FIN 205

Wealth Management
Tutorial Questions
Semester 3 2021
FIN 205 - Wealth Management
Tutorial Questions
TOPIC 1: Financial planning - Personal Finance Basic and Time value of Money

1) The major reason to make a financial plan is to

A) achieve financial goals.
B) serve as a tax planning guide.
C) see where you are over or under spending.
D) allow for a surplus.
E) account for your spending.

2) Which one of the following is not one of the five basic steps in personal financial planning?
A) Let an accountant review your plan.
B) Implement your plan.
C) Define your financial goals.
D) Evaluate your financial health.
E) Develop a plan of action.

3) What is the significance of the financial life cycle?

A) to help you to keep up with other people
B) to better understand the timing and areas of financial concern you will experience
C) to allow you to focus on typical concerns earlier and to plan ahead with fewer problems
D) all of the above
E) both B and C above

4) In order for your financial plan to be realistic it needs to be based upon your
A) balance sheet.
B) number of tax deductions, exemption, exclusions, and credits.
C) budget.
D) income level.
E) none of the above

5) Which of the following principles would apply most appropriately to a 20-year-old college
student?
A) nothing happens without a plan — even (or especially) a simple plan
B) the time value of money — a dollar today is worth more than a dollar in the future
C) the best protection is knowledge
D) all of the above
E) none of the above

6) The value of an investment at some future point in time is also known as

A) compounded annuity.
B) future value.
C) the time value of money.
 D) calculated value.
E) present value.

7) The current value in today's dollars of a future sum of money is called

A) future worth.
B) compound interest.
C) future value.
D) present value.
E) compounded value.

8) This helpful investment rule tells you how many years it takes for a sum of money to double.
A) rule of 100
B) present value
C) compound interest
D) future value
E) rule of 72

9) Assume that you retired at age 65 and have been living off your retirement plan. What stage
of the financial life cycle are you in?
A) stage 1
B) stage 2
C) stage 3
D) stage 4
E) stage 5

10) Which financial planning tools and techniques would have been most helpful to a couple
nearing retirement without enough funds set aside for retirement?
A) compound interest
B) reinvesting
C) present values
D) future values
E) all of the above

11) Consider the following time line:

If the current market rate of interest is 8%, then the present value of this timeline is closest to:
A) $1000
B) $857
C) $860
D) $926
Answer: B
Explanation:
PV = FV / (1 + r)n = 1000 / (1.08)2 = 857.34 or approximately $857
0.857 x 1000= 857

12) Consider the following timeline:

If the current market rate of interest is 10%, then the future value of this timeline is closest to:
A) $666
B) $500
C) $605
D) $650
Answer: A
FV = PV(1 + r)n = 500(1.10)3 = 665.50 which is approximately $666

13) Consider the following timeline:

If the current market rate of interest is 7%, then the future value of this timeline as of year 3 is
closest to:
A) $1720
B) $1500
C) $1404
D) $1717
FV = PV(1 + r)n = FV = 500(1.07)3 + 500(1.07)2 + 500(1.07)1 = $1719.97 or approximately
$1720

14)

Suppose that a young couple has just had their first baby and they wish to ensure that enough
money will be available to pay for their child's college education. Currently, college tuition,
books, fees, and other costs, average $12,500 per year. On average, tuition and other costs have
historically increased at a rate of 4% per year.

.Assuming that college costs continue to increase an average of 4% per year and that all her
college savings are invested in an account paying 7% interest, what should be the amount of
money she will need to have available at age 18 to pay for all four years of her undergraduate
education?

A) $97,110
B) $107,532
C) $101,291
D) $50,000

Answer: A

This is a two step

problem.
Step #1 determine the
cost of the first year of
college.

FV = PV(1 + i)N =
$12,500(1.04)18 =
$25,322.71

Step #2 figure out the

value for four years of
college.

PV of a growing
annuity due = C x
1   1 + g   (1 + r)
1 − 
r − g   1 + r  
= $25,322.71 ×
1   1 + .04  4
1 − 
.07 − .04   1 + .07  
 
(1 + .07) = $97,110.01

Discussion Questions
PROBLEMS (p. 27)

1.2. Using the rule of 72, approximate the following:

a. If land prices in an area is increasing six percent a year, how long will it take for property
values to double?
b. If you earn ten percent on your investments, how long would it take for your money to
double?
c. At an annual interest rate of five percent, how long would it take for your savings to
double?

Solution: a. about 12 years (72/6)

b. about 7.2 years (72/10)
c. about 14.4 years (72/5)

1.6 Using time value of money tables, calculate the following:

a. The future value of $450 six years from now at 7 percent.
b. The future value of $800 saved each year for 10 years at 8 percent.
c. The amount that a person would have to deposit today (present value) at a 6 percent interest
rate in order to have $1,000 five years from now.
d. The amount that a person would have to deposit today in order to be able to take out $500
a year for 10 years from an account earning 8 percent -pv

Solution: a. $450 x1.501 = $675.45

b. $800 x 14.487 = $11,589.60
c. $1,000 x 0.747 = $747
d. $500 x 6.710 = $3,355

Annual Percentage Rate (APR) vs Annual Percentage Yield (APY)

APR is the annual rate of interest without taking into account the compounding of interest within
that year. Alternatively, APY does take into account the effects of intra-year compounding.

A credit card company might charge 1% interest each month (12% pa);

APR = 1% x 12 months = 12%.

This differs from APY, which takes into account compound interest.

APY = (1 + 0.01)12 – 1= 12.68% a year. If you only carry a balance on your credit card for one
month's period you will be charged the equivalent yearly rate of 12%. However, if you carry that
balance for the year, your effective interest rate becomes 12.68% as a result of compounding
each month.

When looking at the difference between APR and APY, you need to be concerned about how a
loan might be "disguised" as having a lower rate. Banks will often quote you the APR but charge
you APY.
TOPIC 2: Savings, financial market and financial institutions- Financial Services

1) Most people look for all of the following in a financial institution except
A) the types of services that fit their hours and needs.
B) personal service that fits their hours and needs.
C) the choice of uninsured accounts that offer much higher returns.
D) reasonable costs associated with the services desired.
E) safety guaranteed by federal insurance.

2) Which of the following statements describe(s) the typical savings accounts you may
encounter?
A) They are easy to open and maintain.
B) A fixed return on your deposit is guaranteed.
C) The bank could require a grace period before allowing you to withdraw.
D) It is less liquid than a checking account.
E) All of the above are descriptive.

3 Which of the following is not a common fee arrangement for checking accounts?
A) monthly fee
B) minimum balance requirement
C) charge per check
D) balance-dependent scaled fees
E) interest earned less number of checks written

4) You want to purchase some short-term notes issued by the federal government. You like the
idea that they mature in 3 to 12 months. You are describing
A) series EE bonds.
B) an asset management account.
C) U.S. Treasury bills.
D) T-bills.
E) both C and D above

5) Cash and investments that can be easily converted into cash are termed
A) liquid assets.
B) capital assets.
C) redeemable assets.
D) convertible assets.
E) none of the above

6) Which of the following is the safest alternative for a not-for-profit foundation's excess funds?
A) certificates of deposit
B) savings accounts
C) money market deposit accounts
D) asset management accounts
E) U.S. Treasury Bills

7) The ability to perform banking operations through your personal computer is termed
A) Internet accommodation.
B) www banking.
C) Internet access.
D) online banking.
E) none of the above

8) Suppose that you go to a bank at which you have no account, give the bank cash, and in return
obtain a check drawn against that bank which you will use to pay someone else. This is
called a
A) cashier's check.
B) open drawer check.
C) certified check.
D) cash check.
E) none of the above

Tony has recently gotten married. He and Laquessa have had their own checking accounts since
they were teenagers. They are earning no interest and have no other bank or investment accounts.
They both have good jobs and at this time want to start making some sound financial decisions
for the future.

