Test Bank for Personal Finance, Fourth Canadian Edition (4th Edition) by Jeff Madu

1 © 2019 Pearson Canada Inc. Test Bank & Solution manual for Personal Finance, Fourth Canadian Edition (4th Edition) by Jeff Mad 2 © 2019 Pearson Canada Inc. Personal Finance, Canadian Ed., 4e (Madura) Overview of a Financial Plan True/False 1) Many people who believe they have strong personal finance skills do not really understand some basic personal finance concepts. Answer: TRUE Diff: 1 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 2) The per capita debt of Canadians has multiplied by more than five times since 1981. Answer: FALSE Diff: 1 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 3) A good example of a personal financial goal would be planning to purchase a home one day. Answer: FALSE Diff: 2 Type: TF Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 4) The Financial Planning Standards Council (FPSC)sets out the steps needed to earn the Certified Financial Planner (CFP) designation. Answer: TRUE Diff: 2 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 5) A car accident which is not fully covered by your insurance is an example of an unexpected expense you cannot plan for. Answer: FALSE Diff: 2 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Applied 3 © 2019 Pearson Canada Inc. 6) An understanding of personal finance is necessary to judge the quality of advice that a financial adviser may give. Answer: TRUE Diff: 1 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 7) The Financial Planning Standards Council (FPSC) is a profit-oriented organization created to benefit the public with regards to financial planning. Answer: FALSE Diff: 1 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 8) Saving money for the downpayment on a house instead of saving for retirement is an example of an opportunity cost. Answer: TRUE Diff: 2 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Applied 9) Financial advisers are in demand because most people lack understanding or are not interested in making their own financial decisions. Answer: TRUE Diff: 2 Type: TF Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Recall 10) Generally, savings in an emergency fund will tend to earn higher interest than savings in a retirement plan. Answer: FALSE Diff: 2 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 11) A complete financial plan consists of budgeting, tax planning, financing, and investing. Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 4 © 2019 Pearson Canada Inc. 12) The first step in budgeting is to evaluate your current financial position by determining your total assets and total liabilities. Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 13) The value of what you own minus the value of what you owe is called your "net assets." Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 14) During the "education" life stage it is important to establish good investing habits. Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 15) If you do not have access to money to cover your cash needs, you may have insufficient liquidity. Answer: TRUE Diff: 1 Type: TF Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Recall 16) Using a credit card to cover an unexpected expense is an example of using an emergency fund. Answer: FALSE Diff: 1 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 17) Money management decisions include deciding how much money to contribute to long term retirement savings. Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 5 © 2019 Pearson Canada Inc. 18) If you have sufficient available credit there is no reason to consider holding liquid cash in an emergency fund. Answer: FALSE Diff: 2 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Applied 19) Your financial plan should include a plan for protecting your assets and income through insurance coverage. Answer: TRUE Diff: 1 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 20) An emergency fund contains the portion of savings that you have allocated to long-term needs. Answer: FALSE Diff: 1 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 21) One of the considerations in determining your investment choices is evaluating the level of risk you are willing to take. Answer: TRUE Diff: 1 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 22) Estate planning involves developing a plan to avoid all taxes upon death. Answer: FALSE Diff: 2 Type: TF Categories: Investment Return and Risk Financial Type: Qualitative Skill Type: Recall 23) Most people act in a logical fashion when implementing a financial plan. Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 6 © 2019 Pearson Canada Inc. 24) There are four key steps in developing a financial plan: 1. Establishing goals; 2. Selecting the best options to reach your goals; 3. Comparing your plan to the plans of other people; and 4. Revising your plan annually. Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 25) An example of a 'SMART' goal is: Jack plans to save to buy a car in three years. Answer: FALSE Diff: 3 Type: TF Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Recall 26) Jim's plan to reduce his spending on junk food by $20 per month and save those funds until he has a $2000 emergency fund is an example of a 'SMART' goal. Answer: TRUE Diff: 2 Type: TF Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 27) When goal setting, in order to achieve financial success, goals should be set as aggressively as possible. Answer: FALSE Diff: 1 Type: TF Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Recall 28) If prepared properly, financial plans are set for life and will rarely need to be changed. Answer: FALSE Diff: 2 Type: TF Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 29) Saving too much for short-term needs does not limit your opportunity for long-term growth. Answer: FALSE Diff: 2 Type: TF Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 7 © 2019 Pearson Canada Inc. 30) Future spending decisions are less relevant to your financial success than past spending decisions. Answer: FALSE Diff: 2 Type: TF Categories: Review Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 31) As long as you stay within your budget of spending $100 per month on eating out, there is no opportunity cost. Answer: FALSE Diff: 2 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Applied 32) From 2000 to 2014, Canada has the least indebted households of any of the G7 countries. Answer: FALSE Diff: 1 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 33) The delinquency rate on personal loans by Canadian youth (age 18 to 25) is less than 10%. Answer: FALSE Diff: 1 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 34) Taxes should have a minimal impact on your financial choices. Answer: FALSE Diff: 1 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 35) Risk management may include deciding not to protect yourself against a given risk. Answer: TRUE Diff: 2 Type: TF Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 