DSST Personal Finance.rev.8.26 - nelnetsolutions.com · I. Risk reduction II. Risk avoidance III....

DSST Personal Finance

1 Copyright © 2010

Peterson's *DSST is a registered trademark of Prometric, which was not involved in the

production of and does not endorse this product.

Time—120 Minutes

99 Questions

For each question below, choose the best answer from the

choices given.

1. Which securities market index is the most widely reported, even though it contains only 30 stocks?

(A) New York Stock Exchange Composite

(B) American Stock Exchange Index

(C) Dow Jones Industrial Average

(D) NASDAQ Composite 2. When a person dies intestate, his or her estate will be distributed according to the

(A) terms of the person’s will

(B) laws of the state in which the person lived

(C) letter of last instruction

(D) decisions of the testator 3. Which of the following is a benefit of renting instead of buying a home?

(A) Tax deductions

(B) Mobility

(C) Appreciation

(D) Equity

4. The primary function of the Federal Reserve is to

(A) manage monetary policy

(B) monitor government fiscal policy

(C) impose political constraints on the Treasurer

(D) control the international currency exchange rate


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5. The process of risk management includes which of the following? I. Risk reduction II. Risk avoidance III. Risk retention IV. Risk transfer

(A) I and III only

(B) I, II, and IV only

(C) II, III, and IV only

(D) I, II, III, and IV

6. Which of the following would NOT be an effective cash management technique?

(A) Maintaining the purchasing power of all funds

(B) Keeping all funds in an interest-bearing checking account

(C) Earning maximum interest on all funds

(D) Maintaining sufficient funds for living expenses

7. Which of the following financial institutions usually offers the highest interest rate on savings?

(A) Commercial banks

(B) Credit unions

(C) Savings and loan associations

(D) Mutual savings banks

8. Which of the following forms is used to determine the amount of tax withheld from a person’s paycheck?

(A) W-2

(B) W-4

(C) W-9

(D) 1099

9. A credit card is appropriate to use instead of cash or a check for all of the following reasons EXCEPT

(A) convenience for the buyer

(B) safety

(C) finance costs

(D) acceptance by the vendor


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10. A young couple with limited income recently had twins, and is looking for a life insurance policy that will give the greatest coverage for the least cost while the children are young. Which type of policy is most appropriate for this couple?

(A) Guaranteed renewable term

(B) Whole life

(C) Variable life

(D) Endowment life

11. Which of the following magazines regularly provides objective, useful information on buying new and

used automobiles?

(A) Consumer Reports

(B) Money Magazine

(C) Car and Driver

(D) Everybody’s Money

12. Which of the following gives an insurance company the right to take action against the negligent party

and that party’s insurance company to obtain reimbursement?

(A) Indemnification

(B) Subrogation

(C) Coinsurance

(D) Contestability

13. A financial planner can be compensated by investors in which of the following ways?

I. Fee II. Commission III. Bonus

(A) I only

(B) III only

(C) I and II only

(D) I, II, and III


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14. The best measure of the cost of a consumer loan is the

(A) annual percentage rate

(B) nominal interest rate

(C) number of payments

(D) amount of each payment


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Questions 15–17 refer to the following table:

15. An investor deposits $500 in a 4 percent savings account. According to the table above, how many years

will it take for the investment to reach a value of $1,500?

(A) 7

(B) 14

(C) 21

(D) 28

16. An investor puts $10,000 in a fund that earns interest at a rate of 6 percent. Based on the table above,

approximately how much will the fund be worth in 7 years?

(A) $15,000

(B) $16,000

(C) $17,500

(D) $19,500


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17. According to the table above, approximately how long will it take $1,000 invested at 15% to be worth $1,500?

(A) 1 year

(B) 3 years

(C) 5 years

(D) 8 years

18. An hourly worker earned $15,000 in taxable income last year. The tax rate for this worker’s income

bracket is 15%. The maximum amount of federal taxes payable by the worker should have been

(A) $0

(B) $1,125

(C) $2,250

(D) $4,200

19. A savings account that pays one rate of interest on a minimum amount of deposit and a higher rate of

interest on a higher balance is known as a

(A) NOW account

(B) tiered account

(C) variable account

(D) money market account

20. Which of the following methods of computing finance charges on credit cards is most expensive for a

consumer who usually carries a balance forward each month?

(A) Average daily balance, two-cycle

(B) Average daily balance, one-cycle

(C) Adjusted balance

(D) Past-due balance

21. On the death of a person, which of the following types of assets is subject to probate?

(A) Life insurance benefits

(B) Individual retirement accounts (IRAs) and annuities

(C) Automobiles and jewelry

(D) A savings account that has ownership with right of survivorship


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22. The regulation of securities is enforced by which of the following authorities?

(A) Each state’s Blue Sky Laws

(B) National Association of Securities Dealers

(C) American Stock Exchange

(D) Securities and Exchange Commission

23. A couple has just won the state lottery and will receive their prize over the next 20 years. If they want to

determine how much their last payment is worth today, they would apply which of the following time-value-of-money concepts?

(A) Present value

(B) Future value

(C) Compound interest

(D) Simple interest

24. Which of the following reasons for using credit is LEAST appropriate?

(A) To cover living expenses

(B) To cover emergencies

(C) To obtain an education

(D) To consolidate debts

25. A married couple files a joint federal tax return with an adjusted gross income of $60,000, earned

exclusively from salaries. They work for different companies, and they both participate in their employers’ pension plan. Which of the following statements, if any, is true about their ability to make additional contributions to qualified retirement accounts?

(A) They can each establish their own Keogh plan.

(B) They can each make non-deductible contributions to their own IRA.

