check for more money than he has in his checking account. In order for the
check to be paid by the bank, he needs to have
A. overdraft protection.
B. credit insurance.
C. a joint account.
D. a credit history.
44. Many companies offer a service to electronically deposit an employee’s net pay into his
designated bank account. This service is known as
A. barter.
A. amortization.
B. automatic savings.
C. direct deposit.
45. When a person cashes a $300 check and only receives $285, she most likely went to a/an
A. investment bank.
B. check cashing store.
C. savings bank.
D. credit union.
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SAMPLE FINANCIAL LITERACY EXAM
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46. A debit card allows a person to
A. pay for purchases directly from a checking or savings account.
B. build wealth.
C. borrow money for a short term.
D. spend more money than deposited in a checking or savings account.
47. The highest interest rate on a loan is charged by a
A. savings bank.
B. credit-card company.
C. pawnshop.
D. investment bank.
48. Electronic banking allows customers to
A. access accounts only during business hours six days a week.
B. perform transactions with the help of a teller during business hours.
C. stop the need to reconcile checking accounts.
D. perform transactions 24 hours a day.
49. When a person asks her bank not to honor a specific check, it is called
A. an overdraft.
B. a stop-payment order.
C. a cancellation.
D. a limit order.
50. What can a person expect as a customer of a credit union?
A. Higher account fees and lower interest rates on loans than a commercial bank offers.
B. Higher account fees and higher interest rates on loans than a commercial bank offers.
C. Lower account fees and higher interest rates on loans than a commercial bank offers.
D. Lower account fees and lower interest rates on loans than a commercial bank offers.
51. What type of information is not found on a consumer’s credit report?
A. Personal medical information.
B. Criminal records.
C. Employment history.
D. Current and past addresses.
52. Hillary and Stephanie have both borrowed $15,000 from the same bank to buy the same model
of a new car. Hillary's credit score is 732 and Stephanie's credit score is 588. Who is likely to pay
a lower finance charge?
A. They will pay the same because they used the same bank.
B. Hillary.
C. Stephanie.
D. They will pay the same because they bought the same car.
53. Choose the best suggestion for building and maintaining a good credit score.
A. Have money in savings and protect against identity theft.
B. Keep debt low and pay bills on time.
C. Make safe investments and set clear financial goals.
D. Comparison shop and follow a budget.
54. What is true about loans?
A. The lower the APR, the more interest is paid.
B. The larger the down payment, the lower the principal.
C. The shorter the length of the loan, the smaller the payments.
D. The higher the APR, the less interest is paid.
SAMPLE FINANCIAL LITERACY EXAM
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55. An example of identity theft is when an individual
A. uses a parent’s charge account to buy lunch for friends.
B. uses another person’s information to open an account.
C. notifies a credit reporting agency of an unpaid debt.
D. has the same name as another person in the same state.
56. It is generally a good idea to borrow money and repay the amount borrowed with future income
when
A. a person needs to buy a car to get a much better paying job.
B. a person really needs a week’s vacation.
C. clothing a person likes goes on sale.
D. the interest on the loan is greater than interest being earned on savings.
57. If a person is behind on his debt payments and goes to a responsible credit counseling service,
what help is likely to be offered?
A. They can cancel and cut up his credit cards without his permission.
B. They can get the federal government to apply his income taxes to pay off his debts.
C. They can work with those who loaned him money to set up a realistic payment schedule.
D. They can force those who loaned him money to forgive his debts.
58. Scott and Eric are young men with good credit reports. They work at the same company and
make approximately the same salary. Scott has borrowed $6,000 to take an overseas vacation.
Eric has borrowed $6,000 to buy a truck. Who is likely to pay the lowest finance charge?
A. Eric will pay less because the truck is collateral for the loan.
B. Scott will pay less because people who travel overseas are less risky to lenders.
C. They will both pay the same because the rate of interest on the loan is set by law.
D. They will both pay the same because they are borrowing the same amount of money.
59. An arrangement to receive cash, goods or services now and pay for them in the future is called
A. credit.
B. liquidity.
C. collateral.
D. net income.
60. The rate imposed by the lender for the borrower to pay on a loan is known as
A. money market rate (MMR).
B. effective annual rate (EAR).
C. annual percentage rate (APR).
D. debit card rate (DCR).
61. The possibility that a borrower fails to repay a loan on time and will never be able to repay the
loan is known as
A. interest rate risk.
B. credit risk.
C. liquidity risk.
D. investment risk.
62. When applying for a loan, borrowers will probably need to provide information regarding their
A. work experience.
B. assets.
C. health record.
D. financial plan.
SAMPLE FINANCIAL LITERACY EXAM
63. A person purchases $2,500 of furniture from XYZ Department Store. She decides to use the
store’s plan where a person makes 12 equal payments over the next year to pay for the
purchase. She signs a contract which specifies what her payments are and when they are due.
This is an example of
A. an installment plan.
B. a predatory loan.
C. a cash purchase.
D. a line of credit.
64. A loan can be denied by a lender because of a person’s
A. education.
B. health.
C. credit history.
D. gender.
65. Which of the following individuals has financial problems?
A. A person who is borrowing money to buy a house.
B. A person who has a loan for college.
C. A person who uses a credit card to make most purchases.
D. A person who is unable to pay his rent.
66. A low credit score can negatively affect a person’s ability to
A. rent an apartment.
B. get approved for a debit card.
C. open a savings account.
D. qualify for a driver’s license.
67. One difference between a debit card and a credit card is that
A. debit cards can only be used when the person makes a large transaction.
B. debit cards provide better consumer protection than credit cards.
C. debit card payments are immediately deducted from the person’s bank account.
D. debit cards generate unsecured debt.
68. An advantage of having a credit card is that it helps a person to
A. limit the amount of cash she has to carry.
B. buy without thinking about her budget.
C. spend more than she earns.
D. owe an unlimited amount of money.
69. Which of the following helps to build a strong credit history?
A. Having a steady employment record.
B. Reporting a lost credit card within 24 hours.
C. Using an ATM several times a month.
D. Being a responsible driver.
70. The grace period refers to the time
A. taken to process a credit card application by the credit card company.
B. permitted for paying a credit card bill to avoid a late fee.
C. allowed to notify a creditor of an error in billing.
D. used for calculating interest.
71. The Truth-in-Lending Act requires that borrowers be given
A. information on the cost of the loan.
B. 45 day notice if interest is being increased.
C. the features of the extended warranty.
D. the reasons credit has been denied.
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SAMPLE FINANCIAL LITERACY EXAM
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72. Which of the following credit cards makes the most sense for a person that pays his balance
every month?
