Finance 1200 Fall 2011 Test 2 With Answers

FINAN 1200 Test #2 Chapters 5-7 Fall 2011
True / False Questions
1. (p. 143) Higher returns on savings will usually result in less liquidity. TRUE
2. (p. 143) A "free" checking account with a minimum balance of $500 has an opportunity cost
of lost interest. TRUE
3. (p. 150) A certificate of deposit is usually considered to be very liquid. FALSE
4. (p. 154) The more frequent the compounding, the less a person will earn on a savings
account. FALSE
Multiple Choice Questions
5. (p. 144) Joan Zemke expects interest rates to decline over the next few months. To maximize
her earnings she should use a(n):
A. regular savings account.
B. interest-bearing checking account.
C. five-year certificate of deposit.
D. six-month certificate of deposit.
E. money market fund
6. (p. 144) When interest rates are rising, a person would be best served by:
A. short-term savings instruments.
B. long-term savings instruments.
C. short-term loans.
D. variable-rate loans.
E. certificates of deposit.
7. (p. 143) Which of the following statements regarding debit and credit card liability is correct?
A. A credit card carries more risk of loss to the cardholder.
B. A debit card carries more risk of loss to the cardholder.
C. There is no cardholder liability if either type of card is lost.
D. The Federal Government insures losses on credit but not debit cards.
E. The Federal Government insures losses on debit but not credit cards.
8. (p. 147) To avoid high fees for loans, a person should avoid borrowing from a:
A. credit union.
B. savings and loan association.
C. pawnshop.
D. commercial bank.
E. mutual savings bank.
9. (p. 150) A certificate of deposit usually has:

A. high interest-rate risk.
B. low safety for savers.
C. limited liquidity.
D. a variable rate of return.
E. no minimum deposit amount.
10. (p. 154) The rate of return on a savings account is also referred to as:
A. liquidity.
B. compounding.
C. yield.
D. opportunity cost.
E. asset turnover.
11. (p. 154) A $200 savings account that earns $13 interest in a year has a yield of
____________ percent.
A. 6.00
B. 13.00
C. 7.00
D. 11.25
E. 6.50
$13/$200 = .065 or 6.5 percent
12. (p. 154) Savings compounded ____________ would have the highest effective yield.
A. daily
B. annually
C. semi-annually
D. monthly
E. weekly
13. (p. 155) The Truth-in-Savings law requires that financial institutions:
A. provide insurance for savings accounts.
B. send customers monthly bank statements.
C. report annual percentage yield on savings.
D. offer adjustable rate savings accounts.
E. become members of the Federal Reserve System.
14. (p. 155) Comparison of earnings for different savings plans can best be accomplished using
the:
A. discounted present value.
B. compounded rate of return.
C. net present value.
D. annual percentage yield.
E. after-tax rate of return.
15. (p. 144) Which of the following is an effective strategy in times of falling interest rates?
A. Use long-term loans to take advantage of current low rates.
B. Use short-term loans to take advantage of lower rates when you refinance the loans.
C. Select short-term savings instruments to take advantage of higher rates when they mature.
D. Select short-term savings instruments to lock-in earnings at current high rates.
E. Select long-term savings instruments to lock-in earnings at current low rates.
16. (p. 164) A personal check with guaranteed payment is called a:
A. traveler's check.
B. bank draft.
C. certified check.
D. money order.
E. cashier's check.
17. (p. 147) Which of the following institutions makes loans based on the value of tangibles
possessions, such as jewelry and collectibles?
A. life insurance company
B. finance company
C. mortgage company
D. pawnshop
E. investment company
18. (p. 155) What type of account would be considered the most liquid?
A. certificate of deposit
B. checking account
C. money market account
19. (p. 147) A pawnshop with a monthly interest rate of 2.75 percent would have an annual
interest rate of ____ percent. Ignore compounding.
A. 33.00
B. 27.50
C. 20.00
D. 5.50
E. 2.75
2.75% x 12 months = 33%