(C) They can each make non-deductible contributions to their own simplified employee pension (SEP) plan.

(D) None of the above

26. One of the primary purposes a person should have in setting long-term financial goals is to help the

person

(A) retire early

(B) obtain wealth

(C) avoid paying income taxes

(D) establish the basis for taking financial actions


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27. Tax advice may be provided best by a person who holds which of the following professional designations?

(A) Certified financial planner (CFP™)

(B) Chartered financial consultant (ChFC)

(C) Accredited financial counselor (AFC)

(D) Certified public accountant (CPA)

28. A Chapter 13 bankruptcy (wage-earner plan) is best described by which of the following?

(A) Debts are totally forgiven when bankruptcy is filed.

(B) Interest and late fees continue to accrue until all debts are repaid.

(C) It is used primarily by small-business owners.

(D) It is a court-regulated process that requires a portion of debt repayment.

29. Under the Rule of 78s, a borrower who repaid a 12-month loan in only 6 months would save

approximately what portion of the interest?

(A) 1

26

(B)

1

13

(C)

1

4

(D)

1

2

30. Which of the following taxes provides the largest source of income for the federal government?

(A) Personal income taxes

(B) Corporate income taxes

(C) Estate taxes

(D) Excise taxes

31. The cost of an automobile lease is based on all of the following EXCEPT the

(A) age of the lessee

(B) length of the lease period

(C) number of miles driven annually

(D) residual value of the automobile


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32. The primary purpose of a credit bureau is to

(A) assist debtors in managing their credit

(B) locate stolen credit cards

(C) provide reports of consumers’ bill-paying history

(D) extend credit to eligible customers

33. A participating life insurance policy has which of the following features?

(A) The premiums are paid by the policy if the insured becomes disabled.

(B) The policy usually pays dividends.

(C) The policyholder selects the investment options.

(D) The policy is interest-rate sensitive.

34. Under the Social Security administration, Medicare and Medicaid were established to provide coverage

for which of the following?

(A) Medicare is for people 65 and older; Medicade is for people with limited income.

(B) Medicare is for people with limited income; Medicade is for people 65 and older.

(C) Medicare is for people 55 and older; Medicade is for people without health insurance.

(D) Medicare is for people without health insurance; Medicade is for people with limited income.

35. As conservative investors, a married couple wants an insured investment with a reasonable return to

cover the cost of their daughter’s college tuition, which is due in 12 months. Which of the following investments would be most appropriate for them?

(A) An asset management account

(B) A money market deposit account

(C) A passbook savings account

(D) A certificate of deposit


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36. A net worth statement includes information about which of the following? I. Income II. Assets III. Debts or liabilities IV. Expenses

(A) I and II only

(B) II and III only

(C) I, II, and III only

(D) I, III, and IV only

37. The fee assessed by some mutual funds to pay for advertising, marketing, and promotional expenses is

called

(A) a front-end fee

(B) a 12b-1 fee

(C) a management fee

(D) an expense ratio

38. Except for bankruptcy, negative credit information usually remains on a credit report for a maximum of

(A) 3 years

(B) 5 years

(C) 7 years

(D) 10 years

39. If a $1,000 certificate of deposit (CD) earns 6% interest annually, how long will it take to double in

value?

(A) 10 years

(B) 12 years

(C) 15 years

(D) 18 years





40. A prospective investor is considering putting $1,000 into a mutual fund. Fund X has a 5% front-end load and an annual expense ratio of 1%. Fund Y is a no-load fund with an annual expense ratio of 1.5%. If the investor plans to keep the investment for 3 years and both perform at the same level, which mutual fund is more appropriate?

(A) Fund X, because it has a lower annual expense ratio.

(B) Fund X, because it has a front-end load.

(C) Fund Y, because it has a higher annual expense ratio.

(D) Fund Y, because its total expenses will be lower over the 3-year period.

41. According to most state lemon laws, an automobile is considered a “lemon” in which of the following

circumstances? I. It has been repaired unsuccessfully four or more times for the same problem. II. Its use, value, or safety has been impaired substantially by a continuing problem. III. It has been in the repair shop for a cumulative total of 30 days during the first year of ownership.

(A) I only

(B) I and III only

(C) II and III only

(D) I, II, or III

42. A life insurance policy that enables the investor to choose the type of investment made with the policy’s

cash value is known as

(A) Adjustable life

(B) Universal life

(C) Endowment life

(D) Whole life

43. All of the following are effective ways of reducing federal estate taxes EXCEPT by creating a(n)

(A) irrevocable living trust

(B) revocable living trust

(C) credit shelter trust

(D) charitable remainder trust





44. The average taxpayer in the United States pays what portion of his or her income for federal, state, and local taxes?

(A) 60%

(B) 30%

(C) 15%

(D) 5%

45. A person who chooses to attend college for four years instead of entering the work force immediately

after high school is applying which of the following financial principles?

(A) Marginal analysis

(B) Opportunity costs

(C) Time value of money

(D) Economic cycle

46. Medigap supplemental insurance is sold in connection with which of the following?

(A) Medicaid

(B) Medicare

(C) Social Security benefits

(D) Veterans’ benefits

47. A consumer carries a monthly credit card balance of $1,000 and has a credit limit of $5,000. From this

consumer’s point of view, the best type of credit card is one that offers

(A) product rebates and enhancements

(B) a grace period

(C) credit life insurance

(D) a low interest rate

48. An agreement between the buyer and the seller of a car that provides free or reduced-cost maintenance

and repair during a specified time period for a fee is called

(A) an implied warranty

(B) a service contract

(C) a guarantee

(D) a sales contract





49. Which of the following statements is true about IRAs and Keogh plans?

(A) Keogh plans are tax deductible for most taxpayers and IRAs are not.