A. A credit card with a 5% fixed interest rate.
B. A credit card with a 0% interest rate for the first six months.
C. A credit card that offers 1% cash back rewards on all purchases.
D. A credit card with a high APR.
73. A company that keeps files and records on people who apply for and use credit is called a
A. credit union.
B. commercial bank.
C. finance company.
D. credit reporting agency.
74. What type of financial aid needs to be repaid?
A. Loan.
B. Grant.
C. Scholarship.
D. Work-study.
75. A computer scam that uses spam or pop-up messages to deceive consumers into disclosing their
card numbers, bank account information, Social Security numbers, passwords, or other personal
information is called
A. soliciting.
B. phishing.
C. scamming.
D. consuming.
76. The maximum amount of money a person can borrow is called a credit
A. history.
B. rating.
C. report.
D. line.
77. Which of the following can help a person lower her personal risk of loss?
A. Insurance.
B. A will.
C. Mutual funds.
D. Home ownership.
78. If a car was damaged in a flood, which type of car insurance would typically cover the damage to
the car?
A. Universal.
B. Term.
C. Disability.
D. Comprehensive.
79. How should a person decide how much coverage she needs when selecting renters insurance?
A. Do online research to find out the minimum coverage requirement.
B. Ask salespeople from several different insurance companies.
C. Determine the dollar value of personal property to be covered by insurance.
D. The amount of insurance is the same for everyone.
80. Car insurance is more expensive for teenage males than teenage females because studies have
shown that
A. male teenagers have a greater number of accidents than female teenagers.
B. more male teenagers take driver education classes than female teenagers.
C. female teenagers do not drive often.
D. female teenagers frequently own their cars.
SAMPLE FINANCIAL LITERACY EXAM
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81. A person had an Apple computer that was destroyed in a fire. She was able to buy a new Apple
computer because her insurance policy had the following benefit
A. actual cash value.
B. replacement value.
C. limited risk.
D. unlimited claim.
82. If a driver receives several traffic tickets, the cost of the car insurance will probably
A. increase.
B. decrease.
C. stay the same.
D. be billed monthly.
83. Money that a person pays to an insurance company for a policy is called a
A. debt.
B. premium.
C. deductible.
D. liability.
84. Before a person can receive money to cover the damage from a car accident, he must
A. file a claim with his insurance company.
B. increase his insurance coverage.
C. have a witness who will testify for him.
D. notify the lender who gave him a car loan.
85. What is the key word for insurance companies when establishing the cost for a policy?
A. Diversify.
B. Deductible.
C. Risk.
D. Credit.
86. Two types of life insurance policies are
A. general and fixed-rate.
B. valuable and indemnified.
C. term and whole life (permanent).
D. annual and tax exempt.
87. When shopping for life insurance, the best strategy is to
A. do what the insurance salesperson recommends, since he is an expert.
B. buy coverage at work if possible.
C. figure out how much is needed, then get prices from different companies.
D. buy insurance coverage after age 40 so the risk will be lower.
88. The purpose of life insurance is to
A. pay a person’s outstanding credit card bills.
B. provide investment income to pay expenses during retirement.
C. help meet the financial needs of dependents upon a person’s death.
D. protect against financial loss during a person’s lifetime.
89. Which of the following financial products has the highest risk?
A. Checking accounts.
B. Certificates of deposit (CDs).
C. Stocks.
D. Savings accounts.
SAMPLE FINANCIAL LITERACY EXAM
90. One reason investors purchase stock is to
A. increase wealth.
B. borrow money.
C. earn interest.
D. balance a budget.
91. Before a person begins investing, he should have
A. taken more than one business course.
B. a meeting with a licensed financial planner/advisor.
C. a minimum of $5,000 to invest.
D. strong self confidence in his ability to make money.
92. The New York Stock Exchange (NYSE) can be described as a
A. marketplace where stocks are bought and sold.
B. market for trading bonds.
C. place to barter goods and services.
D. location where government officials meet.
93. A person wants to invest in a low-risk investment product. Which of the following would be the
best investment for her?
A. US Treasury bond.
B. Mutual fund.
C. Common stock.
D. Speculative stock.
94. The stock price of a corporation is most likely to increase when the corporation announces a
A. decrease in the expected profit for this year.
B. budget deficit.
C. new product being released for sale.
D. serious problem with its product.
95. A method of reducing investment risk is known as
A. speculation.
B. diversification.
C. consolidation.
D. negotiation.
96. Profit from the sale of stocks, bonds, or real estate is called
A. equity capital.
B. gift income.
C. capital gains.
D. tax-free income.
97. A company that sells shares of ownership through a stock exchange to investors is a
A. sole proprietorship.
B. public corporation.
C. securities exchange.
D. private corporation.
98. One of the main reasons for buying a stock mutual fund is that it is
A. safe.
B. managed by a professional.
C. guaranteed to provide income.
D. backed by the government.
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SAMPLE FINANCIAL LITERACY EXAM
99. Investments with greater potential returns generally have higher
A. risk.
B. fees.
C. liquidity.
D. deductibles.
100.
A.
B.
C.
D.
When a person buys a company’s bond, he
owns a part of the company.
has lent money to the company.
is liable for the company’s debts.
can vote as a shareholder.