9) Laquessa wants to purchase some short-term notes issued by the federal government. She
likes the idea that they mature in 3 to 12 months. What she is describing is
A) series EE bonds.
B) an asset management account.
C) T-bills.
D) U.S. Treasury bills.
E) both C and D above

10) By the ________, we mean the rate that would prevail in the economy if the average prices
for goods and services were expected to remain constant during the loan's life.
A) risk-free rate
B) short term
C) real rate
D) long term

11) In the absence of inflation, the nominal rate ________ the real rate.
A) equals
B) is greater than
C) is less than
D) greater than or equal to

12)The impact of credit ________ saving and ________ spending.

A) increases; decreases
B) decreases; increases
C) decreases; decreases
D) Credit has no relationship on saving and spending.

13) Creditors prefer a ________ amount of capital and ________ collateral in the best of
circumstances.
A) low; low
B) high; low
C) high; high
D) medium; low

14) As of November 14, Ben has an outstanding credit card balance of $1,100 from purchases
made over the past month. The new billing period begins on November 15. Assume Ben's
outstanding balance for the first 15 days of this new billing period (Nov. 15-29) is $1,100. Then
on November 29, the financial institution receives a payment of $600 from Ben, reducing his
balance to $500. This is the balance for the remaining 15 days.
Using the average daily balance method and a monthly interest rate of 2.5%, Ben's finance
charge would be
A) $15.00.
B) $12.50.
C) $27.50.
D) $20.00.
Explanation: ($1100 + $500)/2 = $1600/2 = $800. Then $800 × .025 = $20

15) As of November 14, Ben has an outstanding credit card balance of $1,100 from purchases
made over the past month. The new billing period begins on November 15. Assume Ben's
outstanding balance for the first 15 days of this new billing period (Nov. 15-29) is $1,100. Then
on November 29, the financial institution receives a payment of $600 from Ben, reducing his
balance to $500. This is the balance for the remaining 15 days.
Using the previous balance method and a monthly interest rate of 2.5%, Ben's finance charge
would be
A) $15.00.
B) $12.50.
C) $27.50.
D) $20.00.
Explanation: $1100 × .025 = $27.50

16) As of November 14, Ben has an outstanding credit card balance of $1,100 from purchases
made over the past month. The new billing period begins on November 15. Assume Ben's
outstanding balance for the first 15 days of this new billing period (Nov. 15-29) is $1,100. Then
on November 29, the financial institution receives a payment of $600 from Ben, reducing his
balance to $500. This is the balance for the remaining 15 days.
Using the adjusted balance method and a monthly interest rate of 2.5%, Ben's finance charge
would be
A) $15.00.
B) $12.50.
C) $27.50.
D) $20.00.
Explanation: $500 × .025 = $12.50

17) In receiving a credit application, lenders often look for

A) character, capital, capacity.
B) earnings, earnestness, eagerness.
C) honesty, honor, net worth.
D) net worth, net income, no-nonsense.
Discussion Questions

FINANCIAL PLANNING PROBLEMS (p. 223)

6.10. Analyzing Feasibility of a Loan. Fred Reinero has had a student loan, two auto loans, and
three credit cards. He has always made timely payments on all obligations. He has a savings
account of $2,400 and an annual income of $25,000. His current payments for rent, insurance,
and utilities are about $1,100 per month. Fred has accumulated $12,800 in an individual
retirement account. Fred’s loan application asks for $10,000 to start up a small restaurant with
some friends. Fred will not be an active manager; his partner will run the restaurant. Will he get
the loan? Explain your answer.
TOPIC 3: Taxation issues for investors - Planning your Tax Strategy

1) Tax planning, often viewed as a need of the wealthy, is actually important for most taxpayers
because
A) the average American spends over one-third of each year earning money to pay taxes.
B) many people pay several thousand dollars more than they need to.
C) most people don't seem to understand it and end up losing out.
D) A, B, and C
E) A and B

2) Which of the following can reduce your income tax obligation?

A) credits – Child credit
B) adjustments - Pension contributions
C) exemptions – Personal Relief
D) the standard or itemized deductions – medical exp
E) all of the above

3) The amount of income taxes that you actually pay is based upon your
A) taxable income.
B) gross income.
C) adjusted gross income.
D) tax liability minus available credits.
E) both A and D

4) A source of tax-free income is

A) personal monetary gifts.
B) workers' compensation benefits.
C) interest on municipal bonds.
D) interest earned inside a life insurance policy.
E) All of the above are sources of tax-free income.

5) The two types of exemptions include

A) personal and children.
B) spouse and dependency.
C) personal and dependency.
D) personal and spouse.
E) children and dependency.

6) Which of the following is a reason or reasons for the IRS to audit your tax return?
A) You earn a lot of money.
B) There is something suspicious on your return.
C) You were randomly selected as a matter of routine audits.
D) You were audited in the past.
E) any or all of the above

7) A tax system in which tax rates increase as income increases is called a(n) ________ system.
A) representative tax
B) progressive tax
C) adjusted tax
D) uniform tax
E) none of the above
8) The ________ is the income range in which the same marginal tax rates apply.
A) relevant range
B) income bracket
C) income range
D) tax bracket
E) none of the above

9) The percentage of the last dollar you earn that goes toward payment of taxes is called the
________.
A) tax deferral rate
B) average tax rate
C) base tax rate
D) marginal tax rate
E) none of the above

10) Income that comes from wages or a business is called ________.

A) passive income
B) active income
C) investment income
D) portfolio income
E) none of the above

11) Income that is earned from security investments is called ________.

A) passive income
B) portfolio income
C) active income
D) stock income
E) none of the above

12) Your dependent is claimed on ________ tax return.

A) his or her own
B) someone else's
C) your
D) his or her choice of returns
E) none of the above

13)Which of the following items are not included in gross income for the calculation of your
federal income taxes?
A) Wages and salaries
B) Life insurance benefits
C) Sales commission
D) Bonuses
E) All of the above items are included in gross income.

14) Alice pays $1,000 in taxes on $20,000 of gross income. If her income were to rise by $5,000,
her taxes would increase from $1,000 to $1,500. Given this information, her marginal tax rate is
A)20%.
B)10%.
C) 8%.
D) 5%.
Practice Quiz 4-1 (p. 119)

1. How should you consider taxes in your financial planning?

4. What is the difference between your marginal tax rate and your average tax rate?

FINANCIAL PLANNING PROBLEMS (p. 150)

4.1. Computing Taxable Income. Ross Martin arrived at the following tax information:
Gross salary, $52,145
Interest earnings, $205
Dividend income, $65
One personal exemption, $3,900
Itemized deductions, $9,250
Adjustments to income, $1,200
What amount would Ross report as taxable income?

4.5
TOPIC 4: The good, the bad and the ugly - The Housing decision

1) There are four steps in smart shopping. Which of the following is not a step?
A) Purchase insurance or get a warranty.
B) Maintain your purchase.
C) Make your selection.
D) Do your shopping homework.
E) Make your purchase.

