Name: _____________________________

Sample Personal Finance Midterm Exam

96 multiple choice questions @ 1 Point each = 96 Points7 Quantitative problems @ 115 Points total = 117 pointsTotal Possible Points: 213For each of the following, select the best answer from the choices provided

___ 1.Which of the following types of owned housing requires payment of a

homeowner's fee?

(a) single - family dwelling

(b) manufactured housing

(c) condominium

(d) multi-family housing___ 2. The factor(s) that make(s) home ownership financially advantageous over

renting is (are):

(a) cash flow

(b) the American Dream

(c) space & privacy

(d) taxes & appreciation

___ 3.The process of gradually paying off a mortgage loan through a series of periodic

payments is officially called:

(a) amortization

(b) principal reduction

(c) a mortgage

(d) mortgage assumption

___ 4. Which of the following are often included in monthly mortgage payments?

(a) real estate taxes & homeowners insurance premiums

(b) points & loan origination fees

(c) appraisal fees

(d) escrow fee

___ 5. An investigation of the public records to determine the legal ownership rights to

real estate property is called a(n) ___:

(a) deed search

(b) title search

(c) ownership history search

(d) abstract search___ 6. If unemployment is rising rapidly, the Federal Reserve is likely to:

(a) increase the money supply

(b) decrease the money supply

(c) do nothing

___ 7. Treasury Bills are short-term debt instruments issued by the federal

government with maturities ranging from:

(a) 1 - 2 months

(b) 3 - 12 months

(c) 2 - 3 years

___ 8. Treasury Bills pay interest quarterly:

(a) true

(b) false

___ 9. When EE Savings bonds mature, they pay ______ their original purchase price:

(a) 1.5 times

(b) 1.05 times

(c) 2.0 times

___ 10. Credit card interest is a tax-deductible expense:

(a) true

(b) false

(c) it depends on several other factors___ 11. If you never plan on carrying a monthly balance on your credit card,

when selecting a credit card your primary concern would be to:

(a) maximize the grace period

(b) minimize the annual fee

(c) minimize the APR

___ 12. The interest paid on home equity loans is tax deductible if the proceeds are

used to purchase a car:

(a) true

(b) false

___ 13. You are the type of person that usually requires a new car every three

years. Should you be buying your cars or leasing them?

(a) buy

(b) lease

___ 14. Commercial paper is an investment that usually finds its way into _______

portfolios:

(a) savings account

(b) money market

(c) commercial loan

(d) mortgage___ 15. In a cafeteria plan medical account, the maximum an employee can

deposit into his/her account per year is equal to:

(a) $2,500

(b) $5,000

(c) 10% of his/her salary

(d) no limit

___ 16. A decline in business activity or a downturn in the economy is called a(n):

(a) inflation

(b) recession

(c) depression

(d) deflation

___ 17. A steady increase in the general level of prices resulting in a decrease in

purchasing power of money is referred to as:

(a) deflation

(b) inflation

(c) recession

(d) stag-flation___ 18. Which of the following rates is the rate that the Federal Reserve charges it's member banks for short-term loans from the Federal Reserve:

(a) prime rate

(b) three month Treasury Bill rate

(c) federal funds rate

(d) discount rate

___ 19. Putting money in a variety of investments so that if one investment does not

perform well, others are available to maintain overall value is referred to as:

(a) liquidity

(b) diversification

(c) financial planning

(d) liability reduction

___ 20. The IRS form that is used to notify your employer of the number of

exemptions for which you qualify and serves as a basis, along with

income earned, for calculating your payroll withholding is the:

(a) W - 2 form

(b) W - 4 form

(c) 1040 form

(d) Exemption certificate

___ 21. A taxpayer's gross income, minus adjustments to income, minus the

amount for the standard deduction or total itemized deductions, and

minus the amount subtracted based upon the number of exemptions

allowed, is his or her:

(a) adjusted gross income

(b) total income

(c) tax liability

(d) taxable income

___ 22. A married filing jointly taxpayer had a taxable income of $120,000 for 2012, but

on December 30, 2012 received an additional $45,000 bonus. What dollar

amount of federal income tax will be paid on the bonus?

