FIN 474 Exam 1 - KEY
1. In order for your financial plan to be realistic and attainable it needs to be based upon your
A) budget.
B) income level.
C) number of tax deductions, exemption, exclusions, and credits.
D) balance sheet.
E) none of the above
Answer: B
2. What are common factors found in an effective financial plan?
A) Effective financial plans should be flexible to allow for changes in your situation
B) Effective financial plans should provide sufficient liquidity to meet unexpected needs
C) Effective financial plans should provide insurance protection from catastrophic events
D) Effective financial plans should help you minimize paying taxes
E) All of the above are necessary in an effective financial plan
Answer: E
3. Which one of the following is not one of the five basic steps in personal financial planning?
A) Evaluate your financial health.
B) Define your financial goals.
C) Develop a plan of action.
D) Let an accountant review your plan.
E) Implement your plan.
Answer: D
4. Suppose you have just retired, have accumulated many luxury goods over the years, still owe a
mortgage on your home, still have unpaid travel expenses on your credit cards, and have helped your
adult children financially. Your spouse has recently passed away, and you miss his/her contribution to
the household income. Which step in the personal financial planning process have you neglected?
A) Develop your financial health.
B) Define your financial goals.
C) Develop a plan of action.
D) Implement your plan.
E) Review your progress, reevaluate, and revise your plan.
Answer: E
5. The major reason to make a financial plan is to
A) account for your spending.
B) see where you are overspending or underspending.
C) achieve your financial goals.
D) allow for a surplus.
E) serve as a tax planning guide.
Answer: C
6. What is the significance of the financial life cycle?
A) to help you to compare your situation with other people's situation
B) to better understand how your financial needs will most likely change over time
C) to allow you to be more proactive in dealing with expected changes in the future and take steps today
to prepare for them
D) to help you realize that your original plan is sufficient and doesn't need to change
E) both B and C are significant aspects of the financial life cycle
Answer: E
7. When measuring your current financial condition it is important to create
A) positive net worth.
B) a personal balance sheet.
C) an income statement.
D) positive net income.
E) both B and C are required.
Answer: E
8. You know you are insolvent when
A) your expenses exceed your income.
B) your assets are less than your liabilities.
C) your net worth is negative.
D) your debt ratio is too high.
E) both B and C above
Answer: E
9. Which of the following are not typically found on a balance sheet?
A) monetary assets
B) mortgage interest payments
C) current market value of home
D) interest earned on a CD at the bank.
E) both B and D are not found on a balance sheet.
Answer: E
10. Your net worth, or your general level of financial worth, is found by
A) subtracting your expenses from your income.
B) dividing your monetary assets by your current liabilities.
C) subtracting your liabilities from your assets.
D) dividing monthly debt (less mortgage payment) by monthly income.
E) subtracting current liabilities from monetary assets.
Answer: C
11. Which of the following would you calculate if you were concerned about your financial resources
with regards to unplanned money emergencies?
A) liability ratio
B) debt ratio
C) long-term debt coverage ratio
D) current ratio
E) none of the above
Answer: D
12. Which of the following will be the best type of record keeping system to use in maintaining financial
records?
A) manual method with pencil and notebook
B) computer software
C) the CPA's system
D) one you will actually use
E) Any record system out there will do.
Answer: D
13. Which of the following financial institutions is a not-for-profit organization that is open only to
members of that institution and tends to offer more favorable interest rates to borrowers and savers?
A) savings bank
B) commercial bank
C) savings and loan association
D) credit union
E) None of the above are correct.
Answer: D
14. What is the name for comprehensive financial services packages offered by brokerage firms?
A) asset management accounts
B) comprehensive management accounts
C) platinum management accounts
D) consolidated management accounts
E) None of the above are correct.
Answer: A
15. Of the following, which one is not an advantage of a CD as a cash management alternative?
A) fixed interest rate, beneficial if interest rates drop
B) wide selection of maturities
C) is insured
D) liquidity
E) convenient to purchase
Answer: D
16. You are considering an MMMF. The fund is taxable and pays 8.5% interest. If your top federal tax
bracket is 25% and you live in a state that doesn't impose income taxes, what after-tax return would
you realize from this investment?