20. (p. 147) A person borrows $200 from a payday loan company, and pays $10 interest for two
weeks. This would result in an annual interest rate of approximately ___ percent. Ignore
compounding.
A. 260
B. 130
C. 40
D. 20
E. 5
$10 x 26 weeks = $260; $260/$200 = 1.3 or 130%
21. (p. 157) A savings account earns 4 percent. If the saver is in a 28 percent tax bracket, the
after-tax savings rate of return would be ____ percent.
A. 28.00
B. 16.72
C. 4.00
D. 2.88
E. 1.12
4 % x 1-.28 = 2.88%
22. (p. 171) Credit is an arrangement to receive cash, goods, or services now and pay for them in
the future. TRUE
23. (p. 171) Consumer credit refers to the use of credit for personal needs (except a home
mortgage) by individuals. TRUE
24. (p. 171-172) Most consumers have only one choice in financing current purchases. FALSE
25. (p. 173) Credit when effectively used, can help you have more and enjoy more. TRUE
26. (p. 174) Perhaps the greatest disadvantage of using credit is the temptation to overspend.
TRUE
27. (p. 176) With an open-end credit, you pay back one-time loans in a specified period of time
in equal amounts. FALSE
28. (p. 176) Interest is a periodic charge for the use of credit, or other finance charges.
TRUE
29. (p. 180) You should sign your new credit cards as soon as they arrive. TRUE
30. (p. 183) The debt payments-to-income ratio is calculated by dividing your total liabilities by
your net worth. FALSE
31. (p. 185) When you cosign a loan, you are being asked to guarantee this debt. TRUE
32. (p. 186) Credit bureaus obtain their data from banks, finance companies, merchants, credit
card companies, other creditors, and court records. TRUE
33. (p. 187) Your friends and neighbors can get credit information about you. FALSE
34. (p. 192) In the 5 Cs of credit, capital refers to your assets or net worth. TRUE
35. (p. 192) In the 5 Cs of credit, capital refers to your financial ability to meet credit
obligations. FALSE
36. (p. 175) A good example of closed-end credit is:

A. a credit card issued by a department store.
B. a credit card issued by VISA or MasterCard.
C. the use of overdraft protection at a bank.
D. the use of a cashier's check to pay for a purchase.
E. a mortgage loan.
37. (p. 177) Another name for open-end credit is:
A. revolving credit.
B. a box of credit.
C. convenience credit.
D. installment credit.
E. single lump-sum credit.
38. (p. 178) A debit card:

A. immediately deducts the cost of your purchase from your bank account.
B. sends money directly to Dr. Basfords account.
C. is a new type of a credit card issued by VISA International.
D. is another name for a travel and entertainment card.
E. typically has a credit limit of $1,000.
39. (p. 183) Experts suggest that you spend no more than ____________ percent of your net
income on credit purchases.
A. 10
B. 20
C. 30
D. 40
E. 50
40. (p. 185) If you cosign a loan:
A. you are only responsible for half of the debt obligation.
B. you will be asked, but not required, to pay the loan if full if the borrower fails to pay.
C. you will be required to pay the loan in full if the borrower defaults on the payments.
D. the creditor must first try to collect from the borrower.
E. the creditor is prohibited from garnishing your wages if you refuse to pay the loan in full.
41. (p. 187) Most of the information in your credit file may be reported for only ______ years.
A. 7
B. 9
C. 11
D. 13
E. 15
42. (p. 183) The debt payments-to-income ratio is:
A. calculated by dividing total liabilities by net worth.
B. calculated by dividing monthly debt payments (not including house payments) by net
monthly income.
C. determined by dividing your assets by your liabilities.
D. a useless ratio for determining your credit capacity.
E. rarely used by creditors in determining credit worthiness.
43. (p. 183-184) The debt-to-equity ratio is:
A. calculated by dividing total liabilities by net worth.
B. calculated by dividing monthly debt payments by net monthly income.
C. determined by dividing your assets by your liabilities.
D. a useless ratio for determining your credit capacity.
E. rarely used by creditors in determining credit worthiness.
44. (p. 187) If you have declared personal bankruptcy, that fact may be reported by credit
bureaus for ____________ years.
A. 5
B. 10
C. 15
D. 20
E. 25
45. (p. 192) The borrower's attitude toward his or her credit obligations is called:
A. capacity.
B. capital.
C. character.
D. collateral.
E. conditions.
46. (p. 192) A term that refers to the borrower's assets or net worth is called:
A. capacity.
B. character.
C. capital.
D. collateral.
E. conditions.
47. (p. 194) If your credit application is denied, you:
A. should sue the credit rating agency.
B. should file a complaint against the merchant.
C. have no legal right to know why.
D. are entitled to know the specific reason you were denied credit.
E. can reapply for credit after 30 days.
48. (p. 194) The best way to maintain your credit rating is to:
A. use credit sparingly.
B. pay cash for your purchases.
C. repay your debts on time.
D. declare a Chapter 7 bankruptcy.
E. use as many credit cards as you can.
49. (p. 183) Affan Chawdry has monthly net income of $1,050. He has a house payment of $450
per month, a car loan with payments of $250 per month, a Visa card with payments of $50 per
month, and a credit card with a local department store with payments of $100 per month.
What is Affan's debt payments-to-income ratio?
A. 2.63
B. 1.24
C. 0.81
D. 0.38
E. 0.50
Ratio = ($250 + 50 + 100)/$1,050 = 0.38

