FIN 1050 – Personal Finance

Final Exam

1. What are the 5 steps of the personal financial planning process?

a) -Evaluate your Finance Health,
-Define your Finance goals
-Develop a plan
-Implement the plan
-Review and revise plan
2. What is the future value formula? What is the future value of a one-time $2000 investment at
10% for 65 years (based on annual compounding)? For 40 years? At 8% for 65 years? For 40
years?
a) FV = PV (1+r)^n
b) FV = 2000(1+0.1)^65
Answer: $980,742
c) FV = 2000(1+0.1)^40
Answer: $90,519
d) FV = 2000(1+0.08)^65
Answer: $297,560
e) FV = 2000(1+0.08)^40
Answer: $43,449
3. What is the present value formula? What is the present value of $1,000,000 discounted at 10%
for 40 years (based on annual compounding)? At 8%? For 65 years at 10%? At 8%?
a) PV = FV/(1+r)^n
b) PV = 1,000,000/(1+0.1)^40
Answer: $22,095
c) PV = 1,000,000/(1+0.08)^40
Answer: $46,031
d) PV = 1,000,000/(1+0.1)^65
Answer: $2,039
e) PV = 1,000,000/(1+0.08)^65
Answer: $6,721
4. Selma invests $2000/year for 10 years at 8%. What is her total investment? What is the value of
her investment after 35 years if it continues to grow at 8%? Patty waits 10 years before she
starts investing. From years 11-35 she invests $2000/yr. at 8%? What is her total investment?
What is the value of her investment at the end of the 35 year period? Who has more after the
35 years, Selma or Patty?
a) $2,000/yr*10=$20,000
b) $198,422
c) $2000/yr*25=$50,000
d) $146,212
e) Selma
5. What is the rule of 72? If you earn 6% on an investment, how many years will it take to double?
Also calculate the years to double for 7%, 8%, 9%, 10% and 12% rates of return (you can round
to the nearest year).
a) 72/ rate (absolute not decimal form) = # of yrs to double
 FIN 1050 – Personal Finance

b) 6%: 12 yrs
c) 7%: 10 yrs
d) 8%: 9 yrs
e) 9%: 8 yrs
f) 10%: 7 yrs
g) 12%: 6 yrs
6. What are the 2 primary tax forms? Which one do you use if your income is <$100,000
And you want to use the standard deduction? Which schedule do you use for itemized
deductions?
a) -Form 1040
-1040 EZ
b) 1040 EZ
c) Schedule A
7. List the 4 basic fees charged on credit cards. What actions trigger penalty rates?
a) Annual Fees, Cash Advance Fees, Late Fees, & Over the Limit Fees
b) Late fees & over the limit fees
8. What 5 components go into your FICO score? What are the percentage weights for each
component?
Payment history (35%), Amounts owed (30%), Length of Credit History (15%), Types of Credit
Used (10%), & New credit (10%)
9. What is the debt limit ratio? What is the recommended percentage you should keep non-
mortgage debt to take home pay below? The maximum?
a) Total monthly non-mortgage payments/total monthly take home pay
b) 15%
c) 20%
10. What is a down payment? How much do you need for an FHA loan? A conventional loan?
a) Initial percent ownership/ how much money you initially put down for a personal asset
b) 3%
c) 20%
11. What is PMI? When is it needed?
a) Private Mortgage Insurance
b) when one puts <20% in down payment for a home loan
12. What are the 2 main types of home loans? How do they differ?
a) Fixed rate, and ARM
b) Fixed rate – same interest rate over the life of the loan
ARM – adjustable rate mortgages
13. When is it a good idea to get an ARM mortgage? What is the major risk of an ARM?
a) When you are going to stay in the house for 5-7 years
b) If you stay longer, your rate and payments will go up
14. What is PITI? List the 4 components. What is the max percentage of your income for PITI? For
PITI + all other debt? What is the maximum some lenders will accept when approving a home
loan?
a) Calculation of your monthly mortgage obligation and how much you can afford to borrow

-Payment (Loan amnt), Interest, Taxes, and Insurance

 FIN 1050 – Personal Finance

b) 28%
c) 36%
d) 45%
15. What is the minimum FICO score to qualify for a home loan? What score will help you get a
lower interest rate?
a) 620
b) 760
16. What is an earnest money deposit? What is a common amount when making an offer on a
home?
a) Good faith deposit towards purchase of home
b) Around $1000 or 1% of the home price
17. What is term life insurance? What is the primary difference between term and whole/universal
life insurance? Which is more expensive?
a) Protects for a specified time period (1 to 30 years), has a fixed death benefit, may have
fixed or increasing premiums, no cash value, and premiums increase with age.
b) Universal Life Insurance provides PERMANENT protection (term does not[only a specified
time])
c) Universal Life Insurance
18. What is variable life insurance? What does it commonly invest in?
a) Provides permanent protection, either fixed or flexible premiums, flexible death benefits –
depends on investment performance, flexible cash value – depends on investment
performance, and investment portion tax is deferred
b) Mutual Funds
19. What are the 3 main investment categories? List them in order from least risk to most risk.
Cash, Bonds, & Stocks
20. If investing for < 2years, what type of investment should you consider?
Cash
21. If investing for 2-7 years, what type of investment should you consider?
Bonds
22. If investing for >7 years, what type of investment should you consider?
Mix of stocks, bonds, and cash
23. What is diversification and what does it accomplish?
a) Distributing investments
b) reduces risk
24. What does allocating your investments mean? What percentage of your overall return does it
determine?
a) Determining an appropriate mix of Stocks, Bonds and Cash
b) 93% of overall return
25. What 3 factors does an investor base their allocation on?
a) Time Horizon
b) Risk Tolerance
c) Risk Capacity
26. What is the difference between JTWROS (Joint Tenants with Rights of Survivorship) and JTIC
(Joint Tenants in Common)?
a) JTWROS: surviving owner gets whole account (common for married couples)
 FIN 1050 – Personal Finance

