Answer Key -- PF PRE-ASSESSMENT
1. List the 6 steps for setting up a financial plan.
Answer:
Determine your current situation.
Identify and prioritize your goals.
Develop a long-term plan.
Organize your records.
Set up a budget.
Keep it simple.
2. Name two places where you can check recall notices and report defective products.
Answer: Consumer Product Safety Commission and the Federal Consumer Information Center
3. Explain why you might not choose a credit card offering the lowest APR.
Answer: Several possible reasons exist, such as: the lowest APR might just be an introductory rate, the
card with the lowest APR might have unacceptably high fees, you might be planning to pay the balance
in full every month and not incur finance charges (must list at least one of these answers.
4. You put half of your investment money into a company bond that pays 15% per year, and it is called
(the company pays you back your investment plus interest earned to date) after only 6 months. The
other half of your investment money is in a mutual fund that you bought at $45 per share, and one year
later is worth $46 per share. If your original investment was $2,000, how much money is your
investment worth at the end of the year?
Answer: $1000 x 1/2 x 0.15 = $75; $1000 x $46 / $45 = 1022. Total = $1,075 + $1,022 = $2097.
5. You want to see how stock A has done over the past five years. Using a financial web site, you learn
that Stock A was worth $50.36 five years ago. The stock is now worth $60 a share, and has paid
quarterly dividends of 20 cents a share. Based on a purchase of 100 shares, what is the return on
investment of Stock A over the last 5 years?
Answer: 5 x 4 x 100 x $.20 = $400. Current value = $60 x 100 + $400 = $6,400. Price five years ago =
$50.36 x 100 = $5,036. Increase in value = $6,400 – $5,036 = $1364. Percentage increase = $1364/$5036
= 27% increase in five years.
6. How much do financial advisors say you need for retirement?
Answer: Financial advisors say you will need 70–80% of your pre-retirement income to have a
financially secure retirement.
7. Name two tax benefits of the 401(k) plan.
Answer: Contributions to a 401(k) are made on a pre-tax basis. You also do not have to pay taxes on
any earnings until the money is distributed.
8. What is the difference between a traditional IRA and a Roth IRA?
Answer: With a traditional IRA, contributions are made on a pre-tax basis and earnings are not taxed
until withdrawn. A Roth IRA is different because contributions are not tax deductible; however, you can
withdraw your principal investment at any time without a penalty. When you reach retirement age your
withdrawals (even earnings) are 100% tax-free.
9. Anton’s gross salary every two weeks is $1,650. He pays $90 each month on a school loan
and $145 on a car loan. He estimates insurance and taxes will cost about $200 per month. How
much can he afford to spend in monthly mortgage payments?
Answer: $1,650 x 2 = $3,300, which is his monthly gross income. His total housing expenses including
mortgage, homeowners insurance, taxes, etc should not exceed 28 percent of this amount. (.28) x
($3,300) = $924. Subtract from $924 his $200 in other housing expenses and he should spend no more
than $724 per month on his mortgage payment.
10. Jenna owns a car and carries insurance that covers property damage and liability. Her
monthly premium is $150, and her deductible is $475. In the last year she had two accidents.
One caused $1,500 in damage, and the other caused $7,000 in damage. How much did Jenna
pay for the damage, and how much did her insurance company pay?
Answer: Jenna $950 – Ins. Co. $7,550
Life Scenarios – Calculate & determine the correct answer
13) You make custom bicycles; if you price them at $500 you will sell 300 bikes. If you sell them at
$200 you will sell 450 bikes. What price would you sell the bikes for?
Sell the bikes for $500
$500 * 300 = $150,000
$200 * 450 = $90,000
14) Your bank account shows a direct deposit from your employer for $240. Your total
deductions were $80. You make $12 per hour, how many hours did you work?
I worked 26.67 Hours
$240 + $80 = $320
$320 / 12 = 26.67 Hours
15) You purchase a car for $10,000 on a loan over 5 years at 8% interest. What is the closest
estimate to your monthly payment?
Estimated payment around $180 per month
$10,000 / 5 years = $2,000 principal per year
$2,000 * (1+.08) interest = $2,160 principal & interest per year
$2,160 / 12 months = $180 per month
16) You have $10 while making a decision between seeing a movie (cost $10) or going to
play mini-golf (cost $8); what is your opportunity cost?
Opportunity Cost is $2
Movie – Mini-Golf = $10 - $8 = $2 Opportunity Cost
17) Your credit card has an $85 balance. You make a purchase for $25 & a payment for $50
but you have an interest charge of $5. What is your new balance?
New balance is $65
Previous Balance + Purchases – Payment + Interest Charge =
$85 + $25 -$50 + $5 = $65 New Balance
18) If you purchase a car for $20,000 & have made payments of $5,000 with an annual
income of $50,000; what debt ratio is reported on your Credit Report?
Debt ratio reported is 75%
(Initial Amount – Payments) / Initial Amount =
($20,000 - $5,000) / $20,000 = 75% Debt Ratio