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SAMPLE FINANCIAL LITERACY EXAM
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Exam Key
1. C
Create a budget of current income and expenses
Money- Purpose of a budget
Rationale: When a person creates and follows a budget, it helps to control spending. The budget
indicates how money is to be spent and/or saved. When expenses are reviewed, they can be adjusted if
needed to make sure that spending and saving does not exceed income on a monthly basis.
2. C
The price for the car can vary a great deal
Money- Purchasing strategies (comparison shopping)
Rationale: As with any large purchase, a person should comparison shop for the best price. In the case of
buying an automobile, it is extremely important to get price quotes from different dealers and from online
sources to ensure a good and fair deal on the purchase. The actual price may be different than the
manufacturer’s suggested retail price on the sticker of the car window.
3. B
Of the power of compounding and appreciation
Money- Compounding interest
Rationale: It is important to save and invest early because of the power of compounding and appreciation.
When money compounds, interest is earned on interest, which greatly increases the value of the money.
4. A
Has a specific time frame
Rationale: A person’s financial goals should be S.M.A.R.T. – Specific, Measurable, Attainable, Realistic,
and Timely. “Timely” means that a goal should be anchored to a timeframe. By establishing a specific
timetable to achieve the goal, it is more likely to be accomplished. A person’s goals are defined as shortterm, intermediate, and long-term.
5. B
Inflation
Money- Inflation
Rationale: During times of inflation purchasing power is decreased as the value of money declines and
prices rise. For example, if the cost of buying groceries for seven days increases from $100 last year to
$105 this year, it is because of inflation. Thus, with the same level of income this year the person is
unable to purchase as many groceries as they did last year.
6. C
Following a budget that allows for savings
Money- Budget with savings
Rationale: Creating a budget that includes savings is the best way to achieve a financial goal such as
setting aside enough money for a down payment (usually 10%-20% is required) to purchase a house. If
necessary, a person may need to reduce spending in order to save. A larger down payment in cash may
eliminate the requirement for mortgage insurance.
7. C
Is the new cell phone a need or want?
Money –Needs vs. Wants
Rationale: Because the student is on a tight budget, he has to be very careful about spending his money.
He already has a cell phone that meets his needs for communication, so before making a decision to
exchange it for the newest product, he should ask himself whether he actually needs a new one or
whether he simply wants it because it has the newest features and applications.
SAMPLE FINANCIAL LITERACY EXAM
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8. B
“A penny saved is a penny earned.”
Money-Savings
Rationale: The phrase a “penny saved is a penny earned” means that it is a good idea to save money
because it can earn interest. We should not spend or waste money, but try to save it. This represents the
“time value of money.” It is a quote from the 18th century.
9. D
Rent
Money- Budgeting - fixed expenses
Rationale: Fixed expenses are those expenses that are the same amount each month such as rent, a
mortgage payment, or car insurance. Variable expenses are those expenses that vary from month-tomonth such as food, vacation or entertainment costs.
10. A
Federal withholding tax and FICA
Money- Payroll deductions
Rationale: Each pay period, federal income taxes are withheld from an employee’s paycheck. Other
withholding taxes may include state taxes, local taxes, Medicare and Social Security (FICA). Voluntary
deductions may include a personal retirement savings plan (IRA, 401k) or flexible spending plans for
medical expenses.
11. B
As young as possible
Money- Saving for retirement
Rationale: The sooner one starts contributing to a retirement plan, the more money will be available when
the time for retirement comes. If a 23 year-old person is 40 years away from retirement and he starts
contributing $300 a month ($3,600 a year) and his employer contributes $5,000 a year, at 5% interest he
will have $724,782 saved when he retires. This is much more than if he were to wait another ten years
before contributing to the plan.
12. B
Wages/salary
Money- Source of income
Rationale: For most people aged 20-35, the major source of income is their earnings or wages from a job.
Rent and mortgage payments are expenditures, not sources of income for the person who has to pay
them. Dividends are monies earned through investments. While dividends provide income, it is not
usually a major source of income early in life.
13. C
U.S. Internal Revenue Service (IRS)
Money- Power to assess taxes
Rationale: The IRS is responsible for the collection of federal taxes and the enforcement of tax laws. The
Fed regulates banks and the money supply, the SEC regulates the sale of stocks and bonds, and the
CFPB educates consumers and enforces laws and regulations about credit.
14. D
Total expenses + savings = total income
Money- Balanced budget
Rationale: In creating a balanced budget a person should include a portion of income as savings for
future goals such as education, a car or a home. To have a balanced budget, the income has to cover
both savings and expenses.
SAMPLE FINANCIAL LITERACY EXAM
15
15. B
To build wealth
Money- importance of saving
Rationale: The advantage to saving 10% of one’s paycheck is to build wealth for the future. Even if a
person’s take-home pay is $200 a week, if they put 10% or $20(each week) in a savings account it will
accumulate to $1,040 in one year. This amount will also increase with interest over the course of one
year.
16. B
Money received today is worth more than the same amount of money received in the future
Money- Time value of money
Rationale: A dollar received today is worth more than a dollar received tomorrow because it can be
saved, earn interest above the rate of inflation and be invested. This is the concept of the time value of
money. The “Rule of 72” is a convenient way to calculate the increased value of money from interest.
17. B
Buy a book from that store
Money- store gift cards
Basic
Rationale: A store gift card is only good for use in the store, on the store’s website, or at stores owned by
that specific store company. In this case the card can only be used for purchases in that particular book
store company. It is important to read the information on the card regarding an expiration date, signature,
and how to activate the card. A gift card from a credit card company may be used for cash or to make a
purchase in different stores.
18. A
A will
Money – Will
Rationale: A will legally protects a person and distributes his/her property based on his/her wishes and
the needs of his/her family or survivors. It makes clear how a person wants his/her property to be
distributed after death. If there are children under 18 years of age, the will indicates who will take care of
the children. A will also identifies an Executor to ensure that the will is properly followed.
19. B
$10,000
Money- Net worth
Rationale: Net worth is the value of everything a person owns (assets) minus everything a person owes
(liabilities). In this case, the net worth is: $15,000 – $5,000 = $10,000.
