GEB 3006 EXAM 3 Financial Literacy

What two factors count for 65% of your FICO score?

a) Income and payment history

b) Employment history and outstanding debts

c) Payment history and outstanding debts

d) Income and outstanding debts

c) Payment history and outstanding debts

Which company has developed the MOST commonly used credit score to evaluate an individual's credit?

a) Experian

b) Transunion

c) Fair Isaac Corporation

d) Equifax

c) Fair Isaac Corporation

You should try to achieve a FICO score of at least ________ in order to receive a top credit rating.

a) 840

b) 640

c) 760

d) 940

c) 760

What is the debt to credit limit ratio for the following individual?

Visa CardMaster CardCredit Limit$10,000$20,000Balance Due$2,000$19,000Available Credit$8,000$1,000

a) 30%, and decreasing this ratio will help the credit score

b) 70%, and decreasing this ratio will help the credit score

c) 70%, and increasing this ratio will help the credit score

d) 30%, and increasing this ratio will help the credit score.

b) 70%, and decreasing this ratio will help the credit score

True or False?

It is possible that canceling an old credit card with no balance due could hurt your credit score.

True

True or False?

If an individual gets several quotes on a new mortgage within a two week period, it should not immediately impact their credit score. The credit score may later be impacted by the size of the mortgage and related monthly payments.

True

A married couple is applying for a mortgage. One spouse has a low FICO score and one has a high FICO score. What is their best strategy for getting the lowest interest rate possible?

a) Apply in both spouses names since the banks will use the higher score in evaluating the mortgage application.

b) Apply in the name of the spouse with the highest score.

b) Apply in the name of the spouse with the highest score.

Which of the following statements is true?

a) You Answered The treasury yield curve is normally downward sloping, with long term rates being higher than short term rates.

b) The treasury yield curve is normally upward sloping, with long term rates being higher than short term rates.

c) The treasury yield curve is normally downward sloping, with short term rates being higher than long term rates.

d) The treasury yield curve is normally upward sloping, with short term rates being higher than long term rates.

b) The treasury yield curve is normally upward sloping, with long term rates being higher than short term rates.

True or False?

Having mortgage debt is generally considered better than having credit card debt.

True

True or False?

It is illegal for an employer to review your credit report as part of the application process.

False

True or False?

Insurance companies are allowed to review and consider your credit score before quoting a premium.

True

True or False?

Assume you have three credit cards, each having a balance due of $500 for a total of $1,500. Each card has a different interest rate ranging from 12% to 20%. The minimum payment on each card is $10. If the minimum payment is not made, there is a $50 penalty.

If you only have $500 to pay on your credit cards this month, the best way to minimize your interest cost is to pay an equal amount of money on each card.

False

True or False?

In general, applying for and receiving new credit cards will tend to decrease your FICO score.

True

True or False?

Assume that your parents have more liabilities than assets as a result of a $100,000 of credit card debt. In the event of their death, the children will inherit the credit card debt.

False

Interest rates on 30 year fixed rate mortgages tend to follow or correlate with:

a) The 5 year treasury note rate

b) LIBOR

c) The 10 year treasury note rate

d) The 30 year treasury bond rate

c) The 10 year treasury note rate

Interest rates paid by corporations and individual are normally derived from the current:

a) The rate on mortgage backed securities

b) The treasury yield curve

c) ECB funds rate

d) Taylor curve

b) The treasury yield curve

At a given interest rate, extending the term of your auto loan from 36 months to 60 months will:

a) Increase your payment and decrease the amount of interest paid over the loan

b) Decrease your payment and decrease the amount of interest paid over the loan

c) Decrease your payment and increase the amount of interest paid over the loan

d) Increase your payment and increase the amount of interest paid over the loan

c) Decrease your payment and increase the amount of interest paid over the loan

Interest rates for corporations and individuals are set based on the Treasury Yield Curve on any given day. The curve represents the cost of borrowing for the federal government, and:

a) Is generally downward sloping, with long term interest rates being lower than short term interest rates

b) Is generally upward sloping, with short term interest rates being lower than long term interest rates

c) Is generally upward sloping, with long term interest rates being lower than short term interest rates

d) Is generally downward sloping, with short term interest rates being lower than long term interest rates.

b) Is generally upward sloping, with short term interest rates being lower than long term interest rates

If we experience a rapid increase in inflation, the Federal Reserve would likely ________ interest rates.

a) decrease

b) increase

c) maintain

b) increase

In the event that you had $10,000 to invest in a bank Certificate of Deposit (CD), what would be your best course of action in the event that you believed interest rates were likely to increase in the coming years?

a) Invest in a short term CD and roll it over as it expires to another short term CD

b) Invest in a series of short term and long term CDs.

c) Invest in a long term CD today

a) Invest in a short term CD and roll it over as it expires to another short term CD

True or False?