(a) $11,250

(b) $11,919

(c) $12,600__ 23. When you buy a home, which of the following costs will you not incur?

(a) title search

(b) closing costs

(c) realtors commissions

(d) loan application fee

___ 24. Which of the following institutions is owned by its depositors?

(a) credit union

(b) mutual savings and loan association

(c) commercial bank

___ 25. A checking account that pays interest income based upon the amount of money in the checking account is called a(n) _____:

(a) negotiated order of withdrawal account

(b) debit account

(c) full service checking account___ 26. Graduated Payment mortgages can lead to negative amortization:

(a) true

(b) false___ 27. Money Market accounts are protected by FDIC insurance:

(a) true

(b) false___ 28. Property offered and pledged to secure repayment of a loan and subject

to seizure should the borrower fail to repay the loan is called:

(a) holdback

(b) collateral

(c) capital

(d) chargeback

___ 29. A credit arrangement whereby the borrower agrees to repay the amount

owed in a specific number of nearly equal payments is labeled:

(a) installment credit

(b) noninstallment credit

(c) revolving credit

(d) debit credit

__ 30. A personal check that has been guaranteed as being good by the financial institution on which its drawn is called a(n) ________:

(a) cashiers check

(b) certified check

(c) money order

(d) NOW account

__ 31.The _____ the risk that the lender will not be repaid on a loan provided to you,

the ______ the risk premium that you would have to pay with respect to the

prevailing risk-free rate:

(a) higher; higher

(b) higher; lower

(c) lower; higher

__ 32.When the Federal Reserve wishes to rapidly decrease interest rates, it _______ the reserve requirement at commercial banks:

(a) reduces

(b) increases__ 33. Which of the following money market investments is the most liquid?

(a) bankers acceptances

(b) commercial paper

(c) treasury bills

(d) Certificate of Deposit

__ 34.A ________ offered by a depository institution specifies a minimum amount that

must be invested, a maturity date on which the deposit matures, and an

annualized interest rate:

(a) savings account

(b) NOW account

(c) money market deposit account

(d) Certificate of Deposit

__ 35. A ________ maturity for a loan results in _______ monthly payments:

(a) shorter; lower

(b) shorter; higher

(c) longer; higher

__ 36. ________ measures the finance expenses (including interest and other

expenses) on a loan on an annual basis:

(a) The effective annual rate

(b) The annual percentage rate

(c) Compound interest

(d) Add-On interest

__ 37. Jake Smith will earn a salary of $68,000 this year. Jake will pay non-Medicare Social Security taxes in the amount of:

(a) $4,216

(b) $914

(c) $5,202(d) $0

__ 38. Sally purchased stock 9 months ago. Since then, the stock has

increased in value by $45,000. Assume that Sally is in the 28% tax bracket and

that the maximum capital gains tax rate is 15%. If Sally sells the stock today, she will have to pay a tax of:

(a) $6,750

(b) $12,600

(c) $17,200(d) none of the above

__ 39. Which of the following is not a typical type of itemized deduction:

(a) interest on home loans

(b) real estate taxes on your home

(c) educational expenses(d) charitable gifts

__ 40. Trevor Hopkins just applied for a $150,000 mortgage from his bank. The bank

charges 2 points, a 1% loan origination fee, a $450 loan application fee, and

$800 for a title search. Trevors closing costs will total:

(a) $1,250

(b) $1,650

(c) $5,750(d) $2,750__ 41. During the early years of a fixed-rate mortgage, the largest percentage of the

monthly mortgage payment will represent:

(a) principal reduction

(b) interest payment

(c) an increase in the homes equity

(d) none of the above

__ 42. When interest rates are expected to fall, homeowners would prefer a(n):

(a) fixed-rate mortgage

(b) variable-rate mortgage

(c) adjustable-rate mortgage

(d) mixed-rate mortgage

__ 43. A ________ mortgage has relatively low monthly payments and then requires

one large payment after a specified period to pay off the remainder of the

mortgage loan:

(a) fixed-rate mortgage

(b) variable-rate mortgage

(c) balloon mortgage

(d) graduated payment mortgage

__ 44. Fixed rate mortgages are especially desired by homeowners who

expect mortgage interest rates to ________ in the future:

(a) decrease

(b) increase

(c) remain stable

___ 45. The speed and ease with which an asset can be converted to cash is

referred to as:

(a) liquidity

(b) cash equivalency

(c) the cash - out rate

(d) diversification

___ 46. Experts recommend having a liquidity fund equal to how many months of

expenses?