20. C
Bill will likely make more money because he is more valuable to his company
Money- Factors influencing income
Rationale: Among the factors that determine an individual’s earning power is his level of skills. The more
skilled and educated a person is, generally the higher the income he will earn. In this case, Bill will have
more skills and will most likely earn more than Don.
21. A
A student loan
Money- Liabilities
Rationale: Long term debts (liabilities) are loans that will take more than one year to repay, such as a
student loan or mortgage. Debit card purchases, life insurance policies and a person’s stock portfolio are
not debts.
SAMPLE FINANCIAL LITERACY EXAM
16
22. D
$73,000
Money- Determining total income
Rationale: Total (gross) income is the amount of money one earns in a year before taxes are deducted.
Income can be one’s salary as well as interest on savings, capital gains and dividends from investments,
gifts and inheritances. In this case, the person’s total (gross) income is $70,000 + $1,000 + $2,000 =
$73,000.
23. C
Buying concert tickets instead of buying a textbook for a course
Money- Opportunity cost
Rationale: Opportunity cost can be described as the cost of making one decision vs. another. In other
words, what a person gives up to do something else such as purchasing concert tickets instead of buying
a textbook for a course.
24. A
Values on decisions
Money- Effect of values on financial planning
Rationale: Values affect financial decisions in that people are products of their beliefs. If people believe
that “a penny saved is a penny earned” they are likely to save. In this instance if one was to believe that
debt is wrong she will most likely make financial decisions to avoid overspending her budget.
25. C
Unemployment is extremely high
Money – Depression - impact on employment
Rationale: During a depression people have less money available to spend on goods and services
therefore businesses fail, people are laid off, and it is difficult to get a job, causing unemployment to be
extremely high. Depressions are often related to the business cycle and when the recovery begins,
businesses will hire workers reducing the high unemployment rate.
26. A
Surplus
Money- Determining budget surplus or deficit
Rationale: There needs to be sufficient income to cover monthly expenses and savings. When a person
has income of $500 and expenses and savings totaling $450, the person has a $50 surplus of
discretionary income for the month. When a person has a surplus for a number of months, he might want
to increase the amount of money he has budgeted for savings or investing.
27. A
Simple interest
Money- Simple vs. compound interest
Rationale: Simple interest is the interest earned or paid on the principal only. Compound interest is the
interest earned on the principal plus interest earned on the interest. The advantage of interest
accumulating on a daily basis as compared to monthly, quarterly, or annually is that savings will increase
more than with simple interest. With simple interest, if $100 is deposited in a bank account at 10%
interest, at the end of the year the account balance would only be $110.
28. D
Yes, because the money in the emergency account can be used if he loses his job
Money-Emergency Savings
Rationale: Professional financial planners recommend that individuals create an emergency fund of 3-6
months of living expenses to cover unanticipated expenses and loss of a job. Please know that today,
some advisors are recommending 6-9 months of savings. The emergency account needs to be easily
accessible and should be exempt from fees and expenses.
SAMPLE FINANCIAL LITERACY EXAM
17
29. A
Complete a Free Application for Federal Student Aid (FAFSA) form
Money- How to apply for federal aid
Rationale: A FAFSA form must be completed and submitted by students who apply for financial aid to
help pay for their college education. The application includes information from tax returns, bank accounts,
investments, current expenses, debts, and a person’s Social Security number.
30. A
The interest rate remains the same for the life of the mortgage
Money- Fixed-rate mortgages
Rationale: A fixed-rate mortgage is more desirable for most people because the interest rate remains the
same during the life of the loan. Therefore monthly payments are constant whether interest rates rise or
fall. It is possible that a person will pay more money in interest with a 30 year fixed-rate mortgage than
one of 20 or 15 years. If the mortgage was a variable-rate loan, changes in the interest rate generally
cause the monthly payments to change.
31. A
The bank is able to use deposits to earn profits
Money- Cost of Money- Interest
Rationale: A bank is a business that is interested in making a profit. In order to make money, the bank
has to have money. In order to encourage people to deposit money in the bank, the bank pays
depositors’ interest. Once people deposit money, the bank can use most of this money to make loans.
The bank makes money because the interest it charges on these loans is higher than the interest it pays
on the deposits.
32. A
Build equity
Money- Housing
Rationale: When a person buys a home, she is building equity because the home can be sold in the
future and the owner will be able to keep the money after paying the balance due on the mortgage.
Mortgage payments are made up of two parts: first, interest on the loan; second, paying off the principal
amount of the loan. As the principal amount of the loan decreases, the homeowner is building equity
(wealth) because the amount owed on the loan is getting smaller.
33. B
Checking account
Money- Assets vs. liabilities
Rationale: An asset is anything that has monetary value. A checking account has monetary value as the
money in the account can be used as cash. A student or car loan represents money owed and, therefore,
is not an asset. A credit card account is also considered a loan and therefore not an asset. Other
examples of assets are jewelry, investments, and property.
34. D
Build savings
Money- Pay yourself first
Rationale: By “paying yourself first” a person could increase her savings. For instance, if a person takes
home $1,000 each pay period and puts $100 (10%) in a savings account before paying expenses – she
could build substantial savings over the course of years.
35. C
Interest
Banking- Interest on savings
Rationale: Interest income can be earned if a person has an account with an interest rate. The person will
earn interest on the amount of money in the account at the set interest rate. This interest is then
reportable as income for tax purposes.
SAMPLE FINANCIAL LITERACY EXAM
18
36. D
Certificate of deposit (CD), because it generally earns higher interest
Banking- Accounts that earn interest
Rationale: A Certificate of Deposit (CD) is the best option for Sally because she is looking to save the
$200 for a specified period of time. A CD would give Sally the highest interest rate, so the money will
grow the most in the three years due to compounding. Since Sally does not need the money for three
years, she should, therefore, buy a three year CD
37. B
Pay the bank a penalty for early withdrawal
Banking- Cashing in a CD
Rationale: When an individual cashes in a CD before maturity, banks have the right to charge that person
a penalty since the CD is an agreement to keep the money in the account for a specified period of time.