8 © 2019 Pearson Canada Inc. Multiple Choice 1) As of 2015, the personal savings rate in Canada was approximately A) 3.9 percent B) 9.3 percent C) 4.2 percent D) 2.4 percent Answer: C Diff: 1 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 2) Which of the following best describes the level of debt for Canadians? A) Total consumer bankruptcies decreased from 2014 to 2015. B) The personal savings rate has been steadily increasing over the past 30 years. C) From 2000 to 2014 household debt relative to income has increased from 110 percent to 166 percent. D) As of 2016 the per capita debt of Canadians to $49,995. Answer: C Diff: 2 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 3) Which of the following life stages involves the fewest objectives and milestones? A) Late retirement B) Prime earning C) Early career D) Education Answer: D Diff: 1 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 4) The correct order of the key components of a financial plan is A) budgeting, insurance, financing, investing. B) financing, insurance, budgeting, investing C) budgeting, financing, insurance, investing. D) investing, financing, insurance, budgeting. Answer: C Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 9 © 2019 Pearson Canada Inc. 5) Opportunity cost represents A) short- versus long-term financial decisions. B) what you give up as a result of making a decision. C) the financial cost of any opportunity. D) the non-financial cost of any opportunity. Answer: B Diff: 2 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 6) An emergency fund is required in financial planning to A) maintain credit rating. B) maintain your standard of living. C) eliminate risk. D) maintain adequate liquidity. Answer: D Diff: 2 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Applied 7) John earns $3000 monthly income and he decides to set aside 10 percent as savings. In his savings, John wants to reserve 20 percent in his emergency fund. What amount would John accumulate in his emergency fund annually? A) $600 B) $300 C) $360 D) $720 Answer: D Diff: 2 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Quantitative Skill Type: Applied 8) Credit is commonly used to cover both large and small expenses. What is the best way to think about credit? A) Most Canadians do a good job managing credit compared to other G7 countries. B) It is a better source of liquidity than an emergency fund. C) It is an important part of liquidity but needs to be managed. D) It should never be used for liquidity. Answer: C Diff: 2 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 10 © 2019 Pearson Canada Inc. 9) Which of the following is an example of an opportunity cost? A) Renting an apartment near school instead of living with your parents B) Saving money instead of taking a vacation C) Saving for an emergency fund instead of maximizing your RRSPs D) They are all examples of opportunity cost. Answer: D Diff: 1 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Applied 10) Which of the following is an example of investment risk in financial planning? A) Loss of income due to short-term disability B) Loss of liquidity by locking in to a fixed-term deposit C) Loss of property by not buying insurance D) Loss of capital in a particular mutual fund Answer: D Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 11) Which of the following financial planning steps should occur during the "prime earning" life stage? A) Creating a will and power of attorney B) Estate planning C) Investigate employer-based savings options D) Paying off all debts Answer: D Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 12) What is the process of forecasting future expenses and savings called? A) Budgeting B) Planning C) Predicting D) Forecasting Answer: A Diff: 1 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 11 © 2019 Pearson Canada Inc. 13) Which of the following is a decision that you would make during estate planning? A) How you will maximize taxation and probate B) How much money you should allocate to retirement plans C) How your wealth will be distributed before and after your death D) How to enhance your net worth Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 14) Budgeting helps set goals by estimating on a monthly basis which of the following? A) Assets and income B) Liabilities and expenses C) Income and expenses D) Net worth and income Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 15) What is first step in budgeting? A) Determining your net worth B) Establishing good money management habits C) Assessing your current financial position D) Establishing a good credit rating Answer: C Diff: 1 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 16) What is the best way to describe liquidity? A) Positive cash flow B) Access to credit C) Access to ready cash D) Effective money management Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 12 © 2019 Pearson Canada Inc. 17) Which of the following is the best description of money management? A) Decisions regarding how much money to retain in liquid form and short-term investing decisions B) Decisions regarding how much money to retain in total and long-term investing decisions C) Decisions regarding how much credit to have available in combination with liquid savings D) Decisions regarding what to do with surplus income over expenses on a monthly basis Answer: A Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 18) Which of the following best describes how credit should be used? A) Credit should be used at any time as long as you are able to make the minimum monthly payments. B) Credit should be used at any time as long as it can be repaid in full within 90 days. C) Credit should be used only when necessary since you must repay borrowed funds with interest. D) Credit should never be used under any circumstances. Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 19) What is the best measure of a person's or family's net wealth? A) The value of their assets B) The amount of annual income less applicable taxes C) The value of what they own minus the value of what they owe D) The value of their gross income minus the value of their expenses Answer: C Diff: 1 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 20) Which of the following would not be a factor in evaluating your current financial position? A) Income B) Expenses C) Budgeting D) Assets Answer: C Diff: 1 Type: MC Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Recall 13 © 2019 Pearson Canada Inc. 21) Your current net worth will be increased by which of the following actions? A) Changing your monthly savings from 15 percent to 10 percent of your earnings B) Receiving a $500 birthday present from your grandmother C) Buying a new stereo system and putting the entire amount on your credit card D) Using $350,000 you have in savings to purchase a rental property Answer: B Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 22) Which of the