(B) Most taxpayers may make contributions to both plans.

(C) Money invested in both plans grows tax-deferred.

(D) Both plans are available through employers.

50. Individuals pay taxes on their last dollar of taxable income based on which of the following rates?

(A) Average tax rate

(B) Marginal tax rate

(C) Payroll withholding tax rate

(D) Flat tax rate

51. Which of the following taxes has a progressive effect instead of a regressive effect?

(A) A sales tax of 1% on purchases

(B) A city tax of 2% on income

(C) The Social Security tax system

(D) The federal income tax system

52. Which of the following features is NOT generally true of an installment loan?

(A) It is used to purchase high-priced items.

(B) It offers equal payments over a specified period of time.

(C) It gives the borrower a grace period of 25 to 30 days to pay the loan in full.

(D) It is structured to include interest and service charges.

53. When used as a comparison factor, the consumer price index (CPI) is a broad measure of

(A) marginal costs

(B) inflation

(C) government revenue

(D) creditworthiness





54. Which of the following chapters of the federal bankruptcy code permits an over-indebted couple to declare bankruptcy and have their debts discharged quickly?

(A) Chapter 7

(B) Chapter 11

(C) Chapter 12

(D) Chapter 13

55. Which of the following investments would be most appropriate for a family’s emergency fund?

(A) A money market deposit account

(B) A balanced fund

(C) An index fund

(D) An intermediate-term bond fund

56. Which of the following is the primary disadvantage of a health maintenance organization (HMO)?

(A) Members have to spend a lot of time filing insurance claims.

(B) Members are generally restricted to a list of participating doctors.

(C) Very little emphasis is placed on preventive medicine.

(D) The deductible is higher than that of a traditional insurance plan.

57. Which of the following is a tax-deferred investment?

(A) An annuity

(B) A municipal bond

(C) A real estate limited partnership

(D) A growth mutual fund





58. A taxpayer earned a salary of $25,000 and received income from the following sources during the year: $500 of corporate bond interest $250 of U.S. government bond interest $22 of municipal bond interest $12,000 of alimony What is this taxpayer’s adjusted gross income for federal income tax purposes?

(A) $37,950

(B) $37,750

(C) $25,950

(D) $25,500

59. Which of the following methods is NOT appropriate for determining personal debt limits?

(A) Average daily balance

(B) Continuous debt

(C) Ratio of debts to equity

(D) Disposable income

60. Real estate sales agents generally receive their commission from the

(A) seller only

(B) buyer only

(C) seller and buyer

(D) bank that issues the loan

61. Inflation is defined as a(n)

(A) increase in purchasing power and a rise in prices

(B) increase in purchasing power and a decrease in prices

(C) decrease in purchasing power and a rise in prices

(D) decrease in purchasing power and a decrease in prices





62. An investor purchased a bond with a maturity of 10 years when the market rate of return for bonds with similar terms and risk was at 7.5 percent. If factors in the market cause market rates to increase, what will happen to the value of the bond purchased by this investor?

(A) It will increase because bond values parallel market interest rates.

(B) It will increase because higher market interest rates make bond investments more attractive.

(C) It will remain unchanged because market interest rates have no affect on bond value.

(D) It will decrease because bond values change inversely to market interest rates.

63. A person named in a will to carry out its directions and help settle an estate is called the

(A) administrator

(B) trustee

(C) testator

(D) executor

64. A married couple who files a joint tax return has an adjusted gross income of $50,000 before considering

capital-gain transactions. If they have short-term capital gains of $500 and long-term losses of $6,000, what is the adjusted gross income on their federal tax form after calculating the capital gains transactions?

(A) $50,500

(B) $50,000

(C) $47,500

(D) $47,000

65. Costs of Social Security and Medicare are paid for by

(A) employers only

(B) employees only

(C) employers and employees

(D) employees and the state

66. Which of the following health insurance policies provides reimbursement for hospital, surgical, and

medical expenses and typically has policy limits of $1 million with annual deductibles of $1,000?

(A) Health maintenance organization insurance

(B) Preferred provider insurance

(C) Supplemental health insurance

(D) Major medical insurance





67. A homeowner’s insurance policy with replacement-cost coverage generally requires that the home be insured for what minimum percentage of its replacement value?

(A) 50%

(B) 60%

(C) 80%

(D) 100%

68. What is the maximum amount a married couple may give to one person per year to reduce their federal

estate taxes, without reporting the gift to the IRS?

(A) $2,000 ($1,000 each)

(B) $10,000 ($5,000 each)

(C) $26,000 ($13,000 each)

(D) $40,000 ($20,000 each)

69. In the purchase of a home in which the mortgagor requires an escrow account, the account usually covers

which of the following?

(A) Interest only

(B) Taxes only

(C) Interest and insurance

(D) Taxes and insurance

70. Which of the following financial institutions usually offers installment loans at the lowest interest rate?

(A) Commercial bank

(B) Credit union

(C) Savings and loan association

(D) Consumer finance company

71. Which of the following statements is true about Social Security benefits?

(A) Benefits can be received as early as age 62 but will be reduced.

(B) The full-benefit age for persons born after 1937 will be increased to 70.

(C) Fully insured status requires a minimum of 25 quarters of coverage.

(D) Social Security payroll taxes are deductible for taxpayers who itemize.





72. Joe Smith earns $30,000 a year and is considering buying a home that would annually cost $6,000 for the mortgage, $2,400 for property taxes, and $360 for homeowners insurance. What is the monthly PITI for this home?

