-
web.groovymark@gmail.com
- December 17, 2024
Question 01
Which of the following is NOT a component of the 50/30/20 method for budgeting?
a) 50% essentials and needs
b) 20% debt repayment
c) 30% lifestyle
d) 20% savings
Answer: b) 20% debt repayment
Explanation: The 50/30/20 method divides income into 50% for essentials and needs, 30% for lifestyle, and 20% for savings. Debt repayment is not a separate category in this method but may be part of the essentials or lifestyle expenses.
Question 02
A family’s balance sheet includes their home, car, and cash savings. What are these items classified as?
a) Liabilities
b) Tangible assets
c) Investment assets
d) Fair market value
Answer: b) Tangible assets
Explanation: Tangible assets are personal property whose primary purpose is to maintain one’s everyday lifestyle, such as furniture or vehicles. They often depreciate in value over time.
Question 03
What is the primary purpose of an emergency fund?
a) To invest in stocks
b) To pay off long-term debts
c) To cover unplanned financial emergencies
d) To save for a new car
Answer: c) To cover unplanned financial emergencies
Explanation: An emergency fund is set aside specifically to handle unexpected financial situations like medical bills, car repairs, or sudden job loss. The recommended amount is typically 3-6 months of living expenses.
Question 04
Which financial statement best answers the question “Where did your money go?”
a) Balance sheet
b) Cash flow statement
c) Investment portfolio
d) Income statement
Answer: b) Cash flow statement
Explanation: A cash flow statement tracks income and expense transactions over a specified period, showing where money was earned and spent. The balance sheet answers "Where are you financially right now?"
Question 05
Which of the following is considered a short-term (current) liability?
a) Mortgage
b) Car loan
c) Credit card debt
d) Student loan
Answer: c) Credit card debt
Explanation: A short-term liability is any obligation that is due to be paid within one year, such as credit card debt. Mortgages and student loans are considered long-term liabilities.
Question 06
What is the main characteristic of a monetary asset?
a) High risk and high return potential
b) Easily convertible to cash
c) Long-term investment
d) High depreciation over time
Answer: b) Easily convertible to cash
Explanation: Monetary assets, also known as liquid assets or cash equivalents, are assets that can be quickly and easily converted to cash with little or no loss in value.
Question 07
Which term describes the amount left when liabilities are subtracted from assets?
a) Gross income
b) Net worth
c) Total equity
d) Cash flow
Answer: b) Net worth
Explanation: Net worth is the difference between an individual’s assets and liabilities. It represents their financial position at a specific point in time.
Question 08
What is the recommended percentage of income to allocate toward savings, according to the 50/30/20 method?
a) 10%
b) 20%
c) 30%
d) 50%
Answer: b) 20%
Explanation: According to the 50/30/20 method, 20% of income should be allocated to savings. The rest is split into 50% for essentials and 30% for lifestyle expenses.
Question 09
What does the “fair market value” of an asset refer to?
a) The value determined by the asset owner
b) The historical cost of the asset
c) The price a willing buyer would pay a willing seller
d) The price an appraiser sets for the asset
Answer: c) The price a willing buyer would pay a willing seller
Explanation: Fair market value is the amount that a buyer and seller, both having reasonable knowledge of the asset and acting in their own interest, would agree upon.
Question 10
Which of the following describes an individual who is insolvent?
a) Owns more than they owe
b) Has a positive net worth
c) Owes more than they own
d) Has no liabilities
Answer: c) Owes more than they own
Explanation: An individual is insolvent when their liabilities exceed their assets, resulting in a negative net worth.
Question 11
What is the formula used to calculate a surplus or deficit on a cash flow statement?
a) Surplus/Deficit = Total Expenses – Total Liabilities
b) Surplus/Deficit = Total Income – Total Assets
c) Surplus/Deficit = Total Income – Total Expenses
d) Surplus/Deficit = Total Assets – Total Liabilities
Answer: c) Surplus/Deficit = Total Income - Total Expenses
Explanation: A surplus occurs when total income exceeds total expenses, while a deficit occurs when expenses exceed income. This formula calculates the net gain or loss over a period.
Question 12
Which of the following is NOT a fixed expense?
a) Mortgage payment
b) Utility bill
c) Rent payment
d) Health insurance premium
Answer: b) Utility bill
Explanation: Fixed expenses are typically consistent and predictable, such as rent or mortgage payments. Utility bills, however, can vary based on usage and are considered variable expenses.
Question 13
What are the top three credit bureaus in the U.S.?
a) Equifax, TransUnion, Experian
b) Equifax, FICO, TransUnion
c) Experian, FICO, Credit Karma
d) TransUnion, Experian, Credit Sesame
Answer: a) Equifax, TransUnion, Experian
Explanation: The three major credit bureaus in the U.S. are Equifax, TransUnion, and Experian. They track individuals' credit history and provide reports to lenders.
Question 14
What is a pre-approved credit offer?
a) A credit offer that guarantees approval
b) An offer targeted at individuals who applied for it
c) A conditional offer based on a pre-qualification
d) A loan offer that must be accepted by the borrower
Answer: c) A conditional offer based on a pre-qualification
Explanation: A pre-approved offer is extended after a lender has pre-qualified the applicant based on a credit report. Final approval depends on more detailed financial checks.
Question 15
What is the credit utilization ratio?
a) The amount of credit used compared to the credit card limit
b) The total number of credit cards an individual has
c) The ratio of good credit history to bad credit history
d) The percentage of credit card debt paid off each month
Answer: a) The amount of credit used compared to the credit card limit
Explanation: The credit utilization ratio measures how much credit you're using compared to your total available credit. A lower ratio is better for credit scores.
Question 16
Which of the following accurately defines a “promissory note”?
a) A document outlining the terms of a credit card agreement
b) A contract that specifies the repayment terms for a loan
c) A credit report provided by a lender
d) An insurance policy for credit borrowers
Answer: b) A contract that specifies the repayment terms for a loan
Explanation: A promissory note is a legal document that outlines the amount of the loan, interest rate, and repayment terms. It is used for loans, not credit cards.
Question 17
Which of the following describes a subprime borrower?
a) Someone with an excellent credit history
b) Someone who pays off credit cards in full every month
c) Someone with poor credit history who is charged higher interest rates
d) Someone with no credit history at all
Answer: c) Someone with poor credit history who is charged higher interest rates
Explanation: Subprime borrowers have poor credit histories and are considered higher-risk borrowers by lenders. As a result, they are often charged higher interest rates.
Question 18
What is the FICO score range used by most lenders to evaluate creditworthiness?
a) 200-700
b) 300-850
c) 500-1000
d) 250-900
Answer: b) 300-850
Explanation: FICO scores, one of the most commonly used credit scoring systems, range from 300 to 850. A higher score indicates better creditworthiness.
Question 19
Which factor is NOT included in the calculation of your FICO credit score?
a) Payment history
b) Length of credit history
c) Types of credit used
d) Income level
Answer: d) Income level
Explanation: FICO scores are based on factors such as payment history, amounts owed, and credit mix. Income is not directly used in the calculation of a FICO score.
Question 20
What happens when a borrower defaults on a secured loan?
a) The lender cannot take any legal action
b) The lender may take possession of the collateral
c) The borrower’s credit score improves
d) The borrower receives a penalty-free extension
Answer: b) The lender may take possession of the collateral
Explanation: Secured loans require collateral, such as a house or car. If the borrower defaults, the lender may take possession of the collateral to recover their losses.
