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web.groovymark@gmail.com
- December 17, 2024
Question 21
Which formula is used to calculate the debt-to-income ratio?
a) Monthly income ÷ total debt
b) Monthly debt payments ÷ gross income
c) Total income ÷ monthly expenses
d) Credit score ÷ debt payments
Answer: b) Monthly debt payments ÷ gross income
Explanation: The debt-to-income ratio is calculated by dividing monthly debt payments by gross income and multiplying by 100. It shows how much of an individual’s income goes toward paying debt.
Question 22
Which of the following is a characteristic of a variable-rate loan?
a) Interest rates stay fixed over the loan term
b) Interest rates fluctuate based on an underlying benchmark
c) The loan can only be used for fixed-rate mortgages
d) The loan interest rate is set by the lender and does not change
Answer: b) Interest rates fluctuate based on an underlying benchmark
Explanation: Variable-rate loans have interest rates that change over time in relation to an index or benchmark, such as the prime rate, resulting in fluctuating payments.
Question 23
What is the main benefit of a revolving savings fund?
a) It allows for automatic bill payments
b) It builds credit
c) It provides funds for large, irregular expenses
d) It earns a higher interest rate than regular savings accounts
Answer: c) It provides funds for large, irregular expenses
Explanation: A revolving savings fund is used to save for large, non-monthly expenses or to handle occasional deficits due to income fluctuations.
Question 24
What is the purpose of a “cash flow calendar”?
a) To track stock market performance
b) To identify surplus or deficit situations
c) To estimate the future value of investments
d) To calculate tax liabilities
Answer: b) To identify surplus or deficit situations
Explanation: A cash flow calendar is used to estimate monthly income and expenses, helping individuals identify potential surpluses or deficits in their budget.
Question 25
What is the Continuous Debt Method?
a) A method for paying off debt every two years
b) A strategy to use credit cards for large purchases
c) A method for determining if one relies too heavily on debt
d) A calculation for determining monthly credit card payments
Answer: c) A method for determining if one relies too heavily on debt
Explanation: The Continuous Debt Method suggests that if you cannot get completely out of debt every four years, you may be relying too heavily on debt.
Question 26
What is a “recession”?
a) A short-term increase in economic activity
b) A period of temporary economic decline characterized by reduced trade and industrial activity
c) An extended period of economic growth and prosperity
d) A stock market crash lasting for more than one year
Answer: b) A period of temporary economic decline characterized by reduced trade and industrial activity
Explanation: A recession is a period of economic decline, typically identified by a fall in GDP for two successive quarters.
Question 27
Which of the following best describes a “brokered CD”?
a) A certificate of deposit that can only be opened at a credit union
b) A CD purchased by a brokerage firm in bulk to resell to clients
c) A CD issued by a bank that offers no interest
d) A CD with a fixed interest rate and maturity date
Answer: b) A CD purchased by a brokerage firm in bulk to resell to clients
Explanation: A brokered CD is bought by a brokerage firm in bulk and resold to customers, often offering higher yields than traditional CDs.
Question 28
What is an advantage of a money market account (MMA) compared to a regular savings account?
a) Lower minimum balance requirement
b) Higher interest rates
c) No limits on check-writing privileges
d) Guaranteed fixed interest rates
Answer: b) Higher interest rates
Explanation: Money market accounts (MMAs) often offer higher interest rates compared to regular savings accounts, but they typically require a higher minimum balance and may limit the number of checks that can be written.
Question 29
What is the formula for calculating future value (FV)?
a) FV = Present value / (1.0 + interest rate)
b) FV = Present value × (1.0 + interest rate)^number of periods
c) FV = Present value ÷ interest rate
d) FV = Interest rate × number of periods
Answer: b) FV = Present value × (1.0 + interest rate)^number of periods
Explanation: The future value formula is used to determine how much an investment made today will be worth in the future, accounting for interest.
Question 30
Which of the following is an advantage of using a Health Savings Account (HSA)?
a) Contributions are taxed at a lower rate
b) Funds in the account are tax-deductible and can be used for health expenses
c) You can only contribute if you are unemployed
d) HSAs provide high-interest earnings for retirement
Answer: b) Funds in the account are tax-deductible and can be used for health expenses
Explanation: HSAs offer tax advantages where contributions are tax-deductible, and withdrawals for qualified medical expenses are not taxed.