(A) $700

(B) $730

(C) $900

(D) $1,000

73. Joe Smith earns $30,000 a year. He pays $100 a month for a student loan and has a $250 per month car

payment. Joe is considering buying a home that would annually cost $6,000 for the mortgage, $2,400 for property taxes, and $360 for homeowners insurance. Will Joe qualify for a mortgage?

(A) Yes, because his total debt is less than 36% of his gross monthly income.

(B) Yes, because his total debt is less than 28% of his gross monthly income.

(C) No, because his total debt is more than 36% of his gross monthly income.

(D) No, because his property taxes exceed 28% of the cost of the mortgage.

74. Which type of bond is exempt from federal taxes?

(A) Treasury

(B) Corporate

(C) Junk

(D) Municipal

75. An umbrella insurance policy is a personal catastrophe policy that provides protection for

(A) general liability only

(B) automobile liability only

(C) general and automobile liability

(D) business and personal liability

76. When someone purchases a stock in the over-the-counter market, the price the buyer pays is the

(A) money-market price

(B) ask price

(C) bid price

(D) current price





77. All of the following statements are true about installment loans EXCEPT:

(A) Their payments are the same amount each month.

(B) They are made for a specified period of time.

(C) They use simple or add-on interest.

(D) They are typically used to purchase a number of different items at once.

78. Which of the following best describes how a subrogation clause in a homeowner’s policy works?

(A) It gives the insured the right to collect for flood damages.

(B) It gives the insurer the right to request reimbursement from the responsible party.

(C) It gives the insured the right to double the amount of loss for certain specified accidents.

(D) It gives the insurer the right to alter a policy from basic form coverage to broad form coverage.

79. The likelihood that the average taxpayer will be audited by the Internal Revenue Service (IRS) is about

(A) 1 in 100

(B) 15 in 100

(C) 20 in 100

(D) 35 in 100

80. Preferred stock has which of the following advantages over common stock?

(A) It offers a tax advantage to individual owners.

(B) It offers better potential for increased value over time.

(C) Its holders receive dividends before distribution is made to common shareholders.

(D) Its holders have a stronger vote at shareholder meetings.

81. Under an adjustable-rate mortgage, which of the following best describes the interest rate the borrower

pays?

(A) It fluctuates according to a specific economic index.

(B) It begins lower than the market rate and increases over time.

(C) It is scheduled to decrease by a predetermined amount each year.

(D) It is scheduled to increase by a predetermined amount each year.





82. Which of the following approaches to investment analysis assumes that each particular stock has an intrinsic, or true, value based on its expected future earnings?

(A) Fundamental approach

(B) Technical approach

(C) Random-walk approach

(D) Cyclical approach

83. Company X’s stock price is currently $50 per share with an earnings per share (EPS) of $2.50. Company

Y’s stock price is currently $18.50 per share with an EPS of $1.30. The earnings of both companies are expected to grow. On the basis of the companies’ price/earnings (p/e) ratios, which company’s stock is more appropriate to buy?

(A) X’s because its p/e ratio is 20.

(B) X’s because its p/e ratio is higher.

(C) Y’s because its p/e ratio is lower.

(D) Y’s because its EPS is lower.

84. To determine future Social Security benefits, a wage earner should do which of the following?

(A) Contact the payroll department of the wage earner’s current or most recent employer.

(B) Request a personal earnings and benefit estimate from the Social Security Administration.

(C) Multiply the current Social Security benefit rate by the wage earner’s earnings.

(D) Request an analysis by a certified public accountant (CPA).

85. When choosing a bank checking account, a consumer should consider which of the following?

I. Interest rate offered II. Services available III. Convenience IV. Whether the bank is a national or a state institution

(A) I and III only

(B) II and IV only

(C) I,II, and III only

(D) II, III, and IV only





86. What is the statute of limitations for an Internal Revenue Service (IRS) audit of a tax return in which fraud or extreme understatement of income is not suspected?

(A) 2 years

(B) 3 years

(C) 6 years

(D) 7 years

87. A stock with a beta of 1.0 has a risk that is

(A) less than the market average

(B) equal to the market average

(C) slightly more than the market average

(D) much more than the market average

88. The primary purpose of refinancing a mortgage is to

(A) increase the owner’s net worth

(B) increase the owner’s tax deductions

(C) reduce the cost of borrowing

(D) eliminate settlement costs

89. A 401(k) qualified retirement plan is an excellent method of building wealth for which of the following

reasons? I. Contributions are made from pre-tax dollars. II. The earnings grow tax-deferred. III. There is no limit on how much can be invested.

(A) III only

(B) I and II only

(C) II and III only

(D) I, II, and III

90. Which of the following types of automobile coverages would pay for the loss of a stolen family vehicle?

(A) Collision

(B) Uninsured motorist

(C) Liability

(D) Comprehensive





91. Under the Fair Credit Billing Law, consumers are permitted to dispute entries on their revolving credit accounts in which of the following situations? I. A mathematical error appears in a billing statement. II. Fraudulent use occurs. III. The charges were for damaged or poor-quality goods.

(A) I only

(B) II only

(C) I and II only

(D) I, II, and III

92. All of the following are likely to be purchased with installment loans EXCEPT

(A) fitness club memberships

(B) automobiles

(C) household appliances

(D) clothing

93. A homeowner has a mortgage with an annual interest rate of 10% and a consumer loan that charges 12%.

If the homeowner has a 28% marginal tax rate, what are the after-tax costs of these two forms of borrowing?

(A) Mortgage cost: 10%; consumer loan cost: 12%

(B) Mortgage cost: 10%; consumer loan cost: 8.64%

(C) Mortgage cost: 7.2%; consumer loan cost: 12%

(D) Mortgage cost: 7.2%; consumer loan cost: 8.64%

94. Which of the following is NOT true about automobile lemon laws?

(A) Consumers must go to court to exercise their rights.