50. (p. 183-184) Karen Price has determined that her net worth is $30,000, excluding her home.
She owes $80,000 on her mortgage and $15,000 on a car loan. What is Karen's debt-to-equity
ratio?
A. 3.2
B. 2.0
C. 0.5
D. 2.7
E. 0.3
$15,000/$30,000 = 0.5
51. (p. 192) The information in your credit report is primarily used by the credit bureau to
compute your
A. debt to equity ratio
B. FICO score
C. debt payment to income ratio
D. liquidity ratio
E. long term capitalization ratio
52. (p. 213) Buying on credit is almost always cheaper than paying cash. FALSE
53. (p. 213) Parents or family members are often the source of the least expensive loans.
TRUE
54. (p. 219) Two key concepts that you should keep in mind when borrowing are the finance
charge and the annual percentage rate. TRUE
55. (p. 219) The annual percentage rate is the percentage cost of credit on a yearly basis.
TRUE
56. (p. 225) If you want to take advantage of a grace period on your credit card, you must pay
your bill in full every month. TRUE
57. (p. 242) You have two choices in declaring personal bankruptcy: Chapter 7 and Chapter 13
bankruptcy. TRUE

58. (p. 213) Which one of the following is often the source of the least expensive loan?
A. parents or family members
B. banks
C. savings and loan associations
D. finance companies
E. loan sharks
59. (p. 213) One of the drawbacks of borrowing from parents or family members is that such
loans:
A. tend to be more expensive than other types of loans.
B. must be interest-free.
C. may create tension within the family.
D. are limited to oral agreements.
E. are legally prohibited from establishing repayment dates and terms.
60. (p. 219) If you borrow $100 at 10 percent simple annual interest (APR) and repay it in one
lump-sum at the end of one year, you will repay:
A. $100.
B. $105.
C. $110.
D. $115.
E. $120.
Repayment = $100 + (.10 x $100) = $110
61. (p. 214) Which lender is likely to ask you to write a check for $115 before granting you a
$100 loan?
A. credit union
B. payday advance company
C. finance company
D. department store
E. commercial bank
62. (p. 214) Payday, cash advance, check advance, and post- dated checks are _________ loans.
A. inexpensive
B. medium-priced
C. expensive
D. low APR
E. variable APR
63. (p. 219) If Marjorie Wilcox borrows $200 for one year with an APR of 12% and an annual
service fee of $10, what is her total cost of credit?
A. $10
B. $12
C. $24
D. $34
E. $42
Cost of credit = ($200 x .12) + $10 = $34
10

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FINAN 1200 Test #2 Chapters 5-7 Fall 2011

True / False Questions

FINAN 1200 Test #2 Chapters 5-7 Fall 2011

9. (p. 150) A certificate of deposit usually has:

FINAN 1200 Test #2 Chapters 5-7 Fall 2011

FINAN 1200 Test #2 Chapters 5-7 Fall 2011

2.75% x 12 months = 33%

FINAN 1200 Test #2 Chapters 5-7 Fall 2011

36. (p. 175) A good example of closed-end credit is:

FINAN 1200 Test #2 Chapters 5-7 Fall 2011

38. (p. 178) A debit card:

FINAN 1200 Test #2 Chapters 5-7 Fall 2011

FINAN 1200 Test #2 Chapters 5-7 Fall 2011

Ratio = ($250 + 50 + 100)/$1,050 = 0.38

FINAN 1200 Test #2 Chapters 5-7 Fall 2011

FINAN 1200 Test #2 Chapters 5-7 Fall 2011

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