2) Phil and Judy want to buy a house. Which of these steps are not in the housing decision?
A) post-purchase activities
B) pre-shopping homework
C) the selection process
D) making the purchase
E) All are steps.

3) Which one of the following is not a key to finding housing that fits your needs?
A) present needs
B) location
C) future needs
D) decide what you are looking for
E) insurance

4) Select the one cost that is typically not involved in home ownership.
A) title search
B) home owner's insurance
C) loan application fee
D) real estate agent's fee
E) appraisal fee

5) Which of the following is not a one-time fee connected with purchasing a house?
A) down payment
B) points
C) private mortgage insurance
D) origination fee
E) closing costs

6) Sandra Smith wants to know the purpose of a title search. Can you tell her?
A) to gain a clear title to the property
B) to determine if there are any liens or taxes owed on the property
C) to make sure the person selling the property really owns it
D) both A and B above
E) A, B, and C above

7) Name the items that are kept in an escrow account.

A) interest, taxes, insurance, down payment
B) principal, down payment, interest, insurance
C) principal, interest, title fee, insurance
D) insurance, title fee, taxes, interest
E) taxes, insurance
8) How does a lender determine your mortgage limit using PITI compared to 28% of your gross
monthly income, 36% of your gross monthly income, and 90% of the appraised value of the
house?

A) The lowest of these three figures is used.

B) The highest of these three figures is used.
C) The average of these three figures is used.
D) Any of the above can be used.
E) None of the above is used.

9) The two primary advantages of a 15-year mortgage over a 30-year mortgage are
A) easier to obtain.
B) lower payments and prepayment privileges.
C) give you more financial flexibility in the long run.
D) lower interest rate and earlier pay-off.
E) both C and D

10) You are in the process of purchasing a new home. Expenses that you incur when finalizing
the transfer of the ownership of the house are called
A) finalization costs.
B) closing costs.
C) end costs.
D) transfer fees.
E) none of the above

11) A mortgage loan in which the interest rate charged fluctuates with the level of current
interest rates is called a(n) ________.
A) MRA
B) RAM
C) MAR
D) ARM
E) none of the above

12) How much would the monthly payment be on a mortgage of $150,000 for 30 years at a rate
of 6.0%?
A) $899.33
B) $779.48
C) $743.66
D) $721.73
E) $450.03
Practice Quiz 9-3 (p. 315)

FINANCIAL PLANNING PROBLEMS (p. 330)

9.1
TOPIC 5: Risks in investment and insurance - Property and Motor Vehicle Insurance

1) Amy Lambert's home is insured for $85,000 and her detached garage is destroyed by a
windstorm. She hopes to collect $11,850. Will she and under what coverage area?
A) no, dwelling
B) yes, dwelling
C) yes, personal property
D) no, other structures
E) yes, other structures

2) Wilber Robinson found out that his homeowner's coverage comes in handy when a neighbor
steps on a garden rake and it flips up and causes a concussion. Josh did just that and spent
two weeks in the hospital running up a $23,000 bill. Josh was covered under 2) _______
A) section II personal liability.
B) section I loss of use.
C) section II medical payments.
D) added liability insurance.
E) the 80 percent rule.

3) Supplemental coverage for homeowner's insurance is available through endorsements. Which

one of the following is not a common form of additional coverage?
A) medical payments
B) personal articles floaters
C) inflation guard
D) earthquake coverage
E) flood protection

4) The disadvantage of actual cash value coverage of personal property compared to replacement
cost coverage is that it
A) will reimburse you for the cash value of a new item.
B) must be reported as a loss on your tax return.
C) will reimburse you only for the unused value.
D) does not have to be reported as a loss on your tax return.
E) none of the above

5) Toldae and Natasha were driving their friends home when they rear-ended another car. They
are worried about paying for the medical bills and possibly getting sued. Who will be
covered under Part B: Medical expense coverage?
A) Toldae, Natasha, and their friends
B) Toldae, Natasha, and the people in the car they hit
C) their friends and the people in the other car
D) the driver and the people in the other car
E) the driver and their friends

6) Verci and Banok skidded on the ice and hit a telephone pole. Their car suffered severe damage
to the front end. This expense will be covered under part D called
A) comprehensive.
B) liability.
C) property damage.
D) collision and repair.
E) none of the above
7) ________ auto insurance pays for your losses and the losses suffered by your passengers,
while the other driver's insurance would pay for his or her losses. This arrangement is made
to keep insurance costs down, especially for settling claims.
A) No-fault
B) Comprehensive
C) PIP
D) PAP
E) Your fault

8) Your best friend's apartment has just been robbed, and he had no insurance. What would you
suggest to your friend to better protect himself from this event?
A) Add a personal articles floater.
B) Take a written and video tape inventory of his property.
C) Take out personal property replacement cost coverage.
D) both B and C above
E) A, B, and C above

9) Your home and property have a market value of $240,000. To meet the coinsurance provision,
you would need at least ________ of insurance.
A) $144,000
B) $168,000
C) $192,000
D) $216,000
E) none of the above

10) ________ is insurance covering all liabilities other than those resulting from the negligent
operation of an automobile or those associated with business or professional causes.

A) Personal injury protection

B) Collision
C) Uninsured motorist
D) Personal liability insurance
E) none of the above

11) If you wanted to obtain an endorsement that automatically updates the level of property
coverage based on an index of replacement costs that continually updates the cost of
building a home, you would ask for a(n)
A) automatic adjustment policy.
B) inflation guard.
C) replacement cost index.
D) continual adjustment policy.
E) none of the above

12) ________ would provide coverage for you against injuries caused by a negligent driver
whose insurance company is insolvent.
A) Collision
B) Negligent driver rider
C) Uninsured motorist's protection coverage
D) Personal liability
E) none of the above
13) Suppose that you parked your car in a grocery store parking lot. You returned to your car to
find that someone hit it with their automobile and drove off. What specific coverage would
cover you under this circumstance?
A) collision
B) uninsured motorist's protection coverage
C) personal liability
D) comprehensive physical damage coverage
E) none of the above

14) What type of auto insurance protects you in the case of accident regardless of who is at fault?
A) cause-free insurance
B) no-litigation insurance
C) no-fault insurance
D) no-cause insurance
E) none of the above

15) Clay and Jeanie Slinker

Living in the country has many advantages. Jeanie and Clay love living in dairy farm country.
They enjoy living in Clay's ancestral home built by his great-grandfather in 1898. It has been
extensively remodeled by each generation that has lived in it. Clay and Jeanie have made a few
personal touches of their own on the inside and outside of the house. Much of the decor and trim
is made of rare and expensive materials. As of late they have been thinking about updating their
auto, life, and homeowner's insurance.
The Slinkers operate a consulting business out of their home and receive clients in a special room
set aside for business purposes. Their assets are much greater than the liability limits on their
new homeowner's insurance. What should they do?
A) Add additional liability coverage for personal assets and not worry about business since they
are out in the country and no one will know.
B) Add business coverage and self-insure the rest.
C) Add a professional security system.
D) Use the 80 percent replacement rule.
E) Add business coverage and additional liability for personal assets.