following should first be used to cover any short-term cash deficiencies? A) An interest free loan from family or friends B) Retirement savings C) A cashable short-term investment D) A line of credit Answer: C Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 23) Which of the following will most affect your ability to manage your liquidity? A) Choosing between a high-interest and a low-interest credit card B) Determining how much money to save versus how much to spend C) Determining which short-term investments to keep your emergency fund in D) Owning versus renting a home Answer: B Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 24) How much money to retain in a liquid form and how to allocate funds among short-term investment instruments is called A) investment management. B) money management. C) credit management. D) liquidity management. Answer: B Diff: 1 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Recall 14 © 2019 Pearson Canada Inc. 25) What is the term used to describe decisions on how much credit you need to support spending and which sources of credit to use? A) Investment management B) Money management C) Credit management D) Liquidity management Answer: C Diff: 1 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 26) Which of the following is a credit management decision? A) Purchasing a used car with cash B) Putting money into an emergency fund C) Obtaining a student loan to attend college or university D) Putting money into short-term investments Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 27) Which of the following is an example of money management? A) Putting your money in a savings account at your bank B) Shopping around for the credit card with the best interest rate C) Deciding to delay buying a car until you can pay for it with cash D) Purchasing life insurance to protect your spouse should you pass away Answer: A Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 28) Under which component of a financial plan would the following decision fall: determining how much you can afford to borrow, the length of the loan, and appropriate interest rate, when considering how to afford your car purchase? A) Liquidity B) Financing C) Budgeting D) Credit management Answer: B Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 15 © 2019 Pearson Canada Inc. 29) In the early career life stage of financial planning, which of the following is the most important to address? A) Maintaining job security B) Considering when to get married C) Saving for a child's future education D) Paying off student loans and short-term debts Answer: D Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 30) John is in the family and mid-career life stage of financial planning. Which of the following is most important for John to address? A) Reviewing insurance needs B) Paying off student loans C) The pay yourself first principle D) Establishing a credit rating Answer: A Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 31) Usually, people should first consider having a will and power of attorney in which life stage of financial planning? A) Early career B) Early retirement C) Prime earning D) Mid career Answer: D Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 32) Which of the following is included in risk management? A) Determining your risk tolerance for investing in the stock market B) Determining your credit risk for obtaining a $400 000 mortgage C) Deciding whether to rent or buy your home D) Insuring your home Answer: D Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 16 © 2019 Pearson Canada Inc. 33) What are the options on whether to or how to protect against risk? A) Avoid it, insure it, accept it or share it B) Avoid it, reduce it, accept it or share it C) Eliminate it, avoid it, reduce it, accept it D) Homeowner, car, life and health insurance Answer: B Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 34) A type of insurance that protects assets is A) home insurance. B) self-insurance. C) disability insurance. D) health insurance. Answer: A Diff: 1 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 35) Which of the following would be the primary objective of investing? A) Earning a return necessary to meet your goals B) Understanding your risk tolerance C) Acquiring an estate D) Earning the highest return possible Answer: A Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 36) Retirement planning should take place A) when you retire. B) shortly before you retire. C) well before you retire. D) the day you start your first job. Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 17 © 2019 Pearson Canada Inc. 37) One benefit of estate planning is A) protecting your wealth against unnecessary taxes. B) sheltering your wealth against all taxes. C) ensuring that your wealth is distributed according to intestacy laws. D) ensuring you have enough money to fund your retirement. Answer: A Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 38) Which of the following is correct? A) Saving part of your income will increase your net worth. B) Increasing your income will always increase your net worth. C) Liquid savings are not necessary if you have access to adequate credit. D) Insurance is only relevant when you have a small net worth. Answer: A Diff: 3 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 39) Regarding cash flow, which of the following is correct? A) Insurance payments are a cash inflow. B) Selling an investment is a cash outflow. C) Buying items on sale is a cash outflow. D) Mortgage payments are a cash inflow. Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 40) Which of the following goals would be 'SMART'? A) Reduce debt payments. B) Save 40% of your income for an annual vacation. C) Save $100 per month to create a $4000 emergency fund. D) Invest for a safe and comfortable retirement. Answer: C Diff: 2 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 18 © 2019 Pearson Canada Inc. 41) Planning to pay off a car loan in three years' time is classified as A) investment planning. B) increasing cash flow. C) a medium-term goal. D) a short-term goal. Answer: C Diff: 1 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 42) Which of the following would be classified as a medium-term goal? A) Saving a down payment to purchasing a house in three years B) Buying new clothes to begin school this month C) Retiring in 10 years D) Paying for your two-year-old child's college education Answer: A Diff: 2 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 43) The ability of different people to manage their cash flow effectively can be strongly influenced by A) the economic environment of the day. B) their need for immediate gratification. C) their income level. D) theirsocio-economic status. Answer: B Diff: 2 Type: MC Categories: How Psychology Affects Your Financial Plan Financial Type: Qualitative Skill Type: Applied 44) Which of the following would defeat the efforts made in developing a successful