Question 1 | : | Before a person borrows money from a bank to make a major purchase, which question is considered most important for the person to answer? | Correct Answer | : | D: Do the benefits of making the purchase outweigh the costs of borrowing the money? | Reason | : | In making a major purchase that requires a person to borrow money, the individual needs to take into consideration the opportunity costs (what is the trade off in making this purchase) involved with borrowing money in addition to the actual cost of the item. For example, if someone has saved $2000 to buy a used car, is he or she better off buying the older car that may need some work or is the person better off taking out a loan for an additional $5000, paying the interest on the loan as well as the principal, and having a newer, hopefully more reliable car. Or, is the person just borrowing the money to purchase a car with more extras and glitz and would be just fine with the $2000 car. | Your Answer | : | C: Can I just pay for the item on a credit card and pay off the amount due each month? | | Question 2 | : | An example of closed-end credit is a | Correct Answer | : | C: mortgage. | Reason | : | Open-end credit is a revolving line of credit that is offered by banks and other lenders to consumers. There is a limit set on the line of credit and the funds are accessed using a credit or debit card or a check or cash advance. Consumers pay interest on the outstanding balance. There are closed-end mortgages which cannot be repaid in total before maturity without the permission of the mortgage holder. | | Question 3 | : | When a person brings an item to a pawnshop to obtain cash, the transaction is considered | Correct Answer | : | A: a collateralized loan. | Reason | : | Since pawnshops make loans based on determining the value of collateral (a tangible object such as jewelry, cameras, musical instruments) they receive, the loan is considered a collateralized loan. | | Question 4 | : | A 60-year-old makes a withdrawal from his Roth Individual Retirement Account (IRA). The money withdrawn will be | Correct Answer | : | A: tax free. | Reason | : | A Roth IRA (Individual Retirement Account) does not have immediate benefits, but the investment grows on a tax-free basis and when withdrawals are made, after the age of 59 ? years of age, the withdrawals are exempt from federal and state taxes. | | Question 5 | : | A person places $1,000 in an investment that is considered a tax shelter. Because it is a tax shelter the person can expect | Correct Answer | : | B: immediate tax benefits from the investment. | Reason | : | A tax shelter is defined as an investment which provides immediate tax benefits as well as an expectation of a future financial return. An example of a tax sheltered investment is an individual retirement account (IRA). | Your Answer | : | A: the cost of the investment to be deducted from gross income. | | Question 6 | : | In terms of taxes, when stock dividends are reinvested, the owner of the stock | Correct Answer | : | B: still has to pay income taxes on the dividends. | Reason | : | When stock dividends are reinvested, the individual now has more stock in the company. However, the dividends are still taxed as income for the year since it is the money earned in the form of the dividend that is used to pay for the additional shares of stock. | | Question 7 | : | In which situation is a corporation most likely to call (buy back) a bond? | Correct Answer | : | B: It issued bonds at a 7.5% interest rate, but its current corporate bonds are now being issued at a 5% rate. | Reason | : | A corporation is most likely to buy back a bond when the rate it was issued at is greater than the current rate that the corporation is issuing its bonds. This saves the company from paying a lot of extra in interest payments. | | Question 8 | : | Which product is considered to be an investment? | Correct Answer | : | C: A corporate bond | Reason | : | A financial investment is a choice made by a consumer in anticipation of earning interest, dividends, or a capital gain. They are interested in putting their money to work. Buying a car is generally not an investment because almost all cars decrease in value. Savings accounts and CDs are not investments. Corporate bonds are usually not considered aggressive investments as compared to the IPO (initial public offering) of a new issue of stock. | Your Answer | : | B: An initial public offering of stock | | Question 9 | : | When an investor buys a zero-coupon bond, the investor | Correct Answer | : | C: purchases the bond at a discount from the face value of the bond. | Reason | : | A zero-coupon bond is sold at a value far below its face value, makes no annual or semi-annual interest payments and is redeemed for its face value at maturity. The investor makes money by buying the bonds at the low price and redeeming the bonds at their higher face value at maturity. | Your Answer | : | A: receives the interest in a lump sum when the bond matures. | | Question 10 | : | To determine the time value of depositing $100 in a savings account, a person needs to know the interest rate and | Correct Answer | : | B: the rate of inflation. | Reason | : | The ?time value of money? is a way of looking at how much a saving or investment is worth at the end of a period of time when it is compared to the rate of inflation during that period and the person?s earning power. For example, it may not seem as though depositing $100 a month in a retirement account when someone is 23 makes a whole lot of sense; why not wait until age 40 when it will probably be a lot easier to deposit $250 or $300 a month in the account. However, because of the miracle of compounding interest, that $100 will be worth a lot more when the person is older than the money that is deposited at age 40. However, the other factor to consider in making deposits to a regular savings account is the rate of interest as compared to the rate of inflation. If the annual rate of inflation is 03% and the interest earned on money is 01%, the deposit is actually going to have less purchasing power at the end of the year than it did at the start. | | Question 11 | : | A student?s grandmother has decided to buy a long term health care insurance policy. The student?s grandmother's decision is most likely related to the fact that this type of coverage | Correct Answer | : | A: is not offered by Medicare. | Reason | : | Medicare may not cover care in skilled nursing facilities beyond 100 days or nursing or custodial care at home. Long-term care insurance usually covers day-in, day-out assistance that elders may need as they age. | Your Answer | : | D: provides life-insurance benefits to heirs. | | Question 12 | : | A person buys a flat screen, plasma, theater-like television. The person has homeowner?s insurance. Why would it be appropriate to add a personal property floater to that insurance? | Correct Answer | : | D: To cover the cost of replacement should the television get damaged or stolen. | Reason | : | An extremely expensive item such as furs or jewelry or, in this case, the theater-like television, would usually not be covered in a standard insurance policy. As a result, policy holders often opt to attach a rider or ?floater? to the policy to cover replacement or repair of these items. The policy holder also must pay an additional premium for the ?floater? coverage. | | Question 13 | : | A woman has just received a very expensive piece of jewelry. The woman has homeowner's insurance. Which statement would it be most appropriate for her to make to her insurance agent? | Correct Answer | : | A: "I think I need a personal property floater." | Reason | : | A personal floater is additional property insurance, which is available within a homeowner?s policy, to cover damage or loss of a specific item of value. | | Question 14 | : | For the past five years, a person has had a $20,000 whole life insurance policy that has a cash value clause. The person decides to surrender the policy. At the time of surrender, the person will receive | Correct Answer | : | C: a calculated amount of money which includes the premiums paid as well as the interest on that money. | Reason | : | The cash value of a whole life insurance policy is based on premiums paid plus some of the interest earned. | | Question 15 | : | If a person makes a deposit of $10,000 or more into a bank account, the bank must notify the | Correct Answer | : | A: US Treasury Department. | Reason | : | In order to track large deposits, the federal government requires that deposits of $10,000 or more be reported to the Treasury Department. Some concerns may be that a person might be trying to avoid paying taxes on game winnings or perhaps illegal gains. | It took you 10:56 minute(s) to complete 15 questions. | | Here's how your score compares to the:  # of tests taken by people in your zip code 293 Average score (# correct answers) is 66%  # of tests taken from people in your group student/teacher/parent/other:499487 Average score (# correct answers) is 62%  # of tests taken by everyone from all groups: 504844 Average score (# correct answers) is 62% | |