(B) Consumers are entitled to return their vehicle to obtain a refund of the full purchase price, less a reasonable charge for the miles driven.

(C) Consumers are entitled to a comparable new vehicle.

(D) Consumers may have their attorney and expert witness fees paid by the manufacturer.





95. Which of the following financial measures of a corporation’s profitability is based on a share of common stock?

(A) Dividends per share

(B) Price/earnings ratio

(C) Earnings per share

(D) Sales-per-share ratio

96. If a taxpayer is in the 28 percent income tax bracket and contributes $1,000 to an individual retirement

account (IRA), how much will the taxpayer save on income taxes this year?

(A) $28

(B) $280

(C) $560

(D) $720

97. A student lives on campus at college and wants to purchase a stereo system at a department store in the

same town. In this situation, which of the following would determine the student’s creditworthiness?

(A) The store and the salesperson who is selling the stereo

(B) The college and the student’s standing at the college

(C) The student’s character and capacity to repay

(D) The interest rate and the loan duration

98. An hourly wage earner faithfully deposits $50 a month into a mutual fund. The term for this practice is

(A) value averaging

(B) asset allocation averaging

(C) share price averaging

(D) dollar cost averaging

99. What is the primary disadvantage of a revocable living trust?

(A) The public has access to the trust’s terms

(B) The trust must be probated

(C) Income flow from the trust is interrupted

(D) Fees are associated with the trust’s management

ANSWER KEY


ANSWER KEY -

1. The correct answer is C. The Dow Jones average is based on 30 blue-chip stocks, and choice C is the correct answer. The NYSE index, AMEX index, and NASDAQ Composite index use more than 30 stocks to measure market performance, so choices A, B, and D are incorrect. 2. The correct answer is B. Intestacy means that a person has died without a valid will, so choices A and C are incorrect. In such cases, state intestacy laws determine how to divide a person's property, so choice B is the correct answer. 3. The correct answer is B. Benefits of home ownership include federal tax deductions, home appreciation, and home equity. However, owning a home restricts an individual's ability to relocate quickly and easily, so choice B is the correct answer. 4. The correct answer is A. As the central bank of the U.S., the Federal Reserve System oversees the country's monetary policy. The Federal Reserve does not monitor government spending or control foreign exchange rates, so choices B and D are incorrect. The Fed lacks political authority, so choice C is incorrect. 5. The correct answer is D. Risk management is the process of identifying, assessing, and prioritizing financial risk. Risk reduction, risk avoidance, risk retention, and risk transfer are common tools used to minimize financial exposure, so choice D is the correct answer. 6. The correct answer is B. Purchasing power refers to the funds that a person has available to purchase goods or services. Earning as much interest as possible and having enough cash available for daily expenses are also effective cash management methods. However, checking accounts typically do not offer high interest rates, so it would be unwise to place all funds in a checking account. 7. The correct answer is B. Credit unions typically offer higher interest rates on savings accounts than commercial banks, savings and loan associations, and mutual savings banks. Credit unions are non-profit, member-owned financial institutions that do not have to pay federal taxes, which is why they can offer better interest rates. 8. The correct answer is B. Federal withholding taxes are deducted from a worker's gross earnings based on the number of allowances an employee claims on a W-4. Employers send employees a W-2, which indicates annual reported income, so choice A is incorrect. Forms W-9 and 1099 are not used to determine employee withholdings, so choices C and D are incorrect. 9. The correct answer is C. Credit cards are convenient for both consumers and vendors, so choices A and D are incorrect. Carrying large quantities of cash can be dangerous, so credit cards are a safe alternative. Finance charges associated with unpaid credit card balances are an expense, so choice C is the correct answer. 10. The correct answer is A. Term policies have low premiums and no fees and provide a significant amount of death protection, so choice A is the best answer. Whole life has high fixed premiums, so choice B is incorrect. Variable life polices provide limited coverage because they are primarily investment tools, which means choice C is incorrect. Endowment life policies pay the insured living benefits and are useful for covering specific expenses like college tuition.

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DSST Principles of Financial Accounting

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11. The correct answer is A. Each month, Consumer Reports provides objective automobile reviews and ratings. In-house experts compare similar cars based on performance, price, and reliability. The magazine's annual car issue is a best-seller and serves as a reference tool for consumers in the market for a new automobile. 12. The correct answer is B. The right of subrogation allows an insurance company to ask for reimbursement from the negligent party or that person's insurance company. The principle of indemnity prevents an insured party from being compensated beyond the amount of their loss, so choice A is incorrect. 13. The correct answer is C. Financial planners are compensated for their work with either fees or commissions. Bonuses are not a common payment form associated with reputable financial planners, so choice C is the best answer. 14. The correct answer is A. The primary measurement of a loan's cost is the annual percentage rate, which lenders are required to provide to consumers. The nominal interest rate and number and amount of loan payments are less relevant factors, so choices B, C, and D are incorrect. 15. The correct answer is D. Future value is calculated by multiplying the invested amount by the future value factor. Divide $1,500 by $500 to determine the future value factor, which is 3 in this case. The number of years is found by using the 4% column in the above table, and the future value factor, 3, lies between 25 and 30, which means choice D is the best answer. 16. The correct answer is A. Future value is calculated by multiplying the initial investment by the future value factor. $10,000 × 1.504 = $15,040, which is nearest to $15,000. 17. The correct answer is B. Future value is calculated by multiplying the invested amount by the future value factor. Divide $1,500 by $1,000 to determine the future value factor, which is 1.5 in this case. The number of years is found by using the 15% column in the above table, and the future value factor, 1.5, lies closest to 3 years. 18. The correct answer is C. The amount of federal taxes is found by multiplying the taxable income by the tax rate. In this case, the taxable income of $15,000 should be multiplied by the tax rate, which is 15%, or 0.15, and $15,000 × 0.15 = $2,250. 19. The correct answer is B. With tiered savings accounts, the interest rate depends on the amount invested, so choice B is the best answer. NOW accounts are interest-bearing checking accounts, and money market accounts offer one rate of interest. 20. The correct answer is A. The two-cycle ADB method computes finance charges based on two billing cycles, which is more costly than one cycle. Methods of computing finance charges that exclude new purchases and make adjustments for payments and credits are less expensive for consumers. 21. The correct answer is C. Life insurance, IRAs, and savings accounts are elements of the gross estate,