Question 31
Which of the following accurately describes an “interest rate cap”?
a) A fixed maximum interest rate charged on a loan over its term
b) A limit on how much a variable-rate loan interest can increase over time
c) A minimum interest rate set by the lender
d) The total interest paid on a fixed-rate loan
Answer: b) A limit on how much a variable-rate loan interest can increase over time
Explanation: An interest rate cap limits how much the interest rate on a variable-rate loan can increase, protecting borrowers from excessive interest rate hikes.
Question 32
Which term refers to an investor’s general approach to tolerance for risk?
a) Investment portfolio
b) Risk premium
c) Investment philosophy
d) Market risk
Answer: c) Investment philosophy
Explanation: An investment philosophy refers to an investor’s overall attitude towards risk and return, guiding their decisions on investments.
Question 33
What is the primary difference between a conservative and an aggressive investment philosophy?
a) Conservative investors focus on capital gains, while aggressive investors focus on income
b) Conservative investors prioritize risk avoidance, while aggressive investors seek capital gains with higher risk
c) Conservative investors prefer short-term gains, while aggressive investors prefer long-term gains
d) There is no difference; both focus on balancing risk and return
Answer: b) Conservative investors prioritize risk avoidance, while aggressive investors seek capital gains with higher risk
Explanation: Conservative investors focus on minimizing risk and preserving capital, while aggressive investors seek higher returns by taking on more risk.
Question 34
Which financial document describes an individual’s assets, liabilities, and net worth at a specific point in time?
a) Income statement
b) Balance sheet
c) Cash flow statement
d) Budget
Answer: b) Balance sheet
Explanation: A balance sheet provides a snapshot of an individual’s financial condition, listing assets, liabilities, and net worth as of a specific date.
Question 35
What does “vesting” mean in the context of retirement plans?
a) The percentage of an employee’s salary that goes toward retirement savings
b) The process of transferring retirement funds to another employer
c) The point at which an employee earns the right to full ownership of employer contributions
d) The minimum required contributions an employee must make to their retirement account
Answer: c) The point at which an employee earns the right to full ownership of employer contributions
Explanation: Vesting refers to the process by which an employee earns the right to keep the employer’s contributions to their retirement account, typically after meeting certain service requirements.
Question 36
Which of the following retirement plans is specifically designed for high-income self-employed individuals?
a) 401(k)
b) Roth IRA
c) Keogh plan
d) SEP IRA
Answer: c) Keogh plan
Explanation: The Keogh plan is a tax-deferred retirement account designed for self-employed individuals and small business owners, offering higher contribution limits.
Question 37
What is the purpose of a hardship withdrawal from a 401(k) plan?
a) To borrow funds for a home purchase
b) To cover immediate financial needs due to an emergency
c) To avoid paying taxes on investment earnings
d) To take out a loan without repaying it
Answer: b) To cover immediate financial needs due to an emergency
Explanation: A hardship withdrawal allows an employee to take funds from a 401(k) in cases of severe financial need, such as medical expenses or foreclosure.
Question 38
Which of the following is true about the “one-rollover rule”?
a) It applies to unlimited rollovers between IRA accounts
b) It allows only one IRA-to-IRA rollover per 12-month period
c) It allows one rollover every six months between IRAs
d) It does not apply to traditional IRAs
Answer: b) It allows only one IRA-to-IRA rollover per 12-month period
Explanation: The one-rollover rule limits individuals to one IRA-to-IRA rollover per 12-month period. This helps prevent frequent tax-deferred movements between accounts.
Question 39
What happens to a person’s retirement funds when they exercise “portability”?
a) The funds are moved to a foreign investment account
b) The funds are transferred from the employer’s account to another tax-sheltered account without penalty
c) The funds are withdrawn and reinvested into real estate
d) The funds are divided among family members
Answer: b) The funds are transferred from the employer’s account to another tax-sheltered account without penalty
Explanation: Portability allows employees to transfer their retirement savings from one employer’s account to another tax-sheltered account, such as an IRA, without incurring penalties.
Question 40
What is the annual exclusion amount that can be given to a relative or friend to reduce one’s taxable estate?
a) $1,400
b) $14,000
c) $50,000
d) $100,000
Answer: b) $14,000
Explanation: The annual exclusion amount allows individuals to give up to $14,000 per year to any number of recipients without incurring gift taxes, reducing the taxable estate.
