FIN 3030 Final Exam | Q & A (Complete Solutions)

FIN 3030 Final Exam | Q & A (Complete Solutions) You are considering the purchase of one of two different investments. Investment A is tax exempt and pays 6%. Investment B is taxable and pays 8.33%. You live in a state that imposes no income taxes and are in a 28% federal tax bracket and want to earn the highest after tax return possible. Which of the following is true? (round to two decimal places) a. Investment A is preferred. b. Investment B is preferred. c. Investments A and B have identical after tax yields. d. Investments A and B have identical APYs. e. Not enough information has been provided. When using an ATM, keep in mind that a. computer errors can occur. Incorrect b. it is never safe to deposit cash in an ATM. c. you should report electronic transaction mistakes to the bank immediately. d. human problems in handling the transactions can occur. e. All of these are correct. You are examining two different MMMFs. Fund A is tax-exempt and pays 7%. Fund B is taxable and pays 9.5%. You live in a state that imposes no income taxes and you are in the 25% federal tax bracket. Which of these two alternatives is better? a. Find A is the better choice. b. Fund B is the better choice. c. Fund A and Fund B are equal so they both are a wise choice. d. Neither Fund A nor Fund B are wise choices. It is wise to wait until you are earning a substantial amount of money before you establish a disciplined financial plan for your future. True False When you use your debit card or ATM card, you should enter the transaction into your check register. True False How do you compare cash management alternatives to determine which is best for you? a. Compare returns using comparable interest rates. b. Take into account their tax status. c. Consider their safety or risk. d. All of these are correct. Money Market Deposit Accounts enjoy one advantage over savings accounts found in commercial banks. This advantage is a. a variable rate that is generally higher. b. lower fees and smaller minimum balances. c. greater liquidity. d. unlimited check-writing privileges. Which of the following is not a common fee arrangement for checking accounts? a. Monthly fee b. Minimum balance requirement c. Variable interest rates to reflect fee activity d. Charge per check e. Balance-dependent scaled fees Which of the following financial institutions were originally established to provide mortgage loans to depositors? a. Commercial banks b. Savings and loan associations c. Internet banks d. Credit unions John and Maile Johnson The Johnson family is very conservative financially. They have a retirement plan where John works and share a joint checking account at their bank. They keep a lot of money in their checking account to cover short-term needs and emergencies. Both of them want to step up to a higher interest rate than a checking or savings account pays, and at the same time stay with their bank. The Johnsons have been thinking about the financial principle -Pay Yourself First. Being very conservative, they might consider having their bank a. sell them a risky mutual fund. b. send them a monthly reminder to make a deposit in their 401(k). c. do a direct deposit of John's paycheck into their checking account. d. do a direct deposit of some of John's paycheck into a savings fund. Liquid assets allow you to cover unplanned expenses without having to interrupt your long-term investments or liquidate any tangible assets. True False 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 John and Maile Johnson The Johnson family is very conservative financially. They have a retirement plan where John works and share a joint checking account at their bank. They keep a lot of money in their checking account to cover short-term needs and emergencies. Both of them want to step up to a higher interest rate than a checking or savings account pays, and at the same time stay with their bank. What financial principle do they need to understand better? a. The time value of money b. Taxes affect personal finance decisions. c. Risk and return go hand in hand. d. All of these are important to their situation. For a consumer who does not have a checking account a prepaid debit card is a means of paying for goods and services. True False When you automate your savings you are less likely to spend those dollars because they never become part of the funds in your checking account. True False Brick-and-mortar banks typically offer superior interest rates for borrowers and savers. True False Christopher Garcia Christopher just received his checking account statement from his bank. He has a NOW account with free checking that pays 0.75% APR on the balance and requires a $500 minimum balance. His statement shows that he currently has a balance of $3,950. In looking at his statement he notices that his car payment check for $400 is still outstanding, and that his recently received payroll deposit of $3,600 had not posted at the time the statement was created. His normal living expenses average $1,500 per month including his car payment. Other than his car loan, he rarely writes any checks as he prefers to use his debit card and ATM card for day-to-day living expenses. He pays his credit card balance in full every month. Other than his checking account he does not own any investments. He has always dreamed of owning a house, and would like to buy one within the next five years. He has access to a 401(k) pension plan at work where his employer will match contributions up to 6% of his salary. He currently contributes 2% of his salary to this plan. What recommendations would you give Christopher concerning his cash management? a. Create a budget and set some savings goals. b. Automate a savings plan using EFT. c. Set up an account at a mutual fund company. d. All of these are good recommendations. e. All of these except Set up an account at a mutual fund company are good recommendations. Overdraft protection is an automatic loan made to your checking account whenever your account does not contain enough cash to cover