Discussion Questions
Practice Quiz 10-5 (p. 356)

FINANCIAL PLANNING PROBLEMS (p. 362)

P10.6
TOPIC 6: Risks in investment and insurance - Health, Disability and Long-
Term Care Insurance
1) Basic health insurance includes a combination of three types of insurance, which are
A) physician, hospital, and surgical
B) physician, nursing home, and hospital
C) hospital, surgical, and emergency room
D) surgical, hospital, and nursing home
E) doctor, hospital, and lab

2) Health insurance that provides payments to the insured in the event that the insured's income
is interrupted by illness, sickness, or accident is called ________ insurance.
A) unemployment
B) income interruption
C) disability
D) worker's comp
E) accident and sickness

3) Short-term disability insurance generally provides benefits on disabilities from ________ after
a short wait of ________ days.
A) six months to two years; 8 to 30
B) one day to three months; zero
C) 30 days to three months; 7
D) three month to six months; 8 to 10
E) none of the above

4) Why is long-term care insurance needed?

A) Life expectancies have increased.
B) It is not covered under Medicare.
C) It is not covered by major medical insurance.
D) all of the above
E) none of the above

5) Most long-term care policies require the insured to be unable to perform one or more activities
of daily living (ADLs) without assistance. Which of these is not included?
A) exercising
B) walking
C) eating
D) dressing
E) All are included.

6) You should only consider a long-term care policy that includes coverage for Alzheimer's and
Parkinson's disease. It should also include which of the following provisions?
A) inflation adjustment
B) waiver of premium
C) type of care
D) benefit and waiting period
E) all of the above
8) In most employer-sponsored disability income insurance plans:
A) your employer pays part or all of the cost.
B) you pay all the cost.
C) your union pays all the cost.
D) the Social Security Administration pays most of the premium.
E) the Veterans Administration foots the bill.

9) Group health insurance does which one of the following?

A. provides coverage for you but not your immediate family
B. covers all of your health insurance needs
C. provides more health coverage than private plans
D. typically covers all of an individual's medical costs
E. generally requires proof of insurability

10) Because you are young and healthy now, you may overlook the very real need for which type
of insurance?
A. disability income.
B. health.
C. dental.
D. vision care.
E. liability.

Practice Quiz 11-3 (p. 381)

Practice Quiz 11-4 (p. 387)

FINANCIAL PLANNING PROBLEMS (p. 402)

P11.4
TOPIC 7: Risks in investment and insurance - Life Insurance
1) Life insurance buying is a new experience for many people. Which of the following is not a
basic consideration when determining life insurance needs?
A) the amount of coverage you need now and in the future
B) the proper beneficiary designation
C) shopping around for the best agent and price
D) the type of life insurance that fits your needs
E) whether or not you need life insurance at this time

2) John purchases a life insurance policy on his wife Betty where he pays the premium and he
will receive the life insurance money when she dies. John is both the ________ and the
________ who will receive the ________ upon the death of Betty, the ________.
A) policy owner; insured; face amount; beneficiary
B) policy owner; beneficiary; face amount; insured
C) insured; beneficiary; money; policyholder
D) beneficiary; premium payer; face amount; policy holder
E) none of the above

3) Phillip Morris wants to know in which of these conditions is life insurance not needed?
A) single with no dependents
B) married single income couple with no children
C) married with an estate valued at more than $1.2 million
D) married with children
E) own your own business

4) ________ is a method to estimate your life insurance needs by using a multiple of your
annual earnings, such as 5 or 7 times.
A) Triple multiple earnings
B) Multiple regression
C) Earnings multiple
D) Needs approach
E) Retirement needs approach

5) Renea Anjel asked her insurance agent which of these is not a cash-value life plan. He said
A) whole life.
B) group universal life.
C) universal life.
D) term life.
E) variable life.

6) Of the following life policies — term, whole life, universal life, variable life — two have
fixed death benefits. Which are they?
A) term and variable life
B) whole life and variable life
C) term and universal life
D) term and whole life
E) whole life and universal life

7) The policy feature that allows you to pay the premium late but still retain coverage is the
A) nonforfeiture clause.
B) loan clause.
C) grace period.
D) incontestability clause.
E) policy reinstatement clause.

8) Bobbi wants to pay for her life insurance in the least expensive way. She should pay
A) monthly bank draft.
B) quarterly.
C) semi-annually.
D) annually.
E) monthly.

9) Most insurance agents talk about life insurance needs in terms of married couples with
children. Wilma is like a growing number of young Americans — waiting later in life to
marry. Her needs are different at this point in her life. She is a young professional
accountant with no dependents. Wilma knows that life insurance will never be any cheaper
than it is right now.
What is Wilma's prime concern regarding life insurance?
A) to decide which company to go with
B) to decide how much she can afford
C) to decide which type of policy is appropriate
D) to decide how much she needs
E) to decide if she actually needs any

10) Which of the typical objections to life insurance might Wilma raise to her agent?
A) no money to spend
B) no trust in you
C) no trust in your company
D) no hurry to buy
E) no need to buy

11) Wilma wants to stay away from any life plans that are risky and bear unnecessary costs.
Which plan(s) would you advise her to avoid?
A) whole life
B) reentry life
C) universal life
D) level term
E) variable life

12) Suppose that you have decided to buy some life insurance. Which method of determining
needs is the most simple?
A) needs approach
B) agent's opinion approach
C) age and lifestyle approach
D) computer-based approach
E) multiple earnings approach

13) Statisticians who specialize in estimating the probability of death based on personal
characteristics are called
A) morbidity statisticians.
B) actuaries.
C) morbidity analysts.
D) insurance analysts.
E) none of the above

14) Special provisions that may be added to your policy which either provide extra benefits to
the beneficiary or limit the company's liability under certain conditions are
A) secondary provisions.
B) riders.
C) attachments.
D) alternative provisions.
E) none of the above

Practice Quiz 12-2 (p. 414)

Practice Quiz 12-3 (p. 423)
FINANCIAL PLANNING PROBLEMS (p. 438)

12.6. Estimating Life Insurance Needs Using the DINK Method. You and your spouse are in
good health and have reasonably secure jobs. Each of you makes about $38,000 annually. You
own a home with an $80,000 mortgage, and you owe $15,000 on car loans, $5,000 in personal
debt, and $2,000 in credit card loans. You have no other debt. You have no plans to increase the
size of your family in the near future. You estimate that funeral expenses will be $5,000.
Estimate your total insurance needs using the DINK method.

Human Life Value (HLV) Approach

The gross income of an individual is RM200,000 pa. He spends RM30,000 annually on himself
and pays RM100,000 as taxes.. The rest of the money is left for his family for living their daily
lives. This is the surplus that he generates for his family.

That money when invested at some assumed rate of return (say 8% in the below example) for the
working span of the individual (15 years in the example below) gives the HLV value of the
insurance requirement.

Answer

Human Life Value Method

Example 1

Gross Total Income 200,000

Annual Self Maintenance Charges -30,000
Income Tax Payable - 100,000
Surplus income generated for family 70,000
Retirement Age 60
Present Age 45
Working Span 15
Expected Rate of Return 8%
PV of Annuity Factor = 8.559
Human Life Value = 8.559 x 70,000 = 599,130
Example 2

April" is age 35 and plans to retire at age 55. She currently earns a salary of $50,000, of which
20% goes for her own personal living expenses and the other 80% for her family. Also, she
provides an additional $15,000 per year of non-wage value to her family. (Think of this as the
cost to hire a skilled domestic worker to perform her duties.) April's total value to her family at
age 35 is calculated as follows:

80% of her $50,000 salary $40,000

Non-wage value $15,000

Her total value at age 35 $55,000

The next step is to increase this $55,000 for inflation over the next 20 years, until she plans to
retire. At a 3% rate of annual growth, her value would increase to $99,336 by age 55. The final
step is to apply a "discount rate" to each year's projected total value, accounting for the time
value of money. For example, at a discount rate of 4%, the total present value of April's
projected value through age 55 is just over $1 million. That is the amount of life insurance
protection her family needs to adequately insure against her death.