A) 6.375%
B) 2.125%
C) 7.4375%
D) 8.25%
E) 8.5%
Answer: A
17. Please choose the method to use when calculating the after-tax return.
A) taxable return (1 + marginal tax rate) - nontaxable return
B) taxable return (marginal tax rate - 1) - nontaxable return
C) nontaxable return (1 - marginal tax rate) + taxable return
D) taxable return (1 - marginal tax rate) + nontaxable return
E) nontaxable return (1 + marginal tax rate) - taxable return
Answer: D
18. Barbara Stallins had her bank certify one of her personal checks as being good. Which type of check
has been issued?
A) traveler's check
B) certified check
C) cashier's check
D) money order
E) audited check
Answer: B
19. The percentage of the credit card sale the retailer owes to the credit card company is the
A) retailer credit acceptance fee.
B) card usage allowance.
C) franchise fee.
D) merchant's discount fee.
E) interest rebate fee.
Answer: D
20. Typically, the credit card issuer allows you a grace period, which means
A) you do not have to make a payment during the current month.
B) you are not charged any interest during this grace period.
C) you must pay your balance off in full to benefit from the grace period.
D) interest charges are reduced during this time.
E) both B and C apply
Answer: E
21. On October 1st Joe charged $900 to his credit card, on October 10th he charged another $1300 to his
credit card, and on October 15th he charged an additional $100. His credit card charges him an
Annual Percentage Rate (APR) of 18% compounded monthly. Using the Average Daily Balance
Method calculate Joe's finance charge for the month of October.
A) $7.12
B) $28.16
C) $212.36
D) $523.14
E) None of the above are correct answers.
Answer: B
22. The Truth In Lending Act requires that all consumer credit agreements disclose the ________ in bold
print?
A) Effective Annual Rate (EAR)
B) Annual Percentage Rate (APR)
C) Monthly Stated Rate (MSR)
D) Nominal Interest Rate (NIR)
E) none of the above
Answer: B
23. One of the ugliest secrets about using your credit card for a cash advance is that ________.
A) there is usually a 2% to 4% up front fee on the amount
B) the APR on the cash advance is typically higher than the APR for normal purchases
C) payments do not apply to cash advance balances unless the balance for regular credit purchases is zero.
D) all of the above apply to cash advances
E) all but B apply to cash advances
Answer: D
24. Which of the following is not an advantage of credit cards?
A) convenience or ease of shopping
B) emergency use
C) allows for online shopping
D) the finance charge that accrues on the account if not paid off in full each month
E) allows for consumption before the purchase is fully paid for
Answer: D
25. What is the main distinguishing feature(s) for T&E cards?
A) They do not offer revolving credit.
B) The full balance must be paid each month.
C) There is no annual fee.
D) both A and B above
E) both A and C above
Answer: D
26. What is the first step in the financial planning process?
(A) Gather information and data.
(B) Establish the adviser-client relationship.
(C) Set the goals and objectives.
(D) Determine assumptions and risk tolerance.
B is the answer. The first step is to establish the adviser-client relationship.
27. The financial planning process is completed for a client at which of the following stages?
(A) Implementing the plan
(B) Developing the plan
(C) Obtaining the client’s approval of the plan
(D) None of the above
D is the answer. Financial planning is an ongoing process, so the plan must be reviewed and revised
periodically, even after it has been fully implemented.
28. Which of the following arrangements of steps for the financial planning process is the proper
sequence?
(A) Monitor the plan, develop the plan, implement the plan, establish objectives.
(B) Analyze information, develop the plan, monitor the plan, implement the plan.
(C) Implement the plan, analyze information, monitor the plan, develop the plan.
(D) Gather data, analyze information, develop the plan, implement the plan.
D is the answer. After setting goals, the financial planner and client should gather data, including
objectives, analyze information, develop the plan, and implement the plan. Ongoing monitoring of the
plan is the last step.
29. Who is typically responsible for preparing the client’s Will?
(A) The client
(B) The financial planner
(C) The accountant
(D) The attorney
D is the answer. The attorney should be the one to prepare the client’s will since it is a legal document.
The financial planner may be involved in making some of the recommendations to include in the will.
However, the attorney will be the one responsible for drafting the document.
30. Which of the following clients is most likely in need of reviewing their financial plan from last year?
(A) Jonathan who was diagnosed with lung cancer this week
(B) Anna who retired this week as anticipated
(C) Dylan whose oldest child started college this week
(D) Natalie who finally got married this week after a two year engagement
A is the answer. Jonathan is most likely in need of reviewing his financial plan due to the unexpected
cancer. All of the other three clients had events this week that would have already been anticipated in the
financial plan from last year.