The penalty can be between 3-6 months of interest.
38. C
Bounced
Banking- Insufficient funds
Rationale: A check will be bounced if there is not enough money in the bank account of the person who
wrote the check to pay the amount on the check. When a check bounces, the bank charges the person
who wrote the “bad” check a fee. Some banks also charge the person who deposited the “bad” check a
fee. A person can reduce the risk of writing a “bad” check by asking the bank for overdraft protection on
the account.
39. B
Bank check
Banking- Cashier/Bank checks
Rationale: A bank or cashier’s check is a form of payment guaranteed to be as good as cash because the
check is drawn from the bank’s own funds and signed by a bank officer. The bank, rather than the
purchaser, is responsible for paying the amount on the check. Before writing the check, the bank, first
takes the money from the purchaser’s checking or savings account.
40. D
$250,000
Banking- Safety in banking
Rationale: The Federal Deposit Insurance Corporation (FDIC) is an agency of the U.S. government that
protects the money in commercial banks and savings associations (also known as savings banks). The
FDIC insures deposits in each account that an account holder has up to the current legal limit, $250,000,
provided that the name on each account is different. For example, a married couple could have three
accounts, one in each of their names and one in their joint name; all three accounts would be FDIC
insured.
41. D
A person must have a bank account to have an ATM card
Banking- ATM Cards
Rationale: An ATM card allows a person to get cash and information concerning his bank balance at an
ATM machine. The person MUST have a bank account to have an ATM card. A person cannot get cash
anywhere in the world with no fee. If a person goes to an ATM of the bank where he has an account he
will be able to withdraw cash with no fee, but if he goes to an ATM of another bank, he will most likely
have to pay a fee if he wants to withdraw money.
42. D
Regular checking account
Banking- Liquidity
Rationale: A regular checking account is good to have for short-term needs because the money can
easily be accessed and used with no penalties or fees. Life insurance, individual retirement accounts and
bonds are not as easy when money is needed today because it may take a day or more and there are
rules determining when the money can be accessed and used.
SAMPLE FINANCIAL LITERACY EXAM
19
43. A
Overdraft protection
Banking- Overdraft protection
Rationale: Overdraft protection is a service banks offer that allow account holders to temporarily make
purchases with a debit card or write checks even if the person does not have enough money in his
account to cover the purchase or amount on the check. The bank is effectively making a short-term loan
to the account holder so the debit card is not declined or the check bounced. However, the bank charges
a fee whenever an overdraft is incurred. It is important for the account holder to replenish the money in
his account as soon as possible.
44. D
Direct deposit
Banking- Direct deposit of paycheck
Rationale: Direct deposit is when employers automatically deposit their employees’ net pay into a
designated bank account via an electronic funds transfer (EFT) rather than issuing them a check for the
employee to deposit. Direct deposit is recommended since funds are available immediately whereas
checks can take 2-5 days to clear; direct deposit also avoids the risk that a check might be lost. Automatic
savings is when a person designates a specific amount of money from their salary for savings for a
vacation, holiday gifts, or future expenses.
45. B
Check cashing store
Banking – Check cashing store
Rationale: Check cashing stores (centers) charge a fee for their services, in this instance the charge was
$15 and the person cashing the check only received $285. Critics feel these stores exploit the consumers
they serve, while providing a facade of convenience. Checks cashed can incur an average of 3-5% of the
check amount in fees. On average, the annual costs of using a financial service center for check cashing
is greater than fees for using a checking account at a bank or credit union.
For individuals who are unable to open a checking account, there are alternatives, such as second
chance bank accounts, which provide users the convenience of a checking account without having to
pass a credit check. There is also a danger for the people who leave a check cashing store with a
significant amount of cash of being robbed-- especially if the store is located in an area where crime is
prominent.
46. A
Pay for purchases directly from a checking or savings account
Banking- Debit cards
Rationale: A debit card is a card issued by a bank, directly linked to a checking or savings account. With
this card, a person can pay for purchases and the purchase amount is immediately withdrawn directly
from the person’s checking or savings account. Debit cards can also be used to make point of sale (POS)
purchases from stores. In order to use a debit card, a person must have a Personal Identification Number
(PIN).
47. C
Pawnshop
Banking- Where to get a loan
Rationale: When borrowing from a pawnshop, a person will usually face the highest loan rates. When a
person receives a loan from a pawnshop, the loan is secured by something of value, but the interest rate
will still be very high.
48. D
Perform transactions 24 hours a day
Banking- Online banking
Rationale: Electronic banking allows customers to review their account information online (computer,
tablet or smart phone) and perform transactions (e.g. bill payments) via electronic funds transfers 24
hours a day, seven days a week. Customers are not limited to the hours of their local bank branch and
can access their account any day at any time.
SAMPLE FINANCIAL LITERACY EXAM
20
49. B
A stop-payment order
Banking- Stop payment order
Rationale: A stop-payment order is a request made by the account holder for the bank not to pay a check
that has already been written. It can only be done if the check has not already been processed by the
recipient’s bank. Generally, an account holder would only request a stop payment if the check has been
lost or if the account holder is in dispute with the person or business that the check has been written to. A
stop-payment order includes a fee.
50. D
Lower account fees and lower interest rates on loans than a commercial bank offers
Banking- How banks and credit unions differ
Rationale: Credit union checking accounts usually have lower account fees and lower interest rates on
loans than commercial banks because credit unions operate as not-for-profit and member (account
holder) owned institutions.
51. A
Personal medical information
Credit- Information on credit reports
Rationale: A person’s credit report is used for various reasons as it has become an effective measure of
an individual’s personal accountability. Since approximately 80% of the adult population has credit cards,
the credit report is an extensive data base of an individual’s financial history. Medical records are
considered confidential, even though they may be available online. Criminal records, unpaid fines,
employment history and the failure to make child support payments are on a consumer’s credit report, as
is employment history.