Capital Retention (Capital Needs)

Capital Need=Ongoing Income−Ongoing Expenses + (Assets−FinalExpenses)

Real Rate of Return

Assets - Bills = Cash needs (at death)

Dollars in - Expenses = Funds required (ongoing)
(Funds required) / (real Rate of Return) = Gross value of life
How much insurance = Gross value of life + Cash needs

Salleh is using the capital retention approach to determine how additional life insurance he needs
to purchase. He currently has assets that will provide his family with $40,000 per year in
investment income. He would like his family to have $50,000 per year in investment income. He
thinks he can earn 8% on his invested assets. How much additional life insurance should Sam
purchase?

(Answer: 50,000 -40,000 = 10,000 (Amt of Income to be replaced)

10,000/0.08 = $125,000)
Mark is attempting to determine how much life insurance he should purchase according to the
capital retention approach. Mark’s goal is to provide $20,000 in income per year before taxes to
his heirs. Mark’s real estate investments currently generate $6000 per year before taxes. His
preferred stock pays $2500 in dividends annually; and he has a $50,000 certificate of deposit
locked-in at an interest rate of 8 percent. All of these investments will pass to Mark’s heirs upon
his death. The balance of the desired cash flow will be funded through life insurance proceeds
which can be invested to yield 4 percent. How much additional life insurance is required?

Mark’s goal is to provide $50,000 per year to his family if he dies. Currently, the following cash
flow would be available:

Real estate investment income $ 13500

Preferred stock dividends $ 2500
CD interest ($50,000 × 0.08) $ 4000
Total income currently available $20,000

So Mark must provide an additional $30,000 ($50,000 − $20,000) in pre-tax income through
invested life insurance proceeds. Assuming that life insurance proceeds can be invested to
provide a 5 percent return, we can determine how much life insurance is needed:
4% × Life Insurance Proceeds = $30,000
Dividing both sides by 5 percent (0.05), we obtain:
Life Insurance Proceeds = $750,000
TOPIC 8: Share and efficient market - Investing in Stock
1) That portion of a stock's risk or variability that cannot be eliminated through investor
diversification is called ________ risk.
A) inflation
B) supply and demand
C) unsystematic
D) unrealistic
E) systematic

2) That portion of a stock's risk or variability that can be eliminated through investor
diversification is called ________ risk.
A) unrealistic
B) inflation
C) unsystematic
D) systematic
E) supply and demand

3) Billy Steele learned that unsystematic risk does not exist for diversified investors and, as such,
the market does not ________ investors for taking on risk that they can eliminate for free.
A) compensate
B) tolerate
C) need
D) allow
E) diversify

4) Cretia Robritti discovered that the purpose of asset allocation is to ensure that the investor is
________, generally with holdings in several different ________ of investments.
A) protected; denominations
B) well diversified; classes
C) evenly distributed; amounts
D) evenly distributed; classes
E) well diversified; amounts

5) Joe has a high risk tolerance and goes for earning a 24 % return on his money. He has learned
from the rule of 72 that a dollar will triple in just three years at this rate. He is 25 and wants
to retire at age 55 as an independently wealthy man. The only way he can reach this level of
return is to invest in ________.
A) stocks
B) long-term corporate bonds
C) a combination portfolio
D) gold, silver, and other speculation
E) none of the above

6) You recently purchased a stock for $25. It is now worth $35, and it paid a $5 dividend during
the time you held it. What is your rate of return on this stock?
A) 40%
B) 43%
C) 60%
D) -20%
E) none of the above
7) You recently purchased a stock for $3.50. It is now worth $4.75, and it paid a $1 dividend
during the three years you held it. What is your annualized rate of return on this stock?
A) 14%
B) 21%
C) 64%
D) 12%
E) none of the above

8) You purchased an investment for $1,000 on which you earned $120 investment last year. The
inflation rate during that time was 3%. What was your real rate of return?
A) 12%
B) 15%
C) 3%
D) 9%
E) none of the above

9) Which of the following statements is not true of asset allocation?

A) Investments are spread across several different investment classes.
B) Investments reflect the investor's specific time horizon.
C) Allocation may be made in international stocks and bonds.
D) Allocation may be made in domestic stocks and bonds.
E) All of the above statements are true.

10) Patti DeVry has been trading stocks in the over-the-counter market. She offers a ________
price when purchasing and the selling individual wants a(n) ________ price.
A) ask; minimum
B) ask; bid
C) bid; ask
D) starting; minimum
E) bid; minimum

11) Complete the following sentence. The ________ the firm's earnings growth rate, the
________ the firm's P/E ratio and the ________ the investor's required rate of return, the
________ the P/E ratio.
A) higher; higher; higher; higher
B) higher; higher; lower; lower
C) higher; higher; higher; lower
D) lower; lower; lower; lower
E) higher; lower; lower; lower

12) A company has total assets of $10,000,000 and no outstanding debt. The closing price of the
stock is $45.75 per share, and there are 200,000 shares outstanding. It has paid common
dividends of $250,000. What is the book value per share?
A) $45.75
B) $40.25
C) $50.00
D) $25.00
E) none of the above
13) Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year
and a $1.50 per share at the end of the second year. You expect Von Bora's stock price to be
$25.00 at the end of two years. Von Bora's equity cost of capital is 10%
The price you would be willing to pay today for a share of Von Bora stock, if you plan to
hold the stock for two years is closest to:
A) $23.15
B) $20.65
C)$21.95
D)$21.90
Explanation: Div1 Div2 + P2 1.40 1.50 + 25.00
P0 = + = + = $23.17
1 + rE (1 + rE ) 2 1 + .10 (1 + .10) 2

14) Suppose you plan to hold Von Bora stock for one year. The price you would expect to be
able to sell a share of Von Bora stock in one year is closest to:
A) $26.50
B) $22.70
C) $23.15
D) $24.10
Answer: D
Div2 + P2
P1 = =
(1 + rE )1
1.50 + 25.00
= $24.10
(1 + .10)2
15) Suppose you plan to hold Von Bora stock for only one year. Your capital gain from holding
Von Bora stock for the first year is closest to:
A) $0.95
B) $1.40
C) $1.85
D) $1.25
Answer: A
Div2 + P2
P1 = =
(1 + rE )1
1.50 + 25.00
= $24.10
(1 + .10)

Div1
P0 = +
1 + rE
Div2 + P2 1.40
= +
(1 + rE ) 2 1 + .10
1.50 + 25.00
= $23.17
(1 + .10)2

Capital Gain = P1 - P0
= 24.10 - 23.17 = $0.93
16) Suppose you plan on purchasing Von Bora stock in one year, right after the $1.40 dividend is
paid. You then plan on selling your stock at the end of year two, right after the $1.50 dividend is
paid. The total return that you will receive on your investment is closest to:
A) 9.50%
B) 10.75%
C) 10.25%
D) 10.00%
P1 = = = $24.10