JTIC: deceased’s share goes to heirs rather than survivor

27. What is the main benefit of investing in mutual funds?
Diversification
28. What is the main way to evaluate funds?
Average Annual Returns
29. Which type of fund is less volatile (lower average price fluctuations), a low beta fund or a high
beta fund? A fund with a small standard deviation or a fund with a large standard deviation?
a) Low beta fund
b) Small standard deviation
30. What is a fund’s expense ratio? When considering 2 or more funds with similar historical
returns, which would you rather have; a low expense fund or a high expense fund?
a) The total of all fees to manage the fund
b) Low expense fund
31. What is a sales load? Are there usually no-load options for the same funds? Which is generally
a better option?
a) Commission paid to the broker who sells the fund at time of investment
b) Yes
c) No-load option
32. What is a fund marketplace? List 3 brokers who offer fund marketplaces.
a) Large variety of funds available from 1 broker
b) Fidelity, Schwab, and TD Ameritrade
33. What is the minimum number of funds an investor should have to properly diversify their
portfolio? What is an ideal number of funds to hold (range from? To?)?
a) 4
b) A range of 11 to 17
34. What is a target date fund?
A Fund of Funds: 1 fund that invests in multiple other funds (allocated based on a specific
date)
35. If you only want (or can only afford) to hold 1 fund, what type of fund do you buy?
Target date fund
36. What is the difference between tax deferred retirement accounts and tax free retirement
accounts?
a) -Tax deferred retirement: Taxed on the way out
-Tax free retirement: Taxed on the way in
37. What type of retirement accounts are tax deferred?
a) -IRA
-401K
-403 B
-SEP IRA
-Keogh Plans
38. Which retirement account is tax free?
Roth IRA
39. What is the annual contribution limit for IRAs and Roth IRAs?
$5,500/yr
40. What is the early withdrawal penalty for retirement accounts? At What age does it end?
 FIN 1050 – Personal Finance

a) 10% early withdrawal penalty before age 59.5

b) 59.5
41. If you are eligible for an employer sponsored plan that includes an employer matching
contribution, should you strive to match that amount?
Yes
42. What is interest rate risk? What happens to bond prices when interest rates rise? What
happens to bond prices when interest rates fall?
a) What happens to bonds when rates increase and decrease
b) Bonds decrease in price
c) Bonds increase in price
43. What category of bonds should you consider investing in a mutual fund to diversify default risk?
Hi Yield Bonds
44. What is the main benefit of investing in individual bonds compared to investing in bond mutual
funds? Should you stick with investment grade bonds or junk bonds when investing in individual
bonds?
a) You can hold to maturity (= know your exact return), and eliminate market risk
(fluctuations don’t affect portfolio value)
b) Investment grade bonds
45. What is current yield (CY)? How is it calculated?
Annual Interest Payments / market price of bond
46. What is Yield to Maturity (YTM)?
Total yield of annual interest +/- gain or loss from market price to par value
47. How do you calculate the taxable equivalent yield for municipal bonds? How do you calculate
the after tax yield for taxable bonds?
a) Tax free yield/ (1-tax rate)
b) Taxable yield x (1-tax rate)
48. What is a bond ladder? What does it provide?
a) staggered maturity dates over a set period of time
b) a regular repayment of principle
49. What is a bullet strategy? When is it used?
a) All bonds bought with 1 maturity date (within 1 year)
b) Used for interest only income
50. What is a bull market for stocks? A bear market?
a) Bull Market – appreciating market
b) Bear Market – depreciating market
51. What is a stock index? List 7 main stock indexes.
a) groups of stocks that represent market averages
b) DOW, S&P 500, NASDAQ, S&P 400, Russel 2000, Wilshire 5000, and EAFE
52. What is the most popular measure of a stock’s value? What stock is less expensive, a high P/E
stock or a low P/E stock?
a) P/E
b) A low P/E stock
53. How is the dividend yield of a stock calculated? Which produces more income, a high dividend
yield or a low dividend yield?
a) dividend/share price
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b) high dividend yield

54. What is a growth stock? What are its primary characteristics?
a) strong capital appreciation due to a growing business
b) high P/E and low dividend yields
55. What is a value stock? What are its primary characteristics?
a) mature stock that is attractively priced, tend to pay hi dividends
b) low P/E and high dividend yields
56. List the 3 main types of stock orders. Which one will guarantee execution of your order? Which
one will guarantee the price you set? Which one is used to protect against falling stock prices?
a) Market order, Limit order, & Stop Loss order
b) Market order
c) Limit order
d) Stop Loss order

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