31. A client’s net worth will increase if, other things being equal, all of the following changes occur
during the given period of time, EXCEPT:
(A) The client paid off credit card balances with cash from a checking account.
(B) The client received a gift of a car from an uncle.
(C) The client’s brother forgave a loan to the client.
(D) The client failed to spend all of his or her salary and kept the remainder in a checking account.
A is the answer. Paying off a debt does not change net worth because the cash asset is reduced in the
same amount as the liability is reduced.
32. On December 31, the Franklin Family had a net worth of $180,000. In January, the Franklins
acquired a new automobile valued at $12,000, which reduced the family’s total cash by $5,000 and
increased their liabilities by $7,000, and they experienced a $20,000 bonanza because of unrealized
stock market gains. What is the family’s net worth after these changes?
(A) $180,000
(C) $200,000
(B) $192,000
(D) $212,000
C is the answer. There is no change in net worth as a result of purchase of the automobile because
liabilities increased by $7,000 and cash declined by $5,000, so this $12,000 exactly offset the $12,000 car
asset. The increase in net worth was $20,000 because of the stock market gain. Assets $287,000 –
$87,000 Liabilities = $200,000 Net Worth.
33. All the following statements concerning liabilities in a personal statement of financial position are
correct, EXCEPT:
(A) A purchase, where the invoice has not been received, would be excluded.
(B) Any items that must be paid in the future must be included.
(C) Short-term liabilities are incurred for convenience, while long-term liabilities are typically
incurred to purchase use assets.
(D) Mortgage loans are listed separately, rather than as installment loan balances.
A is the answer. A is not a correct statement. If a purchase is not for cash, it creates a liability for the
purchaser. It doesn’t matter that the purchaser has not yet received an invoice. B, C, and D are correct
statements.
34. Which of the following would be a cash inflow in a family’s cash flow statement?
(A) Newly acquired investments
(B) Dividends
(C) A new credit card
(D) Savings deposits
B is the answer. Dividends are a payment to the investor and are a cash inflow. Savings deposits and
investments acquired are outflows of funds, not inflows. Savings and investments are where the family
places some of its cash. For example, the family purchases CDs, common stocks, and mutual funds. A
new credit card is an additional line of credit, not an inflow.
35. Ben has $5,000 in his checking account, a $20,000 vehicle, $10,000 in stocks and bonds and a $2,000
balance on his credit card. If his net worth is $15,000, what is the amount of his car loan?
(A) $12,000
(B) $15,000
(C) $18,000
(D) $20,000
C is the answer. Ben’s net worth is the difference between his assets and his liabilities which is $15,000
= $5,000 + $20,000 + $10,000 – $2,000 – car loan. Thus, the car loan must be $18,000 ($15,000 = $5,000
+ $20,000 + $10,000 – $2,000 – $18,000).
36. Which of the following statements concerning cash flow planning is correct?
(A) The goal is to maximize net cash flow.
(B) The goal should be to invest for the future, rather than maintaining current lifestyle.
(C) The goal should be to identify strengths and weaknesses in the client’s cash flows.
(D) The goal is to optimize net cash flow.
D is the answer. The goal of cash flow planning is to optimize net cash flow. Optimizing is not the same
as maximizing because optimizing recognizes that a client will want to maintain or improve his or her
current lifestyle.
37. Which of the following is the most likely amount recommended by a planner for Jasmine to have in
her emergency fund?
(A) 3-6 months of expenses
(B) 3-6 months of take-home income
(C) 6-9 months of expenses
(D) 6-9 months of take-home income
A is the answer. Jasmine needs to be able to cover 3 to 6 months of expenses in the event of an
emergency. Although, the ability to cover 6 to 9 months of expenses provides her with more coverage, it
is probably too much to have saved in an emergency fund. It is better to cover her expenses rather than
her take-home pay as she might not spend all that she earns or she may spend more than she earns.
38. Morgan’s monthly income is $10,000 of which she brings home $7,000 after all taxes and deductions.
According to the common rule-of-thumb used by lenders, what is the maximum amount Morgan’s
consumer debt payments should not exceed?
(A) $1,400
(B) $2,000
(C) $2,800
(D) $3,600
A is the answer. Morgan’s consumer debt payments should not exceed 20% of her $7,000 take home pay
which is $1,400.
39. Julia’s monthly income is $20,000 of which she brings home $15,000 after all taxes and deductions.
According to the common rule-of-thumb used by lenders, what is the maximum amount Julia’s
monthly mortgage payments should not exceed?