So dividend yield = $1.50 / $24.10 = .0622 or 6.22%

So capital gain rate = (P2 - P1) / P1 = ($25.00 - $24.10) / $24.10 = .03734 or 3.73%

Total return = capital gains rate + dividend yield = 3.73% + 6.22% = 9.95%

15) Margin Trading

Suppose that you think that the stock for the company Apple Bhd, currently at $40 per share, will
go up in value. You want to buy 100 shares, but you have only $2,000. What can you do? If
you're intent on buying 100 shares (versus simply buying the 50 shares that you have cash for),
you can borrow the additional $2,000 from your broker on margin. If you do that, what are the
potential outcomes if:
i) Apple Bhd goes to $50 per share,
If Apple Bhd goes to $50 per share, your investment will be worth $5,000, and your
outstanding margin loan will be $2,000. If you sell, the total proceeds will pay off the loan
and leave you with $3,000. Because your initial investment was $2,000, your profit is a solid
50 percent because ultimately your $2,000 principal amount generated a $1,000 profit.
However, if you pay the entire $4,000 upfront — without the margin loan — your $4,000
investment will generate a profit of $1,000, or 25 percent. Using margin, you will double the
return on your money.

ii) If the stock price remains the same.

If the stock goes nowhere, you still have to pay interest on that margin loan. If the stock pays
dividends, this money can defray some of the cost of the margin loan. In other words,
dividends can help you pay off what you borrow from the broker. Having the stock neither
rise nor fall may seem like a neutral situation, but you pay interest on your margin loan with
each passing day. For this reason, margin trading can be a good consideration for
conservative investors if the stock pays a high dividend. Many times, a high dividend from
$5,000 worth of stock can exceed the margin interest you have to pay from the $2,500 (50
percent) you borrow from the broker to buy that stock.

iii) If Apple Bhd goes to $28 per share.

The margin loan portion exceeds 50 percent of the equity value in that stock — in this case,
because the market value of your stock is $2,800 but the margin loan is still at $2,000. The
margin loan is a worrisome 71 percent of the market value ($2,000 divided by $2,800 = 71
percent). Expect to get a call from your broker to put more securities or cash into the account
to restore the 50 percent balance
TOPIC 9: Investing in Bonds
1) Which of the following is not an advantage of bonds as investments?
A) Bonds, in one form or another, can be purchased by almost anyone.
B) Bonds are the safest investment.
C) Bonds produce steady current income.
D) Bonds reduce risk through diversification.
E) Bonds can be a safe investment if held to maturity.

2) In order to have the money necessary to pay off bond obligations as they come due, bond
issuers establish a ________.
A) indenture
B) preparation fund
C) pay off fund
D) sinking fund
E) debt fund

3) A bond rating is really a measure of a bond's ________.

A) market value
B) riskiness
C) yield to maturity
D) performance
E) yield

4) Harold Coombs saw in a financial magazine that S&P rate prime bonds, strong bonds, and
speculative bonds as ________ respectively.
A) AAA, A, BB
B) AA, Aa, C
C) AA1, AA, D
D) A, B, C
E) AaA, A, B

5) What is the par value of a corporate bond that was issued with a 8% annual coupon, currently
yields 8%, and is due in 10 years?
A) $1,000.00
B) $1,167.33
C) $1,080.00
D) $1,070.23
E) none of the above

6) Suppose you just purchased a corporate bond at 95 1/8. It carries a 7% coupon rate, will
mature in 5 years and is priced to yield 8.22%. What is the annual interest payment to you?
A) $100.00
B) $70.00
C) $82.22
D) $95.125
E) none of the above

7) You hold in your hands a legal document that provides the specific terms of the loan
agreement, including a description of the bond, as well as the rights of the bondholder. You
have a(n) ________.
A) bond signatory
B) indenture
C) agency contract
D) signatory contract
E) none of the above

8)The British government has a consol bond outstanding that pays ₤100 in interest each year.
Assuming that the current interest rate in Great Britain is 5% and that you will receive your
first interest payment one year from now, then the value of the consol bond is closest to:
A) ₤1000
B) ₤1100
C) ₤2100
D) ₤2000
E) ₤2200
PVP = C / r = 100 / .05 = 2000

9) Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity. If the
YTM of this bond is 10.4%, then the price of this bond is closest to:
A) $1000
B) $602
C) $1040
D) $372
E) $972
Answer: D

10) The following table summarizes prices of various default-free zero-coupon bonds (expressed
as a percentage of face value):

The yield to maturity for the two year zero-coupon bond is closest to:
A) 6.0%
B) 5.8%
C) 5.6%
D) 5.5%
E) 5.9%
89.68 = 100/(1+i)2
Practice Quiz 15-3 (p. 532)

Serial Bonds - How it works/Example:

Normally, when a company or government body issues bonds, all of those bonds mature on the
same date (that is, the borrower must repay all of the debt on one particular day). A
serial bond issue, however, matures over several periods (usually at regular intervals).

For example, the issuer of $100 million in traditional bonds with ten-year maturities will have to make
a $100 million principal payment at the end of the tenth year (see the table below). But the issuer of
$100 million in serial bonds might structure the offering such that $20 million matures after five
years, another $20 million matures the year after, $20 million the year after that, and so on.

Why it Matters:

Note in the example above that the reduction in outstanding principal over time means that
the issuer of serial bonds pays less interest over the life of the issue than the issuer of
traditional bonds does. The traditional-bond issuer must make coupon payments on $100 million of
outstanding debt for a full ten years, whereas the serial-bond issuer must only do so until year five.
After year five, the issuer redeems $20 million of that debt and thus only has to pay interest on $80
million, then $60 million, then $40 million, and so forth. This can represent a
considerable cash savings, assuming the issuer is able to make the promised principal repayments.

FINANCIAL PLANNING PROBLEMS (p. 549)

P15.13
TOPIC 10: Management funds - Investing in Mutual Fund
1) What is the advantage of investing in mutual funds over buying individual stocks yourself?
A) inexpensive way to instantly diversify
B) minimal transaction costs
C) liquidity
D) professional management
E) all of the above

2) Roberta Cartwright puts money each month into a mutual fund that has the ability to issue as
many shares as investors want. Roberta has a(n) ________ mutual fund.
A) no-load
B) open-end
C) closed-end
D) back-end load
E) unit investment trust

3) What does the following mathematical expression yield= (total market value of all securities -
liabilities) divided by (total shares outstanding) = ________.
A) net asset value
B) net return value
C) asset return value
D) net value
E) asset value

4) A balanced mutual fund is just that, a balance of ________, ________ ________, and
________.
A) steady income; moderate growth; moderate stability
B) high income; moderate growth; moderate stability
C) steady income; high growth; high stability
D) some income; slow growth; little stability
E) high income; high growth; high stability

5) One item listed below is not required by law to be in a mutual fund prospectus. Can you spot
it?
A) the fund manager's past experience
B) the fund's goal and investment strategy
C) the fund's expected rate of return
D) any tax considerations of importance to the investors
E) any investment limitation the fund may have

6) Judy invests in mutual funds. To either pay no commission or pay one when she liquidates her
holdings, she would want a ________ or a ________.