the checks that you have written against it. True False A savings alternative that pays a fixed rate of interest while keeping your funds on deposit for a contracted period of time that can range from 30 days to several years is called a a. demand deposit. b. negotiable order of withdrawal deposit. c. term deposit. d. certificate of deposit. e. None of these are correct. The APY can never be the same as the APR. True False Christopher Garcia Christopher just received his checking account statement from his bank. He has a NOW account with free checking that pays 0.75% APR on the balance and requires a $500 minimum balance. His statement shows that he currently has a balance of $3,950. In looking at his statement he notices that his car payment check for $400 is still outstanding, and that his recently received payroll deposit of $3,600 had not posted at the time the statement was created. His normal living expenses average $1,500 per month including his car payment. Other than his car loan, he rarely writes any checks as he prefers to use his debit card and ATM card for day-to-day living expenses. He pays his credit card balance in full every month. Other than his checking account he does not own any investments. He has always dreamed of owning a house, and would like to buy one within the next five years. He has access to a 401(k) pension plan at work where his employer will match contributions up to 6% of his salary. He currently contributes 2% of his salary to this plan. What recommendations would you give Christopher about his goal of buying a house in five years? a. You don't have enough income to consider buying a house. b. You need to develop a savings plan. c. You need to estimate what a down payment would be. d. You should switch to a Savings and Loan Association. e. Both You need to develop a savings plan and You need to estimate what a down payment would be are good answers. If you only use your debit card and ATM card and rarely write paper checks, overdraft protection is still a good thing to have. True False The National Credit Union Association is a federal agency that insures deposits at credit unions. True False Brenda White 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 The deregulation of the 1980s has allowed brokerage firms to offer traditional banking services, and has also let banks offer services formerly found only at investment True False Pick the advantage of a certificates of deposit from this list of possibilities. a. The interest paid is compounded daily. b. Early withdrawals after 30 days do not incur a penalty. c. Interest rates are generally higher than typical savings accounts. d. They earn the APY and not the APR. When you are considering different investment options and want to maximize your returns, be sure to compare the investments' a. quoted rates. b. APRs. c. APYs. d. None of these Cash and investments that can be easily converted into cash are termed a. capital assets. b. liquid assets. c. illiquid assets. d. depositable assets. e. None of these are correct. A store-valued card, only used at one store for one purpose, is known as an "open-loop" card. True False When college students start saving early a. in an account earning interest, they immediately put their money to work. b. by automating their savings, they are less likely to spend money. c. they can take advantage of the time value of money and achieve their financial goals. d. All of these. Roxanne has always maintained an excellent credit rating over the years. She has an annual income of $23,000, has lived at her current residence three years, and has worked at the same job for eight years. Susan works in a clerical position, has two credit cards and maintains two bank accounts. Which one of the following items of evaluation would Roxanne score the highest on? a. Employment history b. Annual income c. Length of residence d. All of these are correct answers. The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act established fee caps for cards. Card fees cannot total more than ________ of the initial credit limit. a. 25 percent b. 40 percent c. 45 percent d. 60 percent Crystal tried to use her Macy's credit card at Target but was unsuccessful because her Macy's credit card is a single-purpose card and can only be used at Macy's. True False Bradley Clemons Bradley currently has a Visa card from his bank with the following terms: 21 percent on purchases, 25 percent on cash advances with a 3 percent cash-advance fee on the amount, and a default or penalty rate of 33 percent. His current statement shows a balance of $9,000. Lately, he has been having a hard time paying more than the minimum payment of 3 percent of his balance. What is the APY on Bradley's default, or penalty, rate? a. 33 percent b. 33.50 percent c. 38.48 percent d. 42.96 percent Only a Credit Repair company can remove inaccurate data from your credit report. True False Credit cards issued in conjunction with particular charities or organizations, like the Sierra Club or the Humane Society, that send a portion of their annual fee or percentage of their purchases back to the sponsoring organization are known as a. premium cards. b. prestige cards. c. affinity cards. d. secured credit cards. Credit scoring is a. quite expensive for the lender. b. not a flawless method of determining creditworthiness. c. an inefficient but necessary process. d. All of these. Monty Head Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR. What is the APY on Monty's default or penalty rate? a. 36% b. 36.99% c. 42.58% d. 48.66% Typically, an annual fee charge ranges from $10 to $100, but the American Express Centurion Card charges a ________ annual fee-and there's also a ________ initiation fee for the first year. a. $0; $0 b. $25; $75 c. $250; $750 d. $2,500; $7,500 The ________ provides a single location for financial protection and oversight-and its mandate is to help consumers make better decisions. a. Center For the People Bureau (CFPB) b. Consortium of Fiscal Protection Bureau (CFPB) c. Consumer Financial Protection Bureau (CFPB) d. Consumer