52. B
Hillary
Credit- Low vs. high credit score
Rationale: Credit scores are used by banks, lending institutions, and insurance companies to determine
which individuals will receive the lowest interest rates on loans. A top credit score is 850, although less
than 1% of borrowers have this score. The best rates generally go to people with a credit score above
760. Credit scores are also known as FICO (Fair Isaac Corporation) scores.
53. B
Keep debt low and pay bills on time
Credit- How to maintain a positive credit rating
Rationale: The credit reporting agencies do not track the amount of interest charged by credit companies,
the ability to have protection from identity theft, investments, or a person’s household budget. A person
can improve his credit score by paying bills on time and paying the full balance at the end of the month.
The kinds of investments outside of bank accounts and the quality of purchases made regarding sales
and discounts do not influence a person’s credit rating.
54. B
The larger the down payment, the lower the principal
Credit- Car loan payments
Rationale: An important lesson about borrowing is that the lower the dollar amount of a loan (the
principal), the lower the monthly payments. A higher down payment of $10,000 on a car that costs
$20,000 will reduce the amount of the loan; while a $5,000 down payment requires a larger loan and a
higher monthly payment. A second lesson about borrowing is that it is important to get the lowest interest
rate, which is reported as the APR. When the length of the loan is reduced, the monthly payments will be
higher but the person pays less money in interest for the loan.
SAMPLE FINANCIAL LITERACY EXAM
21
55. B
Uses another person’s information to open an account
Credit- Identity theft
Rationale: Identity theft is a federal crime under The Identity Theft and Assumption Deterrence Act of
1998. The Act established the Federal Trade Commission as the central reporting agency. There are
many ways to steal a person’s identity by getting personal information regarding name, age, date of birth,
address, Social Security number, passwords, and bank or credit card information. A victim of identity theft
will often find that a new account for a phone, utility, credit card, or loan has been made in her name.
Usually, a person using a parent’s charge card has permission and is an authorized user. Giving
information to a credit reporting agency is not illegal. Some people have the same name and sometimes
people in the same family have an identical name which is not identity theft.
56. A
A person needs to buy a car to get a much better paying job
Credit- Benefit of buying on credit
Rationale: A financially responsible person considers the opportunity cost of every financial decision. It is
financially beneficial and an investment in one’s financial wellbeing to buy a car when a person needs it to
get to work or to get a new job with a higher salary. Owning a car requires the expenses of maintenance,
fuel, insurance, and sometimes tolls and parking. The cost of borrowing for recreation, entertainment, and
clothing are likely to be a want rather than a need. It is best to save for these items or include them in the
person’s budget. It is not beneficial to pay more for the interest on the loan than what a bank is paying a
person in a savings account.
57. C
They can work with those who loaned him money to set up a realistic payment schedule
Credit- Resolving credit problems
Rationale: A person who is in debt usually does not have sufficient money to make monthly payments. If
the monthly payments are lowered with lower interest payments, perhaps this person can get out of debt.
A person from a credit counseling service can be effective in talking with this person’s debtors to see if a
new payment schedule can be arranged.
58. A
Eric will pay less because the truck is collateral for the loan
Credit- Types of loans with collateral
Rationale: When a loan is collateralized, as it would be in this case with Eric’s loan, and all other factors
equal, the individual should get a good interest rate and pay less over time. The truck is collateral which
means that, if Eric should default on the loan, the lender could repossess and sell the truck to get the
money to repay the loan in full.
59. A
Credit
Credit- Definition of credit
Rationale: Credit is defined as buying goods and/or services now and paying back the money in the
future, generally with interest. Liquidity refers to how quickly assets can be converted to money, collateral
is property or an asset than can be used to pay for a loan, and net income is the take home pay from
wages after taxes and other required expenses have been deducted.
60. C
Annual percentage rate (APR)
Credit- APR
Rationale: APR is defined as the interest rate imposed by a lender that a borrower has to pay on a loan.
The APR is intended to make it easier to compare lenders and loan options. It includes the hidden
expenses of fees and charges.
SAMPLE FINANCIAL LITERACY EXAM
22
61. B
Credit risk
Credit- Risk associated with credit
Rationale: When there is a possibility that a borrower will not repay the money he has borrowed, the
lender sees him as a credit risk, since he is likely to default on payments and is unable to pay now and in
the future.
62. B
Assets
Credit- Loan applications
Rationale: Borrowers, usually for loans without collateral, need to provide information regarding their
assets (things a person owns that have monetary value such as car, house, etc.) when applying for a loan
so the lender can determine if the borrower will be able to make on-time payments. If a borrower has
many assets, the lender will likely determine that there is low risk and the borrower is likely to repay the
loan. If a borrower has few assets, the lender may think there is too much risk that the borrower may not
repay the loan and will deny the loan.
63. A
An installment plan
Credit- installment plan
Rationale: An installment plan is a type of credit plan where an individual agrees to make a definite
number of payments, which include interest, within a specified period of time. This is considered a fixed
loan. A line of credit is an example of revolving credit because the payments may be made over several
years and the interest rate changes with economic conditions.
64. C
Credit history
Rationale: A person’s credit history influences her credit score, which dictates how creditworthy she is. A
person can be denied a loan based on her credit history. A perfect credit score is 850 and a score above
760 is considered excellent.
65. D
A person who is unable to pay his rent
Rationale: A person who has trouble paying his rent has a financial problem. A mortgage or college loan
is not in itself an indicator of a person in financial difficulty nor is someone who makes most of his
purchases with a credit card unless he cannot make his monthly payments.
66. A
Rent an apartment
Credit- Potential consequence of low credit score
Rationale: Many landlords when they are considering renting an apartment will first check with a credit
reporting agency to determine if the person wanting to rent has a poor record of paying bills on time,
hence a low credit (FICO) score. A person’s credit score does not impact a person’s ability to get a debit
card, open a savings account or qualify for a driver’s license.
67. C
Debit card payments are immediately deducted from the person’s bank account
Credit- Difference between credit and debit card
Rationale: When a debit card is used, money is immediately deducted from a person’s checking or
savings account, depending on which account the debit card owner has arranged with the bank for the
debit card to be used for withdrawals. Both credit and debit cards receive some protection from identity
theft and they can be used for small or large purchases as long as they do not exceed the credit amount
limit or amount in the bank account.