A) no-load fund; back-load fund

B) front-load fund; no-load fund
C) load fund; back-load fund
D) front-load fund; load fund
E) no-load fund; load fund
7) Suppose that the current value of all of a mutual fund's holdings is determined to be $700
million. The fund's liabilities are $100 million and it grew at 20% from last year. It
currently has 50 million shares outstanding. What is the fund's NAV?
A) $16.80 per share
B) $14.00 per share
C) $14.40 per share
D) $12.00 per share
E) none of the above

8) You purchased 100 shares of Gibraltar Strength Fund for $12.75 per share. Its current NAV is
18.75 per share. There was a total of $0.25 in dividends and $0.75 in capital gains
distributed. What is your total return?
A) 37.33%
B) 32.00%
C) 54.90%
D) 47.06%
E) none of the above
- ($6 +$0.25 +$0.75)/$12.75

9) Assume that you wanted to purchase $3,000 of a mutual fund. Upon reviewing its prospectus,
you learned the following:
Front-end Load 5.00%
Back-end Load 5.00% within three years
Management Fee 5.00%
12b-1 fee 3.00%
What would you pay in commissions as you first purchased the fund?
A) $300.00
B) $600.00
C) $450.00
D) $150.00
E) none of the above

10) Zippo Mutual Fund is one of your best performers. It just announced a year-end distribution
of $3.50 per share in capital gains and $1.50 in dividends. Assuming the NAV increased
from $29.50 to $33.50, calculate your total annual return?
A) 30.51%
B) 16.95%
C) 26.87%
D) 14.93%
E) none of the above
- ($3.50 + $1.50+ $4)/29.50

11) The ratio of a mutual fund's total expenses to its total assets is called the ________ ratio.
A) cost
B) revenue
C) expense
D) management
E) none of the above
12) You have just received a packet of information in the mail on a specific mutual fund. It
contains a description of the fund, its objects, risks, historical performance, expenses, and
other relevant information. This is a(n) ________.
A) prospectus
B) ad brochure
C) overview analysis brochure
D) SEC sheet
E) none of the above

13) Total returns on mutual funds can be calculated by adding dividends distributed, capital
gains distributed, and ________ and dividing this sum by the beginning net asset value.
A) beginning NAV - ending NAV
B) beginning NAV + ending NAV
C) ending NAV + beginning NAV
D) dividends undistributed + capital gains undistributed
E) ending NAV - beginning NAV

14) Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 10%.
The amount of money will you have in 10 years is closest to which of the following? The
amount you will have in 50 years is closest to which of the following?
A) $386; $9
B) $2,594; $45,259
C) $2,594; $117,391
D) $3,138; $ 1,311,892

FV = 1000(1.10)10 = 2,594; FV = 1000(1.10)50 = $117,391

Practice Quiz 16-3 (p. 574)

Practice Quiz 16-4 (p. 580)

1. How can an investor make money when investing in mutual funds?

FINANCIAL PLANNING PROBLEMS (p. 584)

P16.1
TOPIC 11: Investing in Real Estate and Other Alternatives
1) An example of an indirect real estate investment is a(n):
A) single family dwelling.
B) duplex.
C) apartment.
D) land.
E) participation certificate.
2) The prices of single-family houses:
A) tend to rise over time, thereby acting as a hedge against inflation.
B) rise less than the Consumer Price Index.
C) always increase in value.
D) tend to be countercyclical, thereby acting as a hedge against the business cycle.
E) remain constant over time.
3) Which type of REIT invests directly in properties?
A. compound
B. equity
C. mortgage
D. hybrid
E. simple

4) Jane Calvert owns a condominium at the beach which she rents out to vacationers. What
type of investment does she hold?
A. direct investment in real estate
B. indirect investment in real estate
C. equity REIT
D. participation certificate
E. mortgage REIT
5) Real property equity investments are usually considered attractive during times of:
A. deflation.
B. disinflation.
C. inflation.
D. recession.
E. unemployment.

6) Financial leverage refers to:

A. the use of borrowed funds for investment purposes.
B. the mathematical law of large numbers.
C. financial averages.
D. buying and selling short.
E. limiting financial liability.
7) Which of the following can be a management problem when investing directly in real
estate?
A. maintaining the rental property
B. inability to sell your interest in a limited partnership
C. disagreements among syndicate members
D. limited financial liability
E. all of the other answers
8) Increasing interest rates in the economy cause gold prices to:
A. skyrocket.
B. increase moderately.
C. remain stable.
D. decline.
E. change, but the direction of the change cannot be predicted.

9) Investors buy precious metals as a hedge against:

A. recession.
B. depression.
C. inflation.
D. deflation.
E. rising value of the U.S. dollar.

10) Easing of international tensions or disinflation cause gold prices to:

A. skyrocket.
B. increase moderately.
C. remain stable.
D. decline.
E. change, but the direction of the change cannot be predicted.
PRACTICE QUIZ 17-2 (p. 602)

Financial Planning Problems

Problems 11 and 12 are based on the following scenario.

In 1978 Juan bought 50 ounces of gold for $1,750 as protection against rising inflation. He sold
half the gold in 1980 at a price of $800 an ounce. Juan sold the other half in 1982 when the price
was $400 an ounce.

17.11. Calculating a Return on Investment. What was Juan’s profit in 1980 and in 1982?

Juan’s cost in 1978 = $1,750 ÷ 50 ounces = $35 per ounce.

In 1980, he sold 25 ounces at $800 an ounce for $20,000 ($800 × 25).
Juan’s profit in 1980 was ($20,000 - $875) or $19,125.
In 1982, Juan sold 25 ounces of gold at $400 an ounce for $10,000. His profit in 1982 was
($10,000 - $875) or $9,125.

17.12. Calculating a Return on Investment. What would Juan’s profit have been if he had sold all
of his gold in 1980?

If Juan had sold all of his gold in 1980, his profit would have been $38,250.
$800 × 50 ounces = $40,000
His cost in 1978 was $1,750
Therefore, the profit would have been ($40,000 - $1,750) or $38.250.
TOPIC 12: Retirement planning - Starting Early: Retirement Planning
1) Social Security is a form of retirement income for those who are qualified to receive it. Your
monthly check is determined by which of the following?
A) number of years of earnings
B) your earnings over the last three years
C) your average level of earning
D) an adjustment for inflation
E) A, C, and D

2) Which of the following questions is not really relevant to your retirement plan?
A) Is there an early retirement age, and if so, what are the benefits?
B) What are the pension requirements in terms of age and years of service?
C) How does the vesting process work?
D) What will be my monthly benefit at age 65?
E) All are relevant.

3) Which statement is accurate in describing a lump-sum retirement payout?

A) If you lose some of it, you may outlive your retirement fund.
B) It provides greater flexibility than other options.
C) It can be a hedge against inflation.
D) It provides money for emergencies.
E) all of the above

4) Harry does not want to be naive about his future retirement plan. He wants to know exactly
how much his Social Security check will be and how much his employer's pension benefits
will be. Which of these questions do you think Harry will ask about his employer's plan
first?
A) How does the vesting process work?
B) If I die, what benefits will my wife and children receive?
C) What are the pension requirements in terms of age and years of service?
D) Is there an early retirement age, and if so what are the benefits?
E) Is this a contributory or a noncontributory plan?