Borrowing on your 401-K plan is generally considered a good financial move.

False

True or False?

You should always shop for a car loan before seeing the dealer, since the loan rates offered by dealers can be manipulated against the profit on the car and the value of the trade-in.

True

Assume you are using student loans to pay for college. What is the maximum recommended level of debt you should incur in order to be conservative and ensure that you can afford the debt payments after graduation?

a) No more than your anticipated starting salary.

b) No more than twice your anticipated starting salary.

c) No more than one quarter of your anticipated starting salary.

d) No more than half of your anticipated starting salary.

d) No more than half of your anticipated starting salary.

True or False?

Debit cards have fewer protections if lost compared to credit cards, but credit cards can result in significant financial difficulties for individuals who misuse the card and incur credit card debt.

True

Assume you are borrowing $10,000 per year to cover all costs of attending UCF. If it takes you 5 years to graduate instead of 4, then the cost of attending UCF is:

a) $50,000

b) $10,000

c) Well worth it (this is not the correct answer!)

d) $40,000

a) $50,000

(10,000*5)

Who sets monetary policy in the United States?

a) The President

b) The Congress

c) The Federal Reserve

d) The Supreme Court

c) The Federal Reserve

True or False?

A flat or inverted yield curve often signals a recession.

True

True or False?

It is generally a good idea to co-sign a loan for another individual in the event they do not qualify for a loan.

False

True or False?

Consumers are allowed by law to receive a free copy of their credit report twice a year from each of the three credit reporting agencies.

False

True or False?

Most experts recommend that consumers "freeze" their credit files as a result of recent data leaks at Equifax.

True

True or False?

You should never shop for a car based on a budgeted payment, but instead look at the overall cost of the vehicle.

True

True or False?

One of the best investments you can make is paying down high interest rate credit card debt. Essentially you are receiving a high after tax return risk free.

True

True or False?

Incurring significant amounts of student debt will impact your future borrowing power for a home or car loan.

True

What are the dual mandates established by Congress for the Federal Reserve?

a) Control inflation and maximize employment

b) Control inflation and print currency

c) Control fiscal and monetary policy

d) Maximize employment and print currency

a) Control inflation and maximize employment

Assume you paid $300,000 for a house that is now worth $400,000. A bank will make you a loan of 90% based on current value. You owe $200,000 on your first mortgage.

How much can you borrow on a second mortgage or home equity loan?

a) $70,000

b) $270,000

c) $360,000

d) $160,000

d) $160,000

How to solve:

(400,000 *.90) - (200,000)

360,000 - 200,000= 160,000

Experts suggest that you should save at least ____ month(s) of take home pay for emergency savings.

a) 1

b) 6

c) 9

d) 3

d) 3

Which of the following is NOT one of the major credit reporting companies monitoring your credit:

a) Trans Union

b) Experian

c) Equifax

d) Trans America

d) Trans America

Which of the following statements is FALSE?

a) Interest accrues on subsidized student loans immediately upon receipt.

b) Subsidized student loans are not based on your major or starting salary upon graduation.

c) Student loans are dischargeable in bankruptcy.

d) Interest does not accrue on subsidized student loans until after graduation.

c) Student loans are dischargeable in bankruptcy.

True or False?

If you buy a larger size of a product, the price per unit (such as price per ounce) will always be lower.

False

True or False?

The price per unit of items bought in a warehouse club such as Sams or Costco will always be lower than a regular retail store.

False

True or False?

Retailers commonly offer new items at significantly higher prices, then plan to market the goods down later to ultimately achieve the desired gross margin goal.

True

Which of the following would provide the most objective information about a product?

a) A recommendation from a friend

b) A food product ingredient label.

c) A sales flyer prepared by the seller.

d) Information received from from a sales person.

b) A food product ingredient label.

True or False?

In most cases, service warranty contracts provide excellent protection and are generally good deals.

False

Assume you spent $250 for a pressure washer that will save you $50 a year in rental costs.

Using simple payback, how long will it take to get your money back?

a) 1 Year

b) 5 Years

c) 10 Years

d) You don't have enough information to answer the question.

b) 5 Years

(250/50)

True or False?

It is never a good idea to prepay something for a discount due to the risk involved.

False

True or False?