(a) 2-3 months

(b) 3-6 months

(c) 9-12 months

___ 47. If inflation is rising rapidly, the Federal Reserve is likely to:

(a) increase the money supply

(b) decrease the money supply

(c) do nothing

___ 48. Jerrys adjusted gross income is $70,000. Jerry has $6,250 in unreimbursed

medical expenses. Jerry can claim _________ as an itemized deduction on

his income tax return.

(a) $0(b) $4,875(c) $1,000(d) $5,250___ 49. Nancy is married and has three children in college. Her husband is a

homemaker. Nancy has an adjusted gross income of $37,400. If Nancys

standard deduction is $7,350, her itemized deductions are $11,200 and she

receives an exemption of $2,800 per dependent, her taxable income is:

(a) $13,250

(b) $12,200

(c) $15,000

(d) $10,450

___50. You earned a salary of $80,000 this year. You will pay a Medicare Social

security tax of:

(a) $6,120(b) $4,960(c) $1,160___ 51. Employees pay total Social Security taxes at a rate of:

(a) 7.65%

(b) 1.45%

(c) 15.30%

(d) 2.90%

____52. You incurred interest expenses of $8,000 on a home mortgage loan during

this year. Furthermore, you incurred state income taxes of $1,000. You also

contributed $500 to the American Cancer Society. Based on this information,

your itemized deductions for this tax year would be:

(a) $1,500

(b) $9,000

(c) $8,000

(d) $9,500

___ 53. If your bank has FDIC insurance, in 2014 your savings account is insured for

amounts up to:

(a) $250,000 per account

(b) $100,000 per depositor

(c) $100,000 per account

(d) $250,000 per depositor___ 54. The ______ the investment horizon chosen, the __________ the annualized

interest rate that can usually be locked in at this time.

(a) longer; lower

(b) shorter; higher

(c) longer; higher

___ 55. Which of the following is a factor that causes a change in the demand

for money:

(a) a change in consumer confidence(b) a change in government borrowing(c) a change in interest rates(d) all of the above are common factors that cause a shift in the

demand curve for money___ 56. If the Federal Reserve buys or sells Treasury securities to affect the money

supply, it is using:(a) changes in the reserve requirement at commercial banks

(b) open market operations

(c) discount rate adjustments

(d) federal funds rates adjustments

___ 57. When the U.S. Government wants to spend more money than it receives in

taxes, it can obtain additional funds by _________ Treasury securities.

(a) buying

(b) selling

(c) buying or selling

(d) none of the above

___ 58. _______ is the risk that a borrower will not repay on a timely basis:

(a) credit risk

(b) interest rate risk

(c) liquidity risk

(d) none of the above

___ 59. Treasury bills are purchased at a(n) __________ par value:

(a) premium relative to

(b) discount relative to

(c) amount equal to

(d) none of the above

___ 60. Short-term debt instruments issued by large corporations are called:

(a) money market deposit accounts (MMDAs)

(b) commercial paper

(c) money market funds (MMFs)

(d) certificates of deposit

___ 61. ___ is the potential loss that could occur as a result of converting an investment

to cash quickly:

(a) default risk

(b) interest rate risk

(c) liquidity risk

(d) none of the above

___ 62. Generally, yields are ____ for securities that are exposed to _____ liquidity risk:

(a) higher; more

(b) higher; less

(c) lower; more

___ 63. If you want to cash in a certificates of deposit (CD) without being charged an

interest penalty by your bank, you can:

(a) wait until it matures

(b) write checks against the CD account

(c) none of the above

___ 64. If you owe more on your car loan than its currently worth, a car dealer would

say that you are:(a) inside out(b) up and down(c) right side up(d) upside down___ 65. You borrowed $25,000 with a home equity loan to buy a new car. You paid