Fiscal Protocol Bureau (CFPB) There is no cash advance fee when you use your credit card at an ATM machine. True False One of the following lists constitutes the five Cs of credit. Select the correct one. a. Character, capacity, capital, collateral, characteristics b. Character, capacity, capital, collateral, co-insurance c. Character, capacity, capital, collateral, careful d. Character, capacity, capital, collateral, conditions e. Character, capacity, capital, collateral, credence Jerome Hanesworth Jerome has three major credit cards and makes payments on them each month. He has had one of them for six years, another for three years, and the last for eleven months. Making just the minimum payment has become automatic at this point, and Jerome barely even looks at the statements. Jerome is beginning to think that his approach to credit may be faulty, and he wants to find out how to adjust it. He just applied for two additional credit cards. Jerome would be considered a a. credit user. b. convenience user. c. combination credit and convenience user. d. T&E card user. Non-profit Credit Counselors should be avoided due to their high fees. True False Due to compounding frequency, the actual interest rate or APY you pay is higher than the advertised interest rate or APR. True False When you withdraw cash from an ATM using your credit card a. you begin paying interest immediately. b. you are not charged any interest until after the date the payment is due. c. the interest fee is lower than that for purchases. d. you're using a relatively inexpensive way to borrow money. Jerome Hanesworth Jerome has three major credit cards and makes payments on them each month. He has had one of them for six years, another for three years, and the last for eleven months. Making just the minimum payment has become automatic at this point, and Jerome barely even looks at the statements. Jerome is beginning to think that his approach to credit may be faulty, and he wants to find out how to adjust it. He just applied for two additional credit cards. Most likely, Jerome is a. unaware of how much of his payments go toward interest. b. not getting the benefits of a grace period. c. obligating his future income. d. All of these are correct. Josh was sued by his former business partner. He lost the case and has to pay his former partner $10,000. He has not yet done so and is refusing to do so. Josh is applying for a mortgage for a new home. Should he be worried about the lawsuit impacting his mortgage application? a. No, this kind of information is not contained on one's credit report. b. Absolutely, this kind of information is contained on one's credit report. Credit card issuers are free to set up shop near large university campuses and offer free gifts-anything from free or discounted flights to free Frisbees. True False Research has determined that undergraduate college students tend to behave in similar manners with regards to their credit card usage. As noted in Chapter 6, which of the following behaviors are indicative of undergraduate students' credit card behaviors? a. Their parents do not frequently pay their credit card balances for them. b. They make more than their minimum payment each month but still tend to carry a balance on their cards. c. They pay off all of their cards in full each month. d. They make more than the required minimum payment on 90% of all other cards each month. What rights would a college friend of yours have whose credit card application was denied? a. The right to view her credit report b. The right to have the file be accurate c. The right to point out errors in her file d. The right to request mistakes in the file be corrected e. All of these are correct answers. Bradley Clemons Bradley currently has a Visa card from his bank with the following terms: 21 percent on purchases, 25 percent on cash advances with a 3 percent cash-advance fee on the amount, and a default or penalty rate of 33 percent. His current statement shows a balance of $9,000. Lately, he has been having a hard time paying more than the minimum payment of 3 percent of his balance. If Bradley buys a new game console for $560 this month and sends in a credit card payment of $950 when he gets his statement, how much interest will he pay on the game console for the month? a. 21 percent b. 1.75 percent c. 3 percent d. None, since he paid for the game console in full during the grace period. Changes to your credit card policies and rates are usually announced via "________"; which are notices enclosed with your bill. a. bill addendums b. policy wards c. bill stuffers d. regal notices Jerome Hanesworth Jerome has three major credit cards and makes payments on them each month. He has had one of them for six years, another for three years, and the last for eleven months. Making just the minimum payment has become automatic at this point, and Jerome barely even looks at the statements. Jerome is beginning to think that his approach to credit may be faulty, and he wants to find out how to adjust it. He just applied for two additional credit cards. Based on his credit card usage, which of the following aspects of a credit card should be most important to Jerome? a. The APR on the unpaid balance b. A low annual fee c. Perks and benefits, like frequent flier miles d. None of these are important to Jerome. Having completed a personal finance class, you are now ready to give some advice to your free-spending friends. Which one is unwise? a. Reduce the credit card balance. b. Resolve any billing errors. c. Quit using credit cards altogether. d. Look for trouble signs in credit card spending. e. Control your spending through discipline. Your credit card company is required to send you a notice 45 days before they can increase your interest rate, change certain fees (such as annual fees, cash-advance fees, and late fees), or make other significant changes to the terms of your card. True False Which method sums the outstanding balances owed each day during the billing period and divides by the number of days in the period? a. Average daily