financial plan? A) Establishing realistic financial goals B) Considering your current financial position C) Identifying and evaluate alternative plans that could achieve your goals D) Evaluating your financial plan every five years Answer: D Diff: 1 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Recall 19 © 2019 Pearson Canada Inc. 45) Why is a net worth statement needed? A) To determine your net cash flow on an annual basis B) To measure your cash accumulation C) To measure the value of your assets minus debts D) To measure expenses and develop priorities Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Recall 46) Which is the most important consideration when establishing your financial goals? A) The emergency fund must be established first. B) Short-term goals should be your only priority. C) Your goals should be as challenging as possible. D) The goals should be specific, measurable and realistic. Answer: D Diff: 2 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Recall 47) Alan has been thinking about his future and is figuring out what his biggest priorities are. At what stage of the planning process is he? A) Selecting and implementing the best plan B) Determining financial goals C) Assessing his current financial position D) Identifying alternative plans to meet goals Answer: B Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 48) Alayne is preparing her budget for the first time. At what stage of the financial planning process is she? A) Establishing financial goals B) Managing her financial resources C) Budgeting and tax planning D) Considering her current financial situation Answer: D Diff: 3 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 20 © 2019 Pearson Canada Inc. 49) Nicole has been saving $500 each month for retirement in her RRSP for the past year, but has been carrying a balance on her credit card for four months now. She is concerned about the high interest charges she has been paying on her credit card. At what stage of the financial plan is she? A) Evaluating the plan B) Establishing financial goals C) Considering alternate plans D) Revising the plan Answer: D Diff: 3 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 50) The rate of return on Marika's investments has not been sufficient to meet her retirement goals. What should Marika do regarding her financial plan? A) Delay her retirement a few years B) Revise her plan C) Increase her income D) Reduce her expenses Answer: B Diff: 3 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 51) Alex has become stressed by his tight budget and is unwilling to stick to his financial plan. What action should he take? A) Establish his goals B) Re-evaluate his goals C) Implement the best plan D) Revise his plan Answer: D Diff: 2 Type: MC Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 21 © 2019 Pearson Canada Inc. 52) Sharon had a net worth at the beginning of the year of $22 000. At the beginning of the year she received $1000 that she invested and earned 3 percent interest for the year. During the year she also saved $50 each week from her pay cheque in a no-interest chequing account. How much is her net worth at the end of the year? A) $25 000 B) $25 630 C) $25 600 D) $23 030 Answer: B Diff: 2 Type: MC Categories: Developing a Financial Plan Financial Type: Quantitative Skill Type: Applied 53) If you have total assets of $10 000 and your net worth is $4000, how much liabilities do you have? A) $4000 B) $6000 C) $10 000 D) $14 000 Answer: B Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Quantitative Skill Type: Applied 54) If John's total assets have increased from $10 000 to $15 000 and his liabilities from $5000 to $8000, by how much has John's net worth increased? A) $4000 B) $3000 C) $5000 D) $2000 Answer: D Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Quantitative Skill Type: Applied 22 © 2019 Pearson Canada Inc. 55) An investor who earns $65 000 from employment and saves 4.5 percent from his total income would have increased her net worth in one year by A) $3000. B) $2900. C) $2925. D) $0. Answer: C Diff: 2 Type: MC Categories: Components of a Financial Plan Financial Type: Quantitative Skill Type: Applied Essay 1) Discuss the pros and cons of using consumer credit to supplement liquidity needs. Answer: Many possibilities. Cons: It can lead to personal debt getting out of control. Some credit, such as credit cards, are a very expensive source of liquidity. If people are already using credit a lot, then have an actual financial set back, they may not be able to keep up debt payments. Available credit can be cancelled/reduced by the lender at any time and this may happen right when you need it most. From bankruptcies increased, the delinquency rate on personal loans for youth (18- 25) increased 11.7%, so there is clearly risk. Pros: If used judiciously, credit cards provide a "interest free" loan for a few weeks each month. Holding funds in an emergency fund that pays no interest (which is the current economic environment) is not an attractive option for an investor. There are many very low interest sources of credit available to people these days and if only used for emergencies, this can be more cost effective than holding funds in a liquid emergency fund. Diff: 3 Type: ES Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 23 © 2019 Pearson Canada Inc. 2) Write out three goals in SMART format. Answer: There are many possibilities, however, they must be specific, measurable, action oriented, realistic and time bound. Examples: Save $200 per month for four years in order to have $5000 to purchase a second-hand Honda Fit. Save $1000 per month from age 30 to 65 in order to be able to retire at age 60 with a similar lifestyle to pre-retirement. Pay off a student loan of $20 000 over five years by making payments of $400 per month at an interest rate of 7.5 percent. Diff: 3 Type: ES Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 3) Name the six steps in the financial planning process and give an example of one activity that would occur at each step. Answer: Many possibilities but overall cover these topics: Step 1 Make SMART goals. Establish your financial goals: determine short, medium and longterm goals. Step 2 Consider current financial position: Cash flow, budget, balance sheet and net worth. Review spending habits and cash flow. Make your personal financial statements and budget. Step 3 Calculate various alternatives to reach the goals. Identify alternate plans. Review different options that would enable you to reach your various goals successfully Step 4 Select and implement a plan. Start the required savings, or insurance etc. previously determined. Be prepared to make specific financial decisions based on your discipline and risk tolerance and realistic cash flow. Step 5 Evaluate your plan: monitor the progress of each component of the plan. Check if the plan is working and you are on track after a few months, and at least once a