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which is subject to federal estate taxes. Real and personal property, such as cars and jewelry, are part of the probate estate, so choice C is the correct answer. 22. The correct answer is D. The SEC was established in 1933 to enforce federal securities laws. The stocks of small and mid-sized companies are traded on the AMEX, so choice C is incorrect. 23. The correct answer is A. Present value is an estimate of the current value of any future amount of money the couple will receive, so choice A is the best answer. Future value would help the couple understand how their current investments will grow in the future, so choice B is incorrect. 24. The correct answer is A. Credit should primarily be used to handle emergencies, pay for college, or manage debt. Cash, rather than credit, is the best choice for handling daily expenses, so choice A is correct. 25. The correct answer is B. Keogh plans are intended for self-employed individuals, and SEP plans are meant for small business owners, which eliminates choices A and C. The best option for this couple is for each of them to contribute to an individual retirement account, so choice B is the correct answer. 26. The correct answer is D. Early retirement, wealth, and minimal taxes are objectives of only some people. In general, long-term financial plans should serve as tools for implementing financial strategies. 27. The correct answer is D. A CPA is a tax professional who prepares tax returns for individuals and businesses. Financial planners, consultants, and counselors help people with investments and are less knowledgeable about tax laws. 28. The correct answer is D. Chapter 13 bankruptcies establish a plan for debt restructuring and waive fees during the repayment period. Debts are eliminated under Chapter 7 bankruptcy, so choice A is incorrect. Choice C describes Chapter 11 bankruptcy. 29. The correct answer is C. According to the Rule of 78s, in the first six months of the loan the borrower is

charged 5778

of the total interest (12 + 11 + 10 + 9 + 8 + 7 = 57). The fraction 5778

is approximately 75%, so the

borrower saves about 25%, or one fourth, of the 12-month loan's interest. 30. The correct answer is A. Personal income taxes collected from U.S. workers are the primary source of income for the federal government. Corporate income taxes, estate taxes, and excise taxes provide a smaller percentage of income. 31. The correct answer is A. The age of the individual leasing a car is irrelevant to the cost of a car lease. The number of years of the leasing agreement, number of miles driven, and residual value are factors that determine the cost of leasing a car. 32. The correct answer is C. Credit bureaus collect and store credit history information about individuals and provide credit reports when requested. Choices A, B, and D are not activities undertaken by credit bureaus.

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33. The correct answer is B. With a participating policy, the policyholder is entitled to dividends, so choice B is the best answer. Such policies do not provide disability coverage, so choice A is incorrect. Choices C and D are not typical characteristics of participating policies. 34. The correct answer is A. Medicare is for individuals over age 65, while Medicaid provides coverage for individuals of any age who cannot pay for healthcare. Individuals with Medicare may have additional coverage through a private firm, so choice D is incorrect. 35. The correct answer is D. A CD is an investment tool that offers competitive returns and federal insurance protection. AMAs and MMDAs are types of interest-bearing checking accounts. CDs typically offer higher interest rates than either checking or savings accounts. 36. The correct answer is B. Assets and liabilities are the main categories of net worth statements, so choice B is correct. Income is not included on a net worth statement, which eliminates choices A, C, and D. 37. The correct answer is B. The annual marketing fee for a mutual fund is the 12b-1 fee, so choice B is correct. Choices A, C, and D are not terms that describe the fee charged for advertising and promotional expenses. 38. The correct answer is C. Delinquencies appear on an individual's credit report for seven years. Bankruptcies remain on a report for ten years. 39. The correct answer is B. The rule of 72 is a formula used to estimate how long it will take to double a sum at a specific interest rate. The number of years to double money is calculated by dividing 72 by the annual compound interest rate. In this case, it will take 12 years for the CD to double in value (72 ÷ 6 = 12). 40. The correct answer is D. Assuming both funds perform at the same level, the total cost of the funds can be approximated. Fund X has an initial cost of $50 and then three payments of approximately $10, which would equal a total cost of approximately $80. Fund Y has no front-end load but costs approximately $15 per year for a total cost of $45. Therefore, the investor should invest in Fund Y because total expenses will be less than those with Fund X.

41. The correct answer is D. Lemon laws protect consumers who purchase cars that fail to meet quality and performance standards. In most states, a car is characterized as a lemon when it meets any of the requirements listed in I, II, or III, so choices A, B, and C are incorrect. 42. The correct answer is B. Universal life insurance is a type of permanent cash value insurance that offers the insured a high degree of flexibility regarding premium investments. Adjustable life policies are flexible but do not offer the savings feature of cash value, so choice A is incorrect. Endowment life and whole life policies are less flexible than universal life policies, so choices C and D are incorrect. 43. The correct answer is B. An individual who sets up a revocable trust will not reduce his or her taxes, so choice B is the correct answer. Irrevocable living trusts and credit shelter trusts minimize taxes. Charitable remainder trusts help grantors avoid capital gains taxes.