balance b. Previous balance c. Adjusted balance d. Balance calculation method e. Simple interest Leon is 28 years old and pays cash for everything he buys. He has never had credit in his name and never missed or been late on any bills he has ever had. He recently went online to check what his credit score was. Where do you think his credit score would be? a. over 800 b. between 700 and 799 c. between 600 and 699 d. None of these Susan Harris Susan has always maintained an excellent credit rating over the years. She has an annual income of $63,000, has lived at her current residence thirteen years, and has worked at the same job for eight years. Susan works in a clerical position, has two credit cards and maintains two bank accounts. Susan is very conservative and has all of her savings ($12,000) in a NOW account at her local bank. One of her credit cards has a balance of $550 and has an APR of 23%. Susan has been making monthly minimum payments on the credit card. Out of curiosity she would like to know how her credit card companies judge her creditworthiness and what she can do to improve her financial situation. Susan is not married and a female. Which of the following Consumer Credit Laws prohibits credit discrimination on the basis of her status? a. The Truth in Lending Act b. The Fair Debt Collections Practices Act c. The Equal Opportunity Act d. The Fair Billing Act A secured credit card is a good tool to help establish credit. True False Steven is beginning a new job but has not yet been paid. He needs $400 to pay his rent this month. Steven is going to borrow the money through a Payday Loan establishment. They are charging him an $80 fee to borrow the money for 10 days until he receives his first paycheck. What is the actual interest rate that Steven is being charged? a. 7.3% b. 73.0% c. 730.0%. d. .073% e. None of these Incorrect Sharry is interested in buying her first home. Currently her monthly gross income is $3,000. From this she makes a car payment of $240, a personal loan payment of $300 and a student loan payment of $85. Based on this information would a bank approve Sharry for a mortgage? a. Yes b. No Which of the following statements would most correctly complete the following sentence? As the interest rate on a loan increases a. the loan maturity would decrease (other things held constant). b. the payment amount would decrease (other things held constant). c. the amoritization would increase (other things held constant). d. the payment amount would increase (other things held constant). e. None of these. When do the payments on a Stafford Loan begin? a. When your school receives the money from the government b. When your loan balance gets over $5,000 c. You can choose when your payments begin anytime within 24 months of your graduation date. d. None of these is correct. Which of the following is the correct formula to calculate the after-tax cost of a home equity loan? a. After-tax cost of a home equity loan = before-tax cost (1 + marginal tax rate) b. After-tax cost of a home equity loan = before-tax cost (1 -marginal tax rate) A short-term loan that provides funding until a longer-term loan can be secured is called a(n) a. bridge loan. b. gap loan. c. straddle loan. d. amortized loan. Student loans are loans with federally subsidized interest rates given, based on financial need, to students making satisfactory progress in their degree programs. True False Many lenders use the 28/36 rule in evaluating mortgage applications. If your mortgage payment itself is 28% of your gross income, that means that the remainder of your monthly debt must be ________% or less. a. 6 b. 7 c. 8 d. 28 e. 36 Which of the following does not require you to have a good credit rating to issue you a loan? a. Your family b. Savings and loan c. Commercial bank d. All of these require a good credit rating to issue a loan. Your brother, a banker, has just approved a loan for you, an add-on interest loan. You will borrow $2,000 for one year with a 12% annual interest rate. What is your monthly payment? a. $166.67 b. $186.67 c. $240.00 d. $256.78 e. None of these What is the name of the interest rate banks charge to their most creditworthy customers? a. Main rate b. Blue chip rate c. Prime rate d. Premier rate e. None of these Which statement is true regarding direct unsubsidized loans? a. The federal government pays the loan's interest while the student is still in school. b. Such loans are made to undergraduate, graduate, and professional students. c. Students have to demonstrate financial need in order to receive the loans. d. All of these are true. Suppose that you are interested in buying a home, but are unsure of how much you can afford. What is the best way to determine your prospects for obtaining a mortgage? a. Calculate your debt limit ratio. b. Figure the 28/36 rule. c. Determine what your mortgage payment will be. d. Determine what your income taxes will be. e. Both Figure the 28/36 rule and Determine what your mortgage payment will be are correct answers. An advantage that direct or subsidized student loans have over other types of loans is a. the after-tax interest rates are very attractive compared with other loans. b. you can borrow at a below-market rate, regardless of your credit situation. c. in an emergency, you can declare bankruptcy and avoid repayment. d. you have the rest of your life to pay it back. e. both the after-tax interest rates are very attractive compared with other loans and you can borrow at a below-market rate, regardless of your credit situation are correct. What happens when you default on a car loan where your Title is held as collateral? a. You damage your credit history but you keep the car. b. You lose the car and damage your credit history. c. You face liability under the deficiency payments clause. d. Only choices You lose the car and damage your credit history and You face liability under the deficiency payments clause are correct. e. All of these choices are correct. Of the following possible sources of credit, which typically has the lowest borrowing rates?