5) Your parents are planning for retirement in 10 years. They estimate inflation at 4% and that
they will need $55,500 in before-tax income while their current available income is only
$45,700, both in today's dollars. What will the amount of the deficit be at retirement? )
_______
A) $14,506.39
B) $9,800.00
C) $6,620.53
D) $22,312.65
E) none of the above
Deficit 55,500-45700=9800 x 1.480 (FV at 4%. 10 yrs)

6) Which of the following is a traditional pension plan in which you receive a promised specific
pension payout at retirement?
A) contributory retirement plan
B) defined-benefit plan
C) portable
D) noncontributory retirement plan
E) none of the above

7) You would be participating in a ________, if the employer provided all the funds for the
retirement plan and the employee need not contribute.
A) defined-benefit plan
B) noncontributory retirement plan
C) portable
D) contributory retirement plan
E) none of the above

8) What type of retirement plan would you be participating in if you, as the employee, possibly
with some contributions by your employer, provided the funds for your retirement plan?
A) noncontributory retirement plan
B) defined-benefit plan
C) portable plan
D) contributory retirement plan
E) none of the above

9) What is the term that describes the requirement that you work for your firm a specified period
of time prior to gaining the right to the retirement contributions made by your employer?
A) certifying
B) validating
C) tenuring
D) vesting
E) none of the above

10) A(n)________ is a pension plan in which you and your employer or your employer alone
contribute directly to a retirement account set aside specifically for you.
A) percentage plus inflation plan
B) defined-contribution plan
C) cash balance plan
D) defined-benefit plan
E) none of the above

11) You are saving for retirement. To live comfortably, you decide that you will need $2.5
million dollars by the time you are 65. If today is your 30th birthday, and you decide,
starting today, and on every birthday up to and including your 65th birthday, that you will
deposit the same amount into your savings account. Assuming the interest rate is 5%, the
amount that you must set aside each and every year on your birthday is closest to:
A) $71,430
B) $27,680
C) $26,100
D) $26,260
E) $28, 680
PV (age 29) = 2500000 / (1.05)36 = 431643.54

PV = 431,643.54
FV = 0
I=5
N = 36
Compute PMT = $26,086

12) Assume that you are 30 years old today, and that you are planning on retirement at age 65.
Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per
year as long as you work. To save for your retirement, you plan on making annual
contributions to a retirement account. Your first contribution will be made on your 31st
birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your
salary each year until you reach age 65. Assume that the rate of interest is 7%.The present
value (at age 30) of your retirement savings is closest to:
A) $87,000
B) $108,000
C) $46,600
D) $75,230
E) $187,000
First deposit = .08 ×
$45,000 = $3,600

$3,600 ×
1   1 + .05  35 
1 − 
.07 − .05   1 + .07  
 
= $87,003
Practice Quiz 18-2 (p. 624)
Practice Quiz 18-3 (p. 627)

FINANCIAL PLANNING PROBLEMS (p. 653)

18.1. Calculating Net Worth. Shelly’s assets include money in the checking and savings
accounts, investments in stocks and mutual funds, and personal property, including furniture,
appliances, an automobile, a coin collection, and jewelry. Shelly calculates that her total assets
are $108,800. Her current unpaid bills, including an auto loan, credit card balances, and taxes
total $16,300. Calculate Shelly’s net worth.

Net Worth = Assets – Liabilities

Shelly’s Net Worth is $108,800 - $16,300 = $92,500

TOPIC 13: Estate planning - Estate planning
1) The process of preparing for what happens to your accumulated wealth and your dependents
after you die is called ________.
A) estate preparation
B) estate planning
C) will preparation
D) probate planning
E) asset preparation

2) Herbert Dix picked up a booklet at his attorney's office that described estate planning. All of
the following were included as primary objectives of estate planning except
A) develop a plan that will minimize estate and inheritance taxes.
B) utilize a living will to describe your choices in a terminal situation and a health care proxy to
identify those to whom you relinquish health care decision making authority in the event of
physical or mental impairment.
C) develop a plan that minimizes settlement costs, including legal and accounting fees.
D) distribute property according to your wishes and provide for your dependents.
E) estate planning involves all of the above objectives.

3) To determine your estate's net worth, you would ________ the amount of your estate's
________ from (to) the amount of the estate's ________.
A) ask your lawyer; worth and deduct; market value
B) add; assets; liabilities
C) add; accounts receivable; assets
D) subtract; liabilities; assets
E) subtract; assets; liabilities

4) Which of the following does not have to be paid out of your estate before distribution to your
heirs?
A) legal fees
B) estate and inheritance taxes
C) funeral expenses
D) outstanding debt
E) All of the above must be paid prior to the distribution of assets.

5) All of the following are commonly used estate planning tools except
A) gifts and trusts.
B) durable power of attorney and joint ownership of assets.
C) life insurance.
D) a will.
E) All of the above are commonly used estate planning tools.

6) Which of the following is not a step in calculating estate taxes?

A) Calculate your estate taxes.
B) Calculate your gift-adjusted taxable estate, by subtracting cumulative life-time taxable gifts to
the taxable value of the decedent's estate at the time of their death.
C) Calculate the value of the gross estate, including all assets, and pensions and insurance
benefits.
D) Calculate your taxable estate, or gross estate minus expenses, debts and deductions.
E) Calculate your gift-adjusted taxable estate, by adding cumulative life-time taxable gifts to the
 taxable value of the decedent's estate at the time of their death.

7) Which of the following costs are typical estate administrative expenses?

A) attorney's fees
B) accountant's and appraiser's fees
C) court costs
D) executor's fees
E) All of the above are costs.

8) The purpose of the probate process is to

A) distribute the assets.
B) collect the taxes.
C) validate the will.
D) A and B
E) A, B, and C

9) You want to modify your will, but writing a new will is not necessary, because the changes
are not major. Therefore, the changes can be made by adding a(n) ________.
A) codicil
B) executor order
C) court order
D) probate
E) new attorney

10) Casey's brother has an alternative to a will that is permanent and cannot be changed. Assets
in this arrangement are not part of his estate and any appreciation is not subject to estate tax.
His brother has a(n) ________.
A) testamentary trust
B) revocable trust
C) irrevocable trust
D) living trust
E) none of the above

11) Carey is a widow with two teenagers, Brenda age 13 and Terry age 15. Her health has
declined and she knows that a will should be drafted. Which of the following statements is
not an important reason to have a will?
A) Without a will, the estate administration fees may cost more, thus leaving less to heirs.
B) Without a will the court will choose Brenda's and Terry's guardian(s).
C) Without a will the court will appoint an administrator for the estate.
D) The children's best interests may not be served without a will.
E) All of the above are reasons Carey should have a will.

12) Peter, an elderly widower, lives at home by himself and is in relatively good health. Part of
his wife’s estate was passed to him. Although his estate is modest, he wants it to be
distributed fairly and evenly to all six of his children. Peter should probably create all of the
following except a
A) will.
B) living will.
C) durable power of attorney.
D) codicil.
E) letter of last instruction.
13) You desire to place assets into a trust and to have the flexibility to withdraw some of them
later, if needed. You should open a(n) ________ trust.
A) irrevocable trust
B) living trust
C) testamentary
D) family trust
E) revocable trust

14) ________ is a letter, generally to your surviving spouse, that provides information and
directions with respect to execution of the will.
A) Guide to will conduct
B) Letter of last instructions
C) Attorney directive
D) Instructional will
E) none of the above

15) What methods exist to avoid probate, or to establish non-probate property?

A) gifts
B) contracts
C) law, or the form of ownership
D) trusts
E) all of the above

Practice Quiz 19-3 (p. 673)

Practice Quiz 19-4 (p. 680)