68. A
Limit the amount of cash she has to carry
Credit – advantage of credit card
Rationale: A major advantage of a credit card is that there is no need to carry large amounts of cash to
make a purchase. All the other choices are disadvantages.
SAMPLE FINANCIAL LITERACY EXAM
23
69. A
Having a steady employment record
Credit- How to establish a credit history
Rationale: A person’s credit history includes the person’s employment record. Therefore, it is important to
have a steady employment history as it is part of a person’s FICO score. Although six months is
considered a minimum for establishing a credit history, consistent employment for two or more years is
desired.
70. B
Permitted for paying a credit card bill to avoid a late fee
Credit- Grace period
Rationale: Each credit card company gives the credit card owner a period of time between when the
credit card bill is generated and when the bill needs to be paid. This period is known as the grace period.
When paying by mail, it is important to allow sufficient time for the payment to reach the credit card
company to be posted as paid by the due date. If the bill is paid late, after the grace period, the person
will be charged a late fee on the next credit card bill.
71. A
Information on the cost of the loan
Credit- Truth in Lending Act
Rationale: The Truth-in-Lending Act protects consumers when they use various forms of credit. The Act
makes lenders tell borrowers the amount being financed, the terms of the loan, the rate of interest,
penalties, and any other charge so that consumers can shop.
72. C
A credit card that offers 1% cash back rewards on all purchases
Credit- Credit card decision
Rationale: It is important to understand the different credit card terms regarding fees, interest rates,
annual percentage rates, credit limits, and rewards. Credit card companies make their money from the
interest charged when a card owner does not pay the balance in full. The card company charges interest
on the unpaid balance each month. While a credit card with a 0% interest rate may appear attractive,
interest will be charged after six months. A person who pays her bill in full benefits with a rewards card
that returns cash at 1% because, in addition to having no interest charges, cash is received.
73. D
Credit reporting agency
Credit- Credit reporting agencies
Rationale: A company that maintains the history of a person’s use of credit is called a credit reporting
agency. At the present time there are three major credit reporting agencies in the U.S. (Experian,
TransUnion and Equifax) and consumers are entitled to a free credit report from each agency once a
year. Free credit reports from these three agencies are available at www.annualcreditreport.com
74. A
Loan
Credit- Financing for college
Rationale: Only a loan needs repayment. Grants, scholarships and money from work-study are examples
of money that is given with the understanding that the receiver will not have to repay it.
75. B
Phishing
Credit- Phishing
Rationale: Phishing is the name given to the scam when someone is trying to obtain a person’s financial
and personal information illegally.
SAMPLE FINANCIAL LITERACY EXAM
24
76. D
Line
Credit- Line of credit (credit limit)
Rationale: A line-of-credit, credit limit or credit line is the amount of money a lender is willing to lend a
borrower. When the borrower reaches that limit, the borrower can no longer borrow money from that
source, e.g. a bank or credit card company.
77. A
Insurance
Insurance- Purpose of insurances
Rationale: The purpose of insurance is to lower a person’s costs due to illness (health insurance) or
loss/damage to the insured person’s property such as a car (auto insurance) or a home (property
insurance). Other types of insurance include life and disability insurance. Life insurance provides financial
protection to dependents upon a person’s death; disability insurance provides income to a person if the
person is unable to work because of sickness or injury.
78. D
Comprehensive
Insurance- Types of automobile insurance
Rationale: Comprehensive insurance is the part of one’s auto insurance that covers damages to one’s
car caused by something other than a collision, such as fire, theft, vandalism, hail, or flooding. Almost all
states require a person to have collision and liability insurance coverage when the person buys a car;
comprehensive insurance, on the other hand, is optional.
79. C
Determine the dollar value of personal property to be covered by insurance
Insurance- Renter’s insurance
Rationale: Renter’s insurance covers losses to the personal property of a renter in case of theft or fire.
Ideally, one should list each personal item a person wants covered and its value or cost to be replaced in
order to determine the amount of coverage to have on his renter’s insurance policy. The renters’
insurance policy should be for an amount equal to this replacement cost.
80. A
Male teenagers have a greater number of accidents than female teenagers
Insurance-Auto premium rates for new male teenage drivers
Rationale: Statistically, male teenage drivers have more accidents than females and, therefore are a
higher risk for insurance companies. To compensate for this increased risk, insurance companies charge
higher premiums for these drivers. Assuming a clean driving record, the premium may fall as the teen
gets older and/or he gets married.
81. B
Replacement value
Insurance- Actual cash value vs. replacement value
Rationale: The term replacement cost or replacement value refers to the amount that an insurance
company would have to pay to replace an asset, such as a computer, at the current retail price if it was
stolen or destroyed in a fire.
82. A
Increase
Insurance- Factors affecting cost of car insurance premiums
Rationale: If a person has been issued several traffic tickets, the insurance company views her as being
at a higher risk for an accident. If she does have an accident, causing damage to her or another person’s
car, then the insurance company will incur the cost (over and above the person’s deductible) to repair the
damage. The company is likely to raise her insurance premium to take into account this higher potential
risk.
SAMPLE FINANCIAL LITERACY EXAM
25
83. B
Premium
Insurance- premium
Rationale: A premium is the payment made to an insurance company to cover the cost of a policy. The
premium payments are made periodically, generally each month, quarterly, every six months, or once a
year. One factor that determines the size of the premium is the deductible that the policy holder elects.
The higher the deductible, the lower the premium is, because with a high deductible the policy holder is
responsible for a higher portion of the loss.
84. A
File a claim with his insurance company
Insurance- Claim
Rationale: As part of the process to receive money for a loss or damage, a person must first file a claim
with his insurance company. The company will then investigate the loss/damage and make a
determination about whether to approve the claim. If the claim is approved, the insurance company will
make the payment for the amount of the claim less the policyholder’s deductible.