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44. The correct answer is B. Most taxpayers in the U.S. contribute approximately 30% of their income to the government. Federal withholding taxes, state income and property taxes, and local sales taxes are only some of the taxes paid by most Americans each year. 45. The correct answer is B. The concept of passing up the next best choice when making a decision is opportunity cost. High school graduates who choose to attend college are giving up the income they could have earned at a job with the assumption that a college degree will help them earn more money later. 46. The correct answer is B. Medigap is a supplemental insurance plan sold in conjunction with Medicare. Medigap provides health coverage for expenses and procedures not covered by Medicare. 47. The correct answer is D. A consumer who carries a regular balance needs a card with a low interest rate to minimize costs. Rebates, grace periods, and insurance plans are less important factors for this particular type of consumer, so choices A, B, and C are incorrect. 48. The correct answer is B. Service contracts are popular tools for handling unpredicted repair issues. Auto buyers purchase service contracts or extended warranties from the dealer as a way to reduce maintenance costs in the future, so choice B is the correct answer. 49. The correct answer is C. Both Keogh plans and IRAs are tax-deductible tools for growing money tax-deferred. Anyone can open an IRA, but Keogh plans are limited to the self-employed, so choices B and D are incorrect. 50. The correct answer is B. The marginal tax rate is the amount of tax paid on each additional dollar of income. The marginal tax rate increases with an individual's income. 51. The correct answer is D. The federal income tax system is based on a progressive tax structure. With a progressive tax structure, the greater the taxable income, the greater the income tax rate, so choice D is the correct answer. 52. The correct answer is C. Installment loans are frequently used for major purchases, such as automobiles. Loan payments are spread over a specified amount of time and include both interest and fees. Grace periods are not part of installment loans. 53. The correct answer is B. The CPI measures the average cost of specific consumer goods and indicates inflation rates. Marginal costs, government funds, and credit ratings are not directly linked to CPI. 54. The correct answer is A. Debts are eliminated under Chapter 7 bankruptcy, so choice A is correct. Businesses rather than individuals file Chapter 11 bankruptcies, so choice B is incorrect. Chapter 13 bankruptcies establish a plan for debt restructuring and waive fees during the repayment period. 55. The correct answer is A. MMDAs are insured savings accounts that offer both check-writing privileges and ATM access. Choices B, C, and D are mutual funds that are more appropriate for investing purposes than

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emergency funds. 56. The correct answer is B. The main complaint associated with HMOs is that members are limited to network doctors. However, this limitation on doctors minimizes the number of claims to file, which eliminates choice A. Wellness programs are stressed, and most plans have no deductibles. 57. The correct answer is A. Earnings gained by an annuity grow tax-deferred, so choice A is correct. Bonds, real estate, and mutual funds are not investment tools that provide tax-shelter benefits, so choices B, C, and D are incorrect. 58. The correct answer is B. The interest earned from municipal bonds is exempt from federal taxes. This taxpayer's gross income is $37,750 ($25,000 + $500 + $250 + $12,000). 59. The correct answer is A. Personal debt limit can be determined by evaluating an individual's amount of continuous debt, so choice B is incorrect. The percentage of a consumer's equity versus debt and amount of disposable income also help assess personal debt limits. 60. The correct answer is A. Real estate commissions are only paid by the seller of a property. Most commissions are 6% of the sales prices. 61. The correct answer is C. Rising prices accompanied by decreasing purchasing power are the components of inflation. Choices A, B, and D fail to describe an economy dealing with inflation. 62. The correct answer is D. A standard rule of the bond market is that bond prices and interest rates move in opposite directions. Therefore, if market rates increase, the bond value will most likely decrease. 63. The correct answer is D. The executor of an estate is designated to carry out the settlement, so choice D is correct. A court-appointed administrator handles the probate process when an individual dies without a valid will. 64. The correct answer is C. The couple's total gross income equals $50,500. Taxpayers may write off capital losses up to $3,000. Therefore, the couple's adjusted gross income is $47,500 ($50,500 – $3,000 = $47,500). 65. The correct answer is C. Employers and employees share the costs associated with Social Security and Medicare. Funds for these programs are collected through withholding taxes. 66. The correct answer is D. Major medical insurance plans typically have lifetime limits of $1 million or higher. Deductibles associated with HMOs, PPOs, and supplemental health insurance are much lower, so choices A, B, and C are incorrect. 67. The correct answer is C. In order for homeowners to receive full replacement reimbursement, they must insure their properties for at least 80% of its value. Replacement cost refers to the amount of money needed to repair, rebuild, or replace a home.

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68. The correct answer is C. Though the maximum amount that may be given to an individual is $13,000, both the husband and the wife may give the same person $13,000, for a total of $26,000. 69. The correct answer is D. Escrow accounts are set up to cover property taxes and insurance premiums. Choices A, B, and C are incorrect. 70. The correct answer is B. Credit unions typically offer consumers lower interest rates than commercial banks, savings and loans, and consumer finance companies. Because they are non-profit organizations, credit unions are not required to pay federal taxes. 71. The correct answer is A. Retirees may receive reduced Social Security benefits at 62. The full retirement age for individuals who were born after 1937 is from 65 to 67, so choice B is incorrect. In order to receive full retirement benefits, a person must work at least 40 quarters, which eliminates choice C. Payroll taxes are not deductible, so choice D is incorrect. 72. The correct answer is B. PITI is the principal, interest, property taxes, and homeowner's insurance for a property. In this case, the monthly PITI is $730.