year. Step 6 Revise your plan if it is not working out. Or if your circumstances have changed, update your goals and plans appropriately. Review your willingness to follow the plan and adjust it according to your current lifestyle. Diff: 3 Type: ES Categories: Developing a Financial Plan Financial Type: Qualitative Skill Type: Applied 24 © 2019 Pearson Canada Inc. 4) Explain four sources from which you could obtain assistance with your financial plan and identify any areas of caution you should observe while accepting such advice. Answer: Possible options: 1. Financial adviser: potential conflict of interest, driven by commissions 2. Bank adviser: only able to sell in-house product or incompetent advice 3. Investor education websites: dedicated to improve investor know-how, make sure it is legitimate and get a second opinion before following any online advice 4. Financial institution websites: watch for conflict of interest, bias, can be useful for certain calculations etc. 5. Government agency websites: generally safe but limited to general recommendations 6. Referrals from friends: ask critical questions Diff: 3 Type: ES Categories: Benefit From Understanding Personal Finance Financial Type: Qualitative Skill Type: Applied 5) Explain why an increase in your income may or may not necessarily mean an increase in net worth. Answer: 1. It does not make any difference what you make, it matters what you do with it. 2. If you get a raise of $1000 per month you could spend it on nicer clothes and entertainment and add nothing to your assets over the year. 3. If you used the $1000 to reduce your debt (e.g., pay down a student loan, or pay off a credit card balance), that would increase your net worth. 4. If you contributed the $1000 each month to your investment account, you would increase your net worth. 5. Most people will spend the money sitting in their bank account, but if you 'pay yourself first', by contributing automatically to a savings or investment account, then your net worth will increase painlessly. Diff: 3 Type: ES Categories: Components of a Financial Plan Financial Type: Qualitative Skill Type: Applied 1 © 2019 Pearson Canada Inc. Personal Finance, Canadian Ed., 4e (Madura) Part 1 Tools for Financial Planning - Applying Time Value Concepts True/False 1) Time value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today. Answer: FALSE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 2) Future value depends on the interest rate and number of years invested but is independent of the number of compounding periods. Answer: FALSE Diff: 1 Type: TF Categories: Future Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Recall 3) The present value of an annuity can be obtained by discounting the individual cash flows of an annuity and totalling them. Answer: TRUE Diff: 1 Type: TF Categories: Present Value of an Annuity Financial Type: Qualitative Skill Type: Recall 4) To convert the table from ordinary annuity to annuity due is to multiple the annuity payment by (1+ i). Answer: TRUE Diff: 2 Type: TF Categories: Present Value of an Annuity Financial Type: Qualitative Skill Type: Recall 5) Ten percent compounded quarterly with 10 years' investment means 40 compounding periods. Answer: TRUE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied 2 © 2019 Pearson Canada Inc. 6) The shorter the time period, the lower the future value interest factor, other things being equal. Answer: TRUE Diff: 2 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 7) The longer the time period, the higher the present value interest factor, other things being equal. Answer: FALSE Diff: 2 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 8) The higher the interest rate, the higher the future value interest factor, other things being equal. Answer: TRUE Diff: 2 Type: TF Categories: Future Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 9) The higher the interest rate, the lower the present value interest factor, other things being equal. Answer: TRUE Diff: 2 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 10) If you invested $10 000 when you turned 20 years of age and received a return of 11 percent annually, you would have over two million dollars when you turned 70. Answer: FALSE Diff: 3 Type: TF Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 11) The rent charged for the use of money is called a dividend. Answer: FALSE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 3 © 2019 Pearson Canada Inc. 12) Compound interest means earning interest on interest. Answer: TRUE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 13) The concept of time value of money only applies to rare financial planning problems. Answer: FALSE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 14) The process of obtaining a present value is called discounting. Answer: TRUE Diff: 1 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 15) Present value of the first year is determined by the future value divided by (1 + i). Answer: TRUE Diff: 2 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 16) The nominal interest rate is also called an annual percentage rate (APR). Answer: TRUE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 17) The effective interest rate is the stated or quoted interest rate by the financial institutions. Answer: FALSE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 4 © 2019 Pearson Canada Inc. 18) The nominal interest rate is the actual rate of interest you earn or pay. Answer: FALSE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 19) The effective rate of interest and compounding frequency have an inverse relation. Answer: FALSE Diff: 3 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Applied 20) Jill will have reached her goal of saving $23 000 to buy a car if she puts away $420 a month in a 7% annual interest savings account for four years. Answer: TRUE Diff: 3 Type: TF Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 21) You make regular monthly rental payments at the beginning of each month. This is an example of an annuity due. Answer: TRUE Diff: 3 Type: TF Categories: Future Value of an Annuity Financial Type: Qualitative Skill Type: Applied 22) You make regular monthly life insurance payments at the end of each month. This is an example of an annuity due. Answer: FALSE Diff: 2 Type: TF Categories: Future Value of an Annuity Financial Type: Qualitative Skill Type: Applied 23) To calculate the present value, all you need is the amount of money in the future, the interest rate, and the number of years the money will be compounded. Answer: FALSE Diff: 2 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 5 © 2019 Pearson Canada Inc. 24) John wants to have a $10 000 down payment for his car in three years. If he puts away $7000 today and gets a 12.7% annual return, he will have the money he needs. Answer: TRUE Diff: 3 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 25) Future value interest factor (FVIF) uses $1.00 to calculate the $1.00 over time with a given interest rate and the number of periods the $1.00 is compounded. Answer: TRUE Diff: 2 Type: TF Categories: Future Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Recall 26) Mary deposits $4000 at the beginning of each year and the money will grow to in 30 years with 12 percent compounded annually. Answer: TRUE Diff: 3 Type: TF Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 27) ABC Bank offers term deposits with 7.8 percent compounded quarterly, while XYZ Bank offers term deposits with 8 percent compounded annually. We know that ABC Bank offers a higher effective rate of return. Answer: TRUE Diff: 3 Type: TF Categories: Interest Rate Conversion Financial Type: Quantitative Skill Type: Applied 28) ABC Bank offers term deposits with 8 percent compounded annually, while XYZ Bank offers term deposits with 7.8 percent compounded monthly. ABC Bank offers a higher effective yield. Answer: FALSE Diff: 3 Type: TF Categories: Interest Rate Conversion Financial Type: Quantitative Skill Type: Applied 6 © 2019 Pearson Canada Inc. 29) Discount refers to the process of earning interest on interest. Answer: FALSE Diff: 1 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 30) If you borrow money, you will receive interest. Answer: FALSE Diff: 2 Type: TF Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Recall 31) Fred is 29 and just sold an antique for that he purchased at age nine for . Fred's annual rate of return on this antique is 7.2 percent. Answer: FALSE Diff: 3 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 32) The higher the interest rate, the higher the present value, other things being equal. Answer: FALSE Diff: 2 Type: TF Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied Multiple Choice 1) Approximately how much would you need to invest today, to receive $200 in ten years, if you received an annual interest rate of ten percent? A) $65 B) $77 C) $87 D) $97 Answer: B Diff: 2 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied 7 © 2019 Pearson Canada Inc. 2) The present value interest factor is A) always less than 1.0. B) always more than 1.0. C) assumes simple interest. D) always between 1.0 to 2.0. Answer: A Diff: 1 Type: MC Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Applied 3) Financial institutions quote rates with different compounding periods. What is the term for the actual interest rate paid or earned? A) Effective B) Nominal C) Real D) Absolute Answer: A Diff: 1 Type: MC Categories: Interest Rate Conversion Financial Type: Qualitative Skill Type: Recall 4) What is the term for the interest rate financial institutions quote? A) Nominal B) Effective C) Annual D) Real Answer: A Diff: 1 Type: MC Categories: Interest Rate Conversion Financial Type: Qualitative Skill Type: Recall 5) You will receive $100 at the end of year one, $200 at the end of year two, and $300 at the end of year three. What is the present value of these cash flows today if the discount rate is 13 percent annually? A) $553 B) $453 C) $423 D) $383 Answer: B Diff: 3 Type: MC Categories: Present Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 8 © 2019 Pearson Canada Inc. 6) Mary wants to have $150 after six years by depositing $100 today and earning six percent interest compounded annually for the next six years. Can Mary attain her financial goal of having $150 lump sum six years later? A) Yes, the future value is more than $150. B) Yes, the present value is more than $150. C) No, the present value is less than $150. D) No, the future value is less than $150. Answer: D Diff: 1 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 7) What is the future value of $200 deposited today at eight percent interest compounded annually for three years? A) $252 B) $250 C) $248 D) $249 Answer: A Diff: 1 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 8) What is the highest effective rate attainable with a 12 percent nominal rate? A) 12.85 percent B) 12.75 percent C) 12.65 percent D) 12.55 percent Answer: B Diff: 2 Type: MC Categories: Interest Rate Conversion Financial Type: Quantitative Skill Type: Applied 9) If John makes annual year-end payments of $8337.83 on a 20-year loan with an annual interest rate of 7.5 percent, what is the original principal amount for John's loan? A) $82 000 B) $83 325 C) $85 700 D) $85 000 Answer: D Diff: 3 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 9 © 2019 Pearson Canada Inc. 10) An antique was originally purchased 50 years ago for $2 and today is worth $600. What is the approximate annual rate of return realized on the sale of this antique? A) 18 percent B) 12 percent C) 9 percent D) 13 percent Answer: B Diff: 3 Type: MC Categories: Present Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 11) Nick invests $50 000 today and the fund guarantees an ordinary annuity of $12 345 for six years. What is the approximate rate of return? A) 11.6 percent B) 8.0 percent C) 12.5 percent D) Insufficient information to calculate Answer: C Diff: 3 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 12) Danny invests $124 090 in a fund and expects to receive $10 000 per year, at the end of each year, for the next 30 years. What is the approximate interest rate provided on the annuity? A) 8 percent B) 6 percent C) 9 percent D) 7 percent Answer: D Diff: 2 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 10 © 2019 Pearson Canada Inc. 13) What is the present value of an ordinary annuity paying $1550 each year for 15 years, with an interest rate of 6.6 percent per annum? A) $19 589 B) $16 528 C) $14 481 D) $13 568 Answer: C Diff: 2 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 14) The future value of $676 deposited at 5.85 percent compounded annually for five years is closest to A) $845. B) $962. C) $907. D) $898. Answer: D Diff: 2 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 15) If the interest rate is zero, the future value interest factor equals A) 0.0. B) -1.0. C) 1.0. D) Undefined Answer: C Diff: 1 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 16) How long will it take Ivy's money to triple in value at 12 percent compounded quarterly? A) 9.5 years B) 9.7 years C) 9.3 years D) Not enough information Answer: C Diff: 3 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 11 © 2019 Pearson Canada Inc. 17) If you borrow $20 000 as a five-year loan from the bank and the bank requires you to make end-of-year payments of $4878.05, what is the annual interest rate on this loan? A) 8 percent B) 6 percent C) 7 percent D) 4 percent Answer: C Diff: 3 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 18) Betty wants to accumulate $1 million by the end of 20 years by making equal annual yearend deposits over the next 20 years. Assuming Betty can earn 10 percent over this period, how much must she deposit at the end of each year? A) $18 560 B) $22 480 C) $27 760 D) $17 460 Answer: D Diff: 3 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 19) Raymond