85. C
Risk
Insurance- Risk
Rationale: Insurance companies set their premiums based on the amount of risk the company is taking.
The higher the risk, the greater the chance that the policy holder will make a claim and that the company
will have to pay a claim. To offset this risk, the premium on the policy is likely to be higher.
86. C
Term and whole life (permanent)
Insurance- Term vs. whole-life
Rationale: There are two types of life insurance policies. The first is term life, which is a policy that lasts
for a specific amount of time and has a specific face value that is only paid on the death of the person.
The second type is whole life (permanent), which lasts for the length of the person’s life and does not
have a specific face value because it can accumulate cash value from a portion of the premium that the
policy holder pays.
87. C
Figure out how much is needed, then get prices from different companies
Insurance- Factors to consider
Rationale: It is always best to determine how much life insurance is needed by examining the person’s
income, expenses and the number of people dependent on the income. After determining the amount, the
person should comparison shop because, like any product or service, insurance companies may charge
different prices for the same policy or offer different policy options and features.
88. C
Help meet the financial needs of dependents upon a person’s death
Insurance- Purpose of life
Rationale: The purpose of life insurance is to financially protect dependents by taking out a policy for a
specified amount of money which will be payable to the dependents upon the person’s death. The cost of
the policy will vary based on factors such as the health and age of the person buying the policy and on
the amount of coverage selected.
89. C
Stocks
Investing- Financial product highest risk
Rationale: Unlike bank accounts (checking, savings and CDs), stocks trade on the stock market every
day and prices can fluctuate daily as a result of market conditions. This makes stocks riskier as prices
could fall and an investor could lose money. Investors expect to be rewarded for this risk with a higher
return from stocks than interest earned on money held in an interest bearing bank account.
SAMPLE FINANCIAL LITERACY EXAM
26
90. A
Increase wealth
Investing- Purpose of purchasing stock
Rationale: Investors buy stocks in companies in order to share in the company’s potential profits and
therefore increase their personal wealth. Investors can build their wealth in two potential ways. First,
some companies distribute a portion of their profits to investors as dividends; second, if a company’s
profit is growing, its stock price may rise. If an investor sells his stock in the company at a higher price
than he paid, he earns a capital gain.
91. B
A meeting with a licensed financial planner/advisor
Investing- Steps before investing
Rationale: A person should meet with a financial advisor/planner to determine the right type of investment
for him such as stocks, bonds and/or mutual funds. The advisor/planner will help him, for example, create
investment goals, understand the risks associated with each type of investment, and research and
explain different investment options and their cost.
92. A
Marketplace where stocks are bought and sold
Investing – NYSE
Rationale: The NYSE is a place where traders go to buy and sell stocks, that is why it is referred to as an
exchange or marketplace. Before they can be traded, the stocks of companies must be listed on an
exchange such as the NYSE. Once listed, stocks are traded on the exchange mostly through computer
systems. Although there are several stock exchanges in the US where stocks are traded, the NYSE is
widely recognized as the leading one.
93. A
US Treasury bond
Investing- Low-risk investment
Rationale: A holder of a US Treasury bond has made a loan to the US Federal Government. These bonds
are backed (not insured) by a Government promise to pay the holder a periodic interest payment and to
repay the loan when the bond matures. While prices can fluctuate prior to maturity, US Treasury bonds
are a safer investment than stocks or mutual funds because the US Government has never failed to
deliver on its promise. Thus, if an investor holds a US Treasury Bond to its maturity, he is investing in a
low risk investment product.
94. C
New product being released for sale
Investing: Stock Price
Rationale: Many factors can influence the price of a stock, either negatively or positively. One of these
factors relates to the business and profit outlook for the corporation. If the outlook is positive, the
company’s stock price is likely to rise. The release of a new product may generate consumer excitement
and improve the outlook for the company and this could increase the price of the stock.
95. B
Diversification
Investing- Diversification to lower risk
Rationale: Diversification refers to a process of investing in different stocks, bonds, mutual funds and
securities instead of investing in one stock or bond. By spreading her money in a variety of investment
products, an investor reduces her overall investment risk because the poor performance of a single
security or stock may be offset by strong performances in others. The risk is higher if the investor holds
only one stock and it performs poorly.
SAMPLE FINANCIAL LITERACY EXAM
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96. C
Capital gains
Investing- Sale of stocks and capital gains
Rationale: A person has a capital gain when she sells an investment for a profit. The amount is based on
the difference between the amount a person paid for the investment asset and the amount the person
sold it for. Capital gains must be reported on the person’s income tax return. Capital gains for assets held
at least one year are taxed at lower rates than assets held for less than a year.
97. B
Public corporation
Investing- Types of companies issuing stocks
Rationale: By definition, a company or corporation becomes a public company when it sells a share of the
ownership in the company through a stock exchange to investors in order to raise money. When a
company sells shares for the first time, the process is called an Initial Public Offering (IPO). The shares
(or stocks) are listed on a stock exchange. Once listed, the shares can be traded to other investors.
98. B
Managed by a professional
Investing- Reason to purchase mutual funds
Rationale: A stock mutual fund owns the stocks of many different companies. One advantage for an
investor to own a mutual fund is that it is managed by a professional. The professional is responsible for
selecting which stocks the mutual fund owns and for tracking and reporting on their performance to
investors in the fund.
99. A
Risk
Investing- Risk and return
Rationale: Generally, investors expect to earn a higher return on investments with the most risk. These
investments are more likely to lose money and investors need a higher reward to offset this higher risk of
loss. Historically, investments in higher risk securities such as stocks have, over the long run, earned
investors higher returns than investments in lower risk securities such as corporate bonds.
100. B
Has lent money to the company
Investing- Company issued bonds
Rationale: Bonds are loans that investors make to a corporation (or a government body) in exchange for
regular interest payments and the return of principal at a future date. Companies issue corporate bonds to
raise money for a variety of purposes including capital expenditures such as a business expansion project
or the acquisition of another company. Unlike stockholders, bondholders do not receive ownership rights
in the corporation.