$6,000 $2,400 $360 $8760 annual costs

$8760$730 per month

12 months

+ + =

=

73. The correct answer is C. The monthly cost of the house would be $730.

$6,000 $2,400 $360 $8760 annual costs

$8760$730 per month

12 months

+ + =

=

Joe's additional debt ($100 + $250 = $350) would bring the monthly total to $1,080.

$730 $350 $1,080+ =

Joe earns $2,500 each month. If he bought the house, his monthly debt would be 43% of his income, which

would be too risky for a mortgage company.

$1,080 monthly debt0.432 43%

$2,500 monthly income= =

74. The correct answer is D. Municipal bonds are exempt from federal taxes, so choice D is correct. Treasury bonds, corporate bonds, and junk bonds are not exempt, so choices A, B, and C are incorrect.

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75. The correct answer is C. Umbrella policies may be purchased for both general and automobile liability coverage, so choices A and B are incorrect. Such policies are for personal rather than business liability, so choice D is incorrect. 76. The correct answer is B. The ask price is the price at which a person can purchase a security. The bid price is the price at which a person can sell a security. 77. The correct answer is D. Loan payments are equally spread over a specified amount of time and are based on either simple or add-on interest. Installment loans are frequently used for major purchases, such as automobiles, rather than for numerous items. 78. The correct answer is B. The right of subrogation gives the insurance company the right to request reimbursement from the responsible party, which may be the person who caused the loss or that person's insurance company. Choice C conflicts with the principle of indemnity, which prevents the insured from being compensated in excess of a loss. Basic form and broad form are coverages found in homeowner's policies that are not directly related to the right of subrogation, so choice D is incorrect. 79. The correct answer is A. The IRS audits less than 10% of all tax returns, so choice A is the best answer. Some returns are randomly selected for audits, while others are audited because of suspicious deductions. 80. The correct answer is C. Holders of preferred stock receive dividend payments before common stockholders. Preferred stock offers no tax advantages or increased long-term value, so choices A and B are incorrect. Owners of common stock have voting privileges, so choice D is incorrect. 81. The correct answer is A. The interest rate of an ARM fluctuates based on the market interest rate. At specified intervals, the mortgage interest rate is adjusted either up or down, which affects the amount of the mortgage payment. 82. The correct answer is A. The fundamental approach focuses on making financial predictions based on past and present stock information. Choice C is incorrect because the random walk approach assumes that the stock market is unpredictable. 83. The correct answer is C. The p/e ratio for Company X equals 20 (50 ÷ 2.5). The p/e ratio for Company Y equals 14 (18.5 ÷ 1.3). A lower p/e ratio is considered best, so choice C is the correct answer. 84. The correct answer is B. The best method for determining future benefits is to request an earnings and benefit estimates from the SSA. Choices A, C, and D are not typical methods for determining future Social Security benefits. 85. The correct answer is C. The primary considerations for choosing a checking account include the interest rate, services, and convenience. Whether the bank is nationally or locally owned is less relevant. 86. The correct answer is B. The statute of limitations for an IRS audit is 3 years when tax fraud is not

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suspected. When an individual does not report a large amount of income, then the IRS has 6 years to collect taxes. 87. The correct answer is B. The stock market has a beta of 1.0. Therefore, a stock with a beta of 1.0 is close to the market average. 88. The correct answer is C. Refinancing a mortgage enables a homeowner to reduce monthly payments or reduce the interest on a loan. Net worth does not increase with refinancing, and settlement costs are still required at closing. 89. The correct answer is B. A 401(k) plan enables individuals to make pre-tax contributions, the earnings from which are tax-deferred. The amount of money that may be invested annually in a 401(k) is limited, so choice B is the correct answer. 90. The correct answer is D. Comprehensive coverage pays for the theft of an insured's car. Collision, uninsured motorist, and liability are types of auto insurance coverage that would not apply to stolen vehicles, so choices A, B, and C are incorrect. 91. The correct answer is D. The Fair Credit Billing Law was enacted to help consumers when they receive bills containing errors. Consumers may dispute bills that contain mathematical errors, fraudulent charges, and charges for damaged products. 92. The correct answer is D. Clothing would most likely be purchased with a debit or credit card. Larger purchases, such as club memberships, cars, and appliances, would be more appropriate for installment loans. 93. The correct answer is C. Choices B and D are eliminated because consumer loans cannot be written off. Mortgage interest can be written off, so the after-tax cost of mortgage interest is lower. 94. The correct answer is A. According to state lemon laws, consumers are not required to have court hearings or file lawsuits when they own cars deemed defective. Choices B, C, and D are true statements regarding lemon laws. 95. The correct answer is C. A firm's annual earnings are usually measured in earnings per share. EPS is calculated by dividing the total earnings after dividends have been paid by the number of shares of common stock outstanding. 96. The correct answer is B. Money contributed to an IRA is tax deferred. If this taxpayer did not contribute the money to an IRA, then he or she would pay 28% of the $1,000, or an additional $280 in income taxes. 97. The correct answer is C. Character and ability to repay the loan will most likely determine whether the student is creditworthy. Choices A, B, and D are less-relevant factors in this situation. 98. The correct answer is D. Regularly investing the same dollar amount in a specific investment is known as dollar cost averaging. Value averaging bases investments on mathematical formulas and typically offers

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better returns than dollar cost averaging. 99. The correct answer is D. The main disadvantage of revocable living trusts is that the trustee charges fees for managing the assets. Advantages include the privacy of the terms, lack of probate, and continued flow of income and management.

DSST Personal Finance.rev.8.26 - nelnetsolutions.com · I. Risk reduction II. Risk avoidance III....

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