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

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