(A) $3,000
(B) $4,200
(C) $5,600
(D) $7,200
C is the answer. Julia’s monthly mortgage payments should not exceed 28% of her $20,000 gross income
which is $5,600.
40. Destiny’s monthly income is $15,000 of which she brings home $12,000 after all taxes and
deductions. According to the common rule-of-thumb used by lenders, what is the maximum amount
of Destiny’s monthly payments that should not be exceeded on all debts?
(A) $3,000
(B) $3,360
(C) $4,320
(D) $5,400
D is the answer. Destiny’s monthly payments on all debts should not exceed 36% of her $15,000 gross
income which is $5,400.
41. Banks will typically grant home equity loans or lines of credit up to what loan-to-value percentage?
(A) 20 percent
(B) 40 percent
(C) 60 percent
(D) 80 percent
D is the answer. Banks typically grant home equity loans or lines of credit up to 80% of the value of a
home, minus the outstanding first mortgage.
42. Which of the following loans most likely has the lowest interest rate?
(A) 5 year unsecured loan
(B) 5 year secured loan
(C) 15 year unsecured loan
(D) 15 year secured loan
B is the answer. Typically secured loans will have lower interest rates as there is less risk associated with
them. Shorter duration loans also have lower interest rates as the banks get their money back sooner.
43. Kevin just found out he is being transferred from Portland, Oregon to Portland, Maine for two years
with his job. His company anticipates moving him to Boston, Massachusetts after he finishes the
position in Maine. He owns a home in Oregon that he has put on the market. What is the best housing
option for Kevin while in Maine?
(A) Extended stay hotel
(B) Buy a home with a 3 year adjustable rate mortgage
(C) Buy a home with a 30 year fixed rate mortgage
(D) Rent a home
D is the answer. Kevin would be better off renting a home for two years rather than purchasing a home
due to all of the closing costs and the potential issue of not being able to sell the home immediately when
he is transferred to Boston. Extended stay hotels are fine for a couple months, but not for two years. He
would be better off renting the home.
44. Gabriel and Ava just bought their first home for $250,000. In order to get the 5.9% interest rate for 30
years, the bank charged them two points. How much did they have to pay the bank in points?
(A) $950
(B) $2,000
(C) $2,950
(D) $5,000
D is the answer. One point is one percent of the loan amount. Thus, they had to pay 2% of $250,000
which is $5,000.
45. Caleb and Kaitlyn currently pay $2,000 for their mortgage on the first of each month. Assuming their
bank allows for the following payment options, which option would allow Caleb and Kaitlyn to pay
off their mortgage the fastest?
(A) $500 per week
(B) $1,000 every two weeks
(C) $1,500 every three weeks
(D) $2,000 once a month
A is the answer. The loan will be paid off the fastest with the $500 weekly payments as each week part of
the principal will be repaid. This causes less interest to be accrued the following week which means even
more principal would be repaid the following week.
46. Thomas has a successful construction company that he runs as an LLC. Thomas periodically needs
access to $50,000 to $100,000 to build a home until he receives payments on his invoices which can
take 30 to 60 days. Which of the following is the best source of funds for Thomas?
(A) $100,000 home equity loan
(B) $100,000 home equity line of credit
(C) $100,000 personal loan at the local bank
(D) Charge the expenses on his credit card when needed
B is the answer. The home equity line of credit will allow Thomas to draw upon the credit line when
needed and he can repay it when he receives payments on his invoices. Thomas will only pay interest on
the amount of the loan outstanding. The home equity loan and the personal loan at the bank provide
Thomas with the $100,000 immediately which he does not need nor should he be incurring interest
expenses on the loan the entire time. The finance charges on the credit card would be much higher than
the home equity line of credit.
47. Which of the following clients is the top candidate for a reverse mortgage this year?
(A) Cameron, age 65, who has $50,000 remaining on his mortgage
(B) Haley, age 75, who is selling her home to move into an assisted living community
(C) Hunter, age 60, who retired this year to spend more time with his grandkids
(D) Savannah, age 63, who is still working part time as a fashion designer
D is the answer. Cameron is not eligible as the home must be completely paid off. Haley is not the top
candidate as she is selling her home which would require the reverse mortgage to be repaid. Hunter is not
eligible as he needs to be at least age 62. Savannah is the best of the four clients listed for the reverse
mortgage.