$2,200 in interest on the home equity loan last year. If your marginal income

tax rate is 28%, your tax savings last year were:

(a) $0

(b) $2,200

(c) $616(d) $560

___ 66. During the later years of a fixed rate mortgage, a large percentage of the

monthly mortgage payment will represent:

(a) principal reduction

(b) interest payments

(c) a reduction in the homes equity

(d) none of the above

___ 67. A ____ mortgage sets relatively low monthly mortgage payments when the

mortgage is first created and then gradually increases the payments over the

first few years:

(a) fixed rate

(b) adjustable rate

(c) graduated payment

(d) balloon payment

__ 68. Adjustible-rate mortgages are especially desired by homeowners who

expect mortgage interest rates to ________ in the future:

(a) decrease

(b) increase

(c) none of the above

___ 69. The process of obtaining present values is referred to as:

(a) compounding

(b) annuitizing

(c) discounting

(d) none of the above

___ 70. Peter Barnes needs $50,000 to buy a boat in five years. If Peter can invest his

money at a rate of 11% compounded quarterly, how much would he have to

invest as a lump sum today?

(a) $29,672.57

(b) $33,701.16

(c) $29,062.52

(d) none of the above

___ 71. The IRS form that your bank uses to inform the IRS as to how much they

paid you in interest in a given calendar year is called the:

(a) W - 2 form

(b) W - 4 form

(c) Schedule B(d) 1099 form___ 72. A(n) ________ represents what you give up as a result of making an alternative

investment decision.

(a) liquidity need

(b) opportunity cost

(c) purchase price

(d) financing cost

___ 73. Your ___________ is (are) the value of what you own minus the value of what

you owe.

(a) net assets

(b) net worth

(c) net liabilities

(d) budget

___ 74. _________ is access to funds to cover any short-term cash deficiencies.

(a) money management

(b) liquidity

(c) credit management

(d) cash management

___ 75. _____ is (are) certificates issued by borrowers (typically firms and government

agencies) to obtain long-term funds.

(a) bonds

(b) stocks

(c) commercial paper

___ 76. __________ sell shares to individuals and invest the proceeds in investment

instruments such as bonds, stocks or short term fixed income investments:(a) mutual funds

(b) financial partnerships(c) brokerage houses(d) none of the above

___ 77. Something that is owed to another person or a financial institution is called a:

(a) cost

(b) asset(c) liability

(d) none of the above

___ 78. In the late 1940s, the highest margin federal income tax rate was:

(a) 15%

(b) 28%

(c) 80%

(d) > 90%

___ 79. A set deduction allowed by the Internal Revenue Service for taxpayers with

relatively uncomplicated financial lives is the _________:(a) itemized deduction(b) standard deduction(c) adjustment to income(d) exemption___ 80. The percentage of the last dollar that you earn that goes towards taxes is called

the _________:

(a) itemized tax rate

(b) average tax rate

(c) marginal tax rate

(d) progressive tax rate

___ 81. The amount by which the selling price of an asset differs from its purchase price

is technically called a(n) _________:

(a) capital gain/loss

(b) average profit/loss

(c) marginal profit/loss

(d) indexed profit/loss

___ 82. The deduction that you can take on your income tax return for each person

supported by the income listed on your tax return is called a(n) ________:

(a) standard deduction

(b) exemption

(c) dependent write-off

(d) child deduction

___ 83. The attachments you add to your federal income tax Form 1040 which provides

the IRS with additional information about your financial life are called: _______

(a) supplemental attachments(b) schedules(c) addendums___ 84. The length of time given to make a payment before interest is charged against purchases on a credit card is called a(n) _______ period:

(a) non-interest

(b) grace

(c) adjusted balance

(d) quiet

___ 85. The following organizations are all national credit reporting bureaus except:

(a) Esperian

(b) Trans Union

(c) Standard & Poors

(d) Equifax

___ 86. The maximum amount of money you are responsible for if your credit card is

lost or stolen and you report its loss in a timely manner is:

(a) $500(b) $0(c) $50

(d) unlimited___ 87. All other things being equal, the interest rate charge for a secured loan will be

______ than the interest rate charged for an unsecured loan:

(a) less

(b) greater

___ 88. A clause in a loan agreement which states that if the borrower misses one

payment, the entire loan balance can come due at the request of the lender is

called a(n) _____ clause:

(a) deficiency payment

(b) acceleration

(c) default

(d) termination

___ 89. If you must lease a car, whats the best type of lease to get?

(a) closed-end

(b) open-end

(c) residual value

(d) true value lease___ 90. An apartment building or group of apartments owned by a corporation in which

the residents of the building are the stockholders of the corporation is called

a(n) ____:(a) shared-appreciation property

(b) condominium(c) cooperative

(d) depreciable property___ 91. The type of mortgage in which you pay one-half of the monthly mortgage every

two weeks is called a(n) _________ mortgage:

(a) adjustable

(b) bi-weekly

(c) bi-monthly

(d) accelerated

___ 92. You have an adjustable rate (2/5) mortgage that was initially issued five years

ago at a rate of 5%. Because interest rates have been rising, the rate youve been paying this year is 8.5%. When the rate gets adjusted next year, what could be its maximum value?(a) 10%

(b) 10.5%

(c) 9%

(d) 9.5 %___ 93. Private mortgage insurance is generally required if your down payment is less

than ______ of a homes value:?

(a) 15%

(b) 20%

(c) 25%

(d) 30%

___ 94. Refinancing an adjustable rate mortgage is allowed:

(a) true

(b) false

___ 95. In 2014, private mortgage insurance is income tax-deductible:(a) true(b) false___ 96. If you pay a mortgage lender points at closing, you are trying to _______ the

loans interest rate over the life of the loan:(a) stabilize

(b) guarantee

(c) lower

(d) establish a maximum forMidterm Quantitative Problems (117 Points)(1.) 15 Points - John is retiring at the end of this year. The company that John works for has a pension plan that gives John the following choices: (1) receive $3,000 per month for the next 35 years, or (2.) receive one lump-sum payment when he retires. If he selects the lump-sum option, how much will he receive? Assume a discount rate of 5%.

(2.) 30 Points - Assume that you are currently 25 years old. You want to become financially independent by age 62, i.e. you dont want to have to work from age 62 to your death. Your definition of success is to have $80,000 per year of buying power (as measured in current dollars) available to you at retirement.

(a) Assuming inflation is a constant 3.5% per year, how much income will you need in your first year of retirement as measured in then-year dollars? (5 Points)

(b) How much money will you need to have accumulated by age 62 in order to be able to support your retirement lifestyle from age 62 to your assumed death at age 91? Assume: (a) that inflation goes to zero after age 62, and (b) the rate at which all of your assets grow after retirement is 7.2% per year. (13 Points)

(c) What constant amount will you have to save monthly in order to have the cash you'll need for retirement? Assume that pre-retirement, you invest aggressively and your assumed rate of return is 11% per year. (12 Points)

(3.) 25 Points You have a child named Sarah. Sarah is four years old and youd like to start saving for her college education. Youd like her to go to Washington University for four years starting when she is age 18.

Assume that the current cost of Washington University is $50,000 and that this cost will increase at the rate of 4.0% per year.

(a) Calculate the future cost of each year of Sarahs future college education. (5 Points)

(b) How much must you have saved up by the time Sarah is age 18 in order to fully fund her four years of education? Assume a discount rate of 5.5% per year. (5 Points)

(c) If you were lucky enough to be able to set aside a single large lump sum of money today, how much would you need to fully fund Sarahs education? Assume a growth rate of 11% per year. (5 Points)

(d) How much would you need to save each month in order to fully fund Sarahs education? Assume a growth rate of 11% per year. (10 Points)

(4.) 10 Points - Ms. Clark is interested in purchasing her first home. Here are the relevant financial facts for her situation:

Annual income:

$75,000

Current mortgage interest rate

for a fixed rate, 30 year loan:

8%

Her monthly debt payments

(car, credit cards, etc.):

$700

Her estimated homeowners

insurance and real estate taxes (monthly):$300

(a) Using the appropriate ratios, calculate the largest mortgage loan that Ms.