has an investment of $25 000 now, and in three years it will mature and pay Raymond $32 000. What is the approximate annual interest rate he will receive? A) 9.3 percent B) 8.6 percent C) 8.9 percent D) Insufficient information to calculate this question Answer: B Diff: 2 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 20) Assuming an inflationary economy, the future value interest factor is A) always equal to 1.0. B) always less than 1.0. C) always greater than 1.0. D) always uncertain. Answer: C Diff: 1 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Recall 12 © 2019 Pearson Canada Inc. 21) The future value of $810 deposited today at 7.71 percent compounded annually for four years is closest to A) $1620. B) $1090. C) $1060. D) $1066. Answer: B Diff: 2 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 22) What is the present value of $1000 to be received ten years from today, assuming an interest rate of nine percent per annum? A) $402 B) $488 C) $470 D) $422 Answer: D Diff: 2 Type: MC Categories: Present Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 23) The amount to be invested today at a given interest rate over a specified period in order to equal a future amount is called the A) present value interest factor. B) future value. C) present value. D) future value interest factor. Answer: C Diff: 1 Type: MC Categories: Present Value of a Single Dollar Amount Financial Type: Qualitative Skill Type: Recall 13 © 2019 Pearson Canada Inc. 24) The future value of today's $200 to be received 10 years later with an interest rate of 10 percent per annum is A) $424. B) $484. C) $542. D) $519. Answer: D Diff: 2 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 25) If you want to have $10 000 for a down payment on a new car in three years' time, assuming an interest rate of 4.5 percent compounded annually, how much money do you need to deposit as a lump sum today? A) $8650 B) $8712 C) $8112 D) $8763 Answer: D Diff: 2 Type: MC Categories: Present Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 26) Raymond wants to save the college tuition fees his child will need in ten years by starting with a deposit of $6500 today and depositing another $500 at the end of each year. How much will Raymond have in ten years if he gets a rate of return of four percent? A) $15 625 B) $11 960 C) $15 865 D) $17 023 Answer: A Diff: 3 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 14 © 2019 Pearson Canada Inc. 27) If you want to save $40 000 for a down payment on a home in five years, assuming an interest rate of 4.5 percent compounded annually, how much money do you need to save at the end of each month? A) $666 B) $609 C) $622 D) $597 Answer: D Diff: 3 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 28) Hazel needs to plan the mortgage amount she can afford. How much would she need to pay at the end of each month on a mortgage of at six percent interest, calculated semiannually and amortized over 30 years? A) $555 B) $1211 C) $1199 D) $1190 Answer: D Diff: 3 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 29) How much interest would Aleem save if he paid off his mortgage over 15 years instead of 30 years? His mortgage is $100 000 at six percent interest calculated semi-annually. A) $64 111 B) $107 069 C) $58 297 D) $62 959 Answer: D Diff: 3 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 15 © 2019 Pearson Canada Inc. 30) Julian is a student relying on student loans. He feels he would like to borrow an extra $4000 each year for the next four years to take vacations to recover from studying. Assume that no interest accrues until he completes his education and begins paying off the loan. The interest rate for the loan amount will be seven percent per year compounded monthly and he will pay it off over five years by making end of month payments. What would his monthly payment be on this loan? A) $374 B) $267 C) $271 D) $316 Answer: D Diff: 3 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 31) Rebecca is retiring next month when she turns 65. She can select a pension that pays $1745 at the end of every month guaranteed for the rest of her life, but not indexed for inflation, or take a lump sum of $312 000. Assume she can invest the lump sum at five percent annually and draw the same income as the pension. What age must she reach for the monthly pension to be the better choice? A) 89 B) 90 C) 92 D) 93 Answer: C Diff: 3 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 32) Jessie won a lottery and was given the following choice. He could either take $5000 at the end of each month for 25 years, or a lump sum of $700 000. Assuming annual compounding at approximately what interest rate would he would be indifferent between the two choices? A) 12.3 B) 6.7 C) 7.0 D) 7.3 Answer: D Diff: 3 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied 16 © 2019 Pearson Canada Inc. 33) Ishan plans to retire at age 40 with a decent lifestyle. He assumes that he can safely earn a real return of 4% annually on his money and that he would need $4000 a month, paid to him at the end of each month, to last until he turned 90. How much money would he need to have accumulated at age 40 (to the nearest thousand) if he were going to retire and no longer earn any money? A) $1 050 000 B) $2 980 000 C) $1 500 000 D) $2 400 000 Answer: A Diff: 3 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 34) Mortgages are annuities in that a fixed monthly payment is made to the lender (assume end of month payments and an interest rate that compounds semi-annually). Sara is planning to take on a mortgage of $100 000 and believes she can afford monthly payments up to $700. How much interest would she save if she decided to pay off her mortgage over 20 years, rather than over 25 years? Her mortgage is at five percent interest calculated semi-annually. A) $42 000 B) $18 120 C) $34 896 D) $16 776 Answer: D Diff: 3 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied 35) Alexis wants to have saved $600 000 by the time she retires at age 60. She is turning 46 in the next week and has accumulated in her RRSP accounts. Assuming she can continue to get a 6% annual return on her RRSP investments, how much does she need to keep saving at the end of each month to reach her goal? A) $2262 B) $1467 C) $2102 D) $396 Answer: D Diff: 3 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied 17 © 2019 Pearson Canada Inc. 36) The most important thing to note about an annuity is A) that the payment must not change over time. B) that the payment increases according to the discount rate. C) it reflects the growth of a single lump sum. D) that it reflects the power of simple interest. Answer: A Diff: 1 Type: MC Categories: Future Value of an Annuity Financial Type: Qualitative Skill Type: Recall 37) Naldo is considering selling a painting he inherited from his grandparents and which cost $200 when purchased 72 years ago. He accepted an offer for for it recently. What is the approximate