48. How much does Jack have FDIC insured if he has the following accounts all at City Bank: $100,000
checking account, $200,000 joint savings account with his wife, and a $300,000 IRA?
(A) $100,000
(B) $250,000
(C) $450,000
(D) $500,000
C is the answer. FDIC insurance is up to $250,000 per depositor per bank with a separate $250,000 limit
for the retirement accounts. As a result, Jack has $450,000 of insured amounts which consists of the
$100,000 checking account, $100,000 joint savings account (his 50% interest) and $250,000 IRA.
49. Which of Nicole’s accounts at Lake Bank are eligible for FDIC insurance (subject to account limits)?
I
Checking account
II
Savings account
III
Money market deposit accounts
IV
Money market mutual funds
(A) I and III only
(B) II and IV only
(C) I, II, and III only
(D) I, II, III, and IV
C is the answer. Money market mutual funds are not FDIC insured.
50. Which of the following accounts can be rolled over tax-free to another family member?
I
Coverdell ESAs
II
529 plans
III
2503(b) trusts
IV
2503(c) trusts
(A) II only
(B) II and IV only
(C) I and II only
(D) III and IV only
C is the answer. Both 529 plans and Coverdell ESAs provide for tax-free rollovers to family members.
2503(b) and 2503(c) trusts may not be rolled over.
51. By what age must a Coverdell ESA be rolled over to another family member or distributed?
(A) 18
(B) 21
(C) 30
(D) There is no age limit
C is the answer. Coverdell ESAs must be rolled over to another family member or distributed by age 30.
52. By what age must a 529 plan be rolled over to another family member or distributed?
(A) 18
(B) 21
(C) 30
(D) There is no age limit
D is the answer. Section 529 plans do not have an age limit by which they must be rolled over or
distributed.
53. A parent can contribute to their child’s ESA until the child reaches what age?
(A) 18
(B) 21
(C) 30
(D) There is no age limit
A is the answer. Taxpayers can contribute to an ESA until the child reaches age 18.
54. In order for Maria to attend college, she needs school loans as her father lost his factory job five years
ago and her mother died when she was young. Which of the following loans would Maria potentially
qualify for?
I
Perkins loans
II
Subsidized Stafford loans
III
Unsubsidized Stafford loans
IV
PLUS loans
(A) I and II only
(B) III and IV only
(C) I and III only
(D) I, II, III, and IV
D is the answer. Perkins loans and subsidized Stafford loans are both based on financial need. However,
Maria may also qualify for unsubsidized Stafford loans and PLUS loans which are not based on financial
need.
55. Angie is 5 years old and lives with her father. Her mother died during child birth due to a rare
complication. Angie’s dad has a $250,000 AGI. Angie is also very close to her grandmother who has
a $50,000 AGI. Which of the following contributions should be made to Angie’s Coverdell ESA this
year?
(A) Angie’s father should contribute $2,000
(B) Angie’s grandmother should contribute $2,000
(C) Angie’s father and grandmother should both contribute $1,000
(D) Angie’s father and grandmother should both contribute $2,000
B is the answer. The limit is $2,000 per student per year to the ESA. Due to the AGI limitations, Angie’s
father will not be able to contribute to the ESA. As a result, Angie’s grandmother should contribute the
$2,000.
56. Stephanie and Chip want to fund their 8 year old son Thornton’s college education. The current cost
of tuition is $10,000 per year and they expect it to increase 6% per year. They also anticipate earning
5% per year on their investments. Approximately how much do they need to contribute today to fund
five years of college for Thornton?
(A) $45,000
(B) $56,000
(C) $58,000
(D) $63,000
B is the answer. This is a three step calculation.
Step 1: Cost of tuition the first year in college
The variables are:
N = 10
I=6
PV = 10,000
PMT = 0
Solve for FV which is $17,908.
Step 2: The amount they need the day Thornton starts college
The variables are:
BEG mode
N=5
I = inflation adjusted rate of return which is -0.9434 ([1.05 / 1.06 – 1] x 100)
PMT = 17,908
FV = 0
Solve for PV which is $91,262.
Step 3: The amount they need to contribute today to fund the education
N = 10
I=5
PMT = 0
FV = 91,262
Solve for PV which is $56,027
Alternatively, this can be solved using the cash flow keys as follows:
Year
0
1–9
10 – 14
Cash Flow
0
0
10,000
I = inflation adjusted rate of return which is -0.9434 ([1.05 / 1.06 – 1] x 100)
Solve for NPV which is $56,028