Clark will qualify for. (8 Points)(b) Assuming that the maximum mortgage loan will equal 80% of the price of the home, calculate the price of the most expensive home that Mrs. Clark should be considering for purchase. (2 Points)

(5.) 12 Points Yesterday you bought a home and got a $250,000 - 30 year, 7% fixed-rate mortgage loan.

Today (the very next day!) mortgage interest rates have plunged and new 30 year, fixed rate mortgages are now available at 6%.

If you refinanced your old mortgage, it would cost you $2,000 in fees to get one of these new, lower interest rate mortgages.Ignoring the impact of amortization, income taxes and the time value of money, if you refinanced your mortgage at the new lower rate, approximately how long would it take you to recoup the cost of refinancing?

(6.) 10 Points Assume that you can afford to save $6,000 per year and that you'll achieve a compounded annual rate of return of 9% per year. If these savings are contributed at the end of each year, how many years will it take you to accumulate $1,000,000?(7.) 15 Points - You have as a goal the purchase of your first home in five years. Today, the type of home you'd like to buy costs $200,000. Assume that you can achieve an annual rate of return of 6% and that in five years you'd like to have saved up enough money to make a 20% down-payment on the purchase price of the home.

(a) Assume that homes will increase in price at the constant annual rate of 3%. How much money will be required for the 20% down - payment? (2 Points)(b) How much money will you need to save at the end of each year if you are to have enough for the down payment in part (a)? (3 Points)Assume that you've been successful in putting 20% down on your home.

(c) How much money will you have to borrow in order to buy the home? (2 Points)(d) Assuming that you get a 30 year mortgage at a fixed rate of 7%, how large will your monthly mortgage payments be? (5 Points)(e) Calculate the total interest you'll pay over the life of your 30 year mortgage. (2 Points)Potentially Useful Equations

_1486811865.unknown

_1423482913.pdf

Page 105 of 108 Fileid: ions/I1040/2012/A/XML/Cycle10/source 21:06 - 18-Jan-2013The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

2012Tax RateSchedules

The Tax Rate Schedules are shown so you can see the tax rate that appliesto all levels of taxable income. Do not use them to gure your tax. Instead,see the instructions for line 44.

Schedule ZIf your ling status is Head of household

Schedule XIf your ling status is Single

The tax is:If your taxableincome is: of the

amountover

But notoverOver

Schedule Y-2If your ling status is Married filing separately

Schedule Y-1If your ling status is Married filing jointly or Qualifying widow(er)

The tax is:If your taxableincome is: of the

amountover

But notoverOver

The tax is:If your taxableincome is: of the

amountover

But notoverOver

The tax is:If your taxableincome is: of the

amountover

But notoverOver

CAUTION

$0

8,700

35,350

85,650

178,650

388,350

$8,700

35,350

85,650

178,650

388,350

$0

8,700

35,350

85,650

178,650

388,350

$0

17,400

70,700

142,700

217,450

388,350

$0

8,700

35,350

71,350

108,725

194,175

$0

12,400

47,350

122,300

198,050

388,350

$17,400

70,700

142,700

217,450

388,350

$8,700

35,350

71,350

108,725

194,175

$12,400

47,350

122,300

198,050

388,350

$0

17,400

70,700

142,700

217,450

388,350

$0

8,700

35,350

71,350

108,725

194,175

$0

12,400

47,350

122,300

198,050

388,350

10%

$870.00 + 15%

4,867.50 + 25%

17,442.50 + 28%

43,482.50 + 33%

112,683.50 + 35%

10%

$1,740.00 + 15%

9,735.00 + 25%

27,735.00 + 28%

48,665.00 + 33%

105,062.00 + 35%

10%

$870.00 + 15%

4,867.50 + 25%

13,867.50 + 28%

24,332.50 + 33%

52,531.00 + 35%

10%

$1,240.00 + 15%

6,482.50 + 25%

25,220.00 + 28%

46,430.00 + 33%

109,229.00 + 35%

-105-