annualized rate of return on this painting? A) 1.12% B) 2.75% C) 11.7% D) 6.75 % Answer: D Diff: 3 Type: MC Categories: Future Value of a Single Dollar Amount Financial Type: Quantitative Skill Type: Applied 38) Tracey is buying a condo and will have a mortgage of $180 000 which she plans to pay off in 25 years. The interest rate is 5% compounded semi-annually. Her payments would be $1046 at the end of every month. She has heard she can reduce the time it would take to pay off her mortgage if she pays $523 every two weeks instead. How many years it would take her to pay off her mortgage if she chooses the second option. A) 10.2 years B) 21.7 years C) 25.0 years D) 21.5 years Answer: D Diff: 3 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied 18 © 2019 Pearson Canada Inc. 39) If your credit card says 28% interest compounded daily, what is the effective interest rate? A) 32.3% B) 29.8% C) 31.9% D) 28.9% Answer: A Diff: 2 Type: MC Categories: Interest Rate Conversion Financial Type: Quantitative Skill Type: Applied 40) In which situation is simple interest the most appropriate interest calculation to use? A) When there is one compounding period B) Never C) Always D) When there are two or less compounding periods Answer: A Diff: 2 Type: MC Categories: Applying Time Value Concepts Financial Type: Qualitative Skill Type: Applied 41) Joe and Bill are the same age and starting their careers. Each plans to retire at age 65 and each wants to have in his RRSP account by then. If they both get seven percent annual return on their RRSP savings, which one will be closer to reaching his goal? A) Bill if he starts saving $800 a month when he is 45 years old B) Joe if he starts saving $200 a month when he is 25 years old C) Bill if he starts saving $1000 a month when he is 45 years old D) Joe if he starts saving $150 a month when he is 20 years old Answer: D Diff: 2 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied 42) What is the effective interest rate for a car loan advertised at five percent compounded monthly? A) 5.1% B) 5.2% C) 5.3% D) 5.4% Answer: A Diff: 2 Type: MC Categories: Interest Rate Conversion Financial Type: Quantitative Skill Type: Applied 19 © 2019 Pearson Canada Inc. 43) If Jenn could get a 10 percent annual return on her investment holdings, how long would it take for her to double her money? A) 7.3 years B) 6.9 years C) 10.0 years D) 83.5 years Answer: A Diff: 2 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied 44) Selena wants to have enough funds to cover $13 000 per year for four years of her daughter's university expenses and will need the money at the beginning of each year. If her funds get an annual return of 4.3 percent, how much would she need to have in the account when her daughter starts university? A) $48 764 B) $46 857 C) $52 000 D) $48 872 Answer: D Diff: 2 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 45) Ruby is expecting her first child next month and would like to have saved for university education when the child turns 17. If Ruby can get a 6.6 percent annual return on the education savings for her child, approximately how much does she need to start saving at the end of each month once the baby is born? A) $2688 B) $392 C) $224 D) $218 Answer: D Diff: 2 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied 20 © 2019 Pearson Canada Inc. 46) Ralph wants to know what he should be able to save in his child's RESP account if he contributes $2,500 per year and also gets the CES grant of $500 each year. He wants to assume a conservative investment return of four percent annual return and that he will only contribute until the child is 15 (assume 15 years of $3000 deposits made at the end of the year). A) $46 500 B) $52 200 C) $65 500 D) $60 700 Answer: D Diff: 2 Type: MC Categories: Applying Time Value Concepts Financial Type: Quantitative Skill Type: Applied 47) Sally will not be making any investments for five years as she is paying off student loans. In five years, she will make regular monthly investments, at the beginning of every month, in the amount of $350. She will make these investments for 25 years. What is the present value of her investment account assuming she can earn an annual return of 8.5%? A) $229,725 B) $345,428 C) $519,405 D) $313,250 Answer: A Diff: 3 Type: MC Categories: Present Value of an Annuity Financial Type: Quantitative Skill Type: Applied 48) Reza is trying to decide between to investment alternatives. Invest A allows her to invest $100 at the beginning of every month for 15 years at an interest of 9.0% per year. Investment B allows her to invest $1,350 at the end of every year for 15 years at 8.7% interest. Which of the following is true regarding these two alternatives? A) Investment A will grow by $1,787 more than Investment B . B) Investment B will grow by $1,787 less than Investment A. C) Both Investment A and Investment B grow to exactly the same amount. D) Investment A will always be better because it always better to invest small amounts monthly rather than one amount at the end of the year. Answer: A Diff: 3 Type: MC Categories: Future Value of an Annuity Financial Type: Quantitative Skill Type: Applied 21 © 2019 Pearson Canada Inc. 49) Which of the following is a true statement regarding the future value of an annuity due? A) All else being equal, an annuity due will always generate a higher future value than an ordinary annuity. B) All else being equal, an annuity due will never generate a higher future value than an ordinary annuity. C) All else being equal, an annuity due will sometimes generate a higher future value than an ordinary annuity. D) All else being equal, an annuity due will generate a higher future value than an ordinary annuity only if interest is compounded monthly. Answer: A Diff: 1 Type: MC Categories: Future Value of an Annuity Financial Type: Qualitative Skill Type: Recall 50) If you could choose any of the following interest rates for your investment which would you choose to give you the highest return? A) 15% compounded annually B) 14% compounded semi-annually C) 14% compounded quarterly D) 14% compounded monthly Answer: A Diff: 2 Type: MC Categories: Interest Rate Conversion Financial Type: Quantitative Skill Type: Applied 22 © 2019 Pearson Canada Inc. Essay 1) Assuming a discount rate of 14 percent per year, Peter wants to know the market value of his investment today based on the following cash flows. Explain your reasoning. Year Cash flows 1 to 5 $20 000 per year, at the end of the year 6 to 10 $35 000 per year, at the end of the year Answer: Present value of years 1 - 5 This first part a five year annuity P/Y is 1, C/Y is 1 FV = 0 I/Y = 14 N = 5 PMT = -20 000 CPT PV = 68 661.62 The second part is another five year annuity, the rest of which need to be discounted again to the present time to determine current market value. FV = 0 I/Y = 14 N = 5 PMT = -35 000 PV yr 5 = $120 157.83 Then to PV it to now, FV = 120 157 I/Y = 14 N = 5 PMT