When shopping for a car, you should immediately offer your current car as a trade-in to strengthen your bargaining power.

False

True or False?

Zero percent financing is always a great deal since a zero percent interest rate is lower than any bank would ever offer.

False

True or False?

Is is always advisable to have your auto financing arranged in advanced before you start negotiating on a car.

True

Assume that a dealer has offered you $10,000 for your car as a trade-in which will save you 7% sales tax on your new car's tax value.

If you decide to sell the car to a third party, you need to get more than ______.

a) $9,346

b) $10,000

c) $10,500

d) $10,700

d) $10,700

How to solve:

(10,000*.07) + 10,000

700 + 10,000= 10,700

Assume you drive 10,000 miles per year and get 20 miles to the gallon.

If your car requires premium gas, how much more will this cost you over a 5 year period assuming that premium gas costs $0.60/gallon more than regular?

a) $1,000

b) $1,250

c) $1,500

d) $1,800

c) $1,500

Depreciation on autos tends to be highest in years _______.

a) 1 to 3

b) 4 to 7

c) 5 to 8

d) 7 to 10

a) 1 to 3

True or False?

Leasing cars is generally much cheaper than buying cars since the payment is so much lower.

False

Generally, you need to plan to stay in a house for about ______ years to reduce the risk of losing money on the house when you resell it.

a) 3 Years

b) 5 Years

c) 7 Years

d) 10 Years

b) 5 Years

What are some of the disadvantages of owning a house?

a) Housing values could drop.

b) Limited mobility since it can take time to sell a house.

c) Higher costs such as maintenance and insurance.

d) All of the above are disadvantages of owning a house.

d) All of the above are disadvantages of owning a house.

Which of the following statements is TRUE?

a) Real estate commissions are usually 4% and paid by the seller.

b) Real estate commissions are usually 4% and paid by the buyer.

c) Real estate commissions are usually 6% and paid by the seller.

d) Real estate commissions are usually 6% and paid by the buyer.

c) Real estate commissions are usually 6% and paid by the seller.

Monthly escrow for property taxes and insurance can add up to ____ more to the mortgage payment.

a) 20%

b) 30%

c) 40%

d) 50%

c) 40%

True or False?

PITI stands for principal, interest, taxes and insurance.

True

The housing expense ratio of PITI divided by gross monthly income should not exceed a maximum of ____.

a) 18% for conventional loans and 19% for FHA loans

b) 28% for conventional loans and 29% for FHA loans

c) 38% for conventional loans and 39% for FHA loans

D) 48% for conventional loans and 49% for FHA loans

b) 28% for conventional loans and 29% for FHA loans

The total debt ratio of (PITI + long term debt obligations) divided by gross monthly income should not exceed _____.

a) 16% for conventional loans and 23% for FHA loans.

b) 26% for conventional loans and 33% for FHA loans.

c) 36% for conventional loans and 43% for FHA loans.

d) 46% for conventional loans and 53% for FHA loans.

c) 36% for conventional loans and 43% for FHA loans.

Before shopping for a house, buyers should get _______ for their mortgage.

a) Prequalified

b) Preapproved

b) Preapproved

Assume a homeowner is paying Private Mortgage Insurance (PMI).

At what point should the homeowner contact the mortgage company and request that PMI be stopped?

a) When the homeowner's equity in the house reaches 10%.

b) When the homeowner's equity in the house reaches 15%.

c) When the homeowner's equity in the house reaches 20%.

d) When the homeowner's equity in the house reaches 25%.

c) When the homeowner's equity in the house reaches 20%.

Recently, 85% of mortgages have been granted to individuals with FICO scores ranging from:

a) 680 and above

b) 700 and above

c) 720 and above

d) 760 and above

c) 720 and above

Assume that a house is sold for $300,000. The square footage is as follows:

Area under air conditioning and heating2,800Garage400Patio200Total3,400

The cost per square foot as traditionally calculated in the real estate industry is:

a) $88.24

b) $93.75

c) $107.14

d) $0.0093

c) $107.14

In comparison to a 15 year fixed rate mortgage, a 30 year fixed rate mortgage will:

a) Build equity more quickly

b) Have a higher payment

c) Pay more in total interest over the life of the loan

d) All of the above.

c) Pay more in total interest over the life of the loan

True or False?

A homeowner decides to get a second mortgage at 7% to pay down credit card debt with an interest rate of 20%. While this appears to be a good move, the primary risk is that the homeowner could lose his/her home if they fail to make payments on the new second mortgage.

True

Which of the following would tend to have the highest interest rate at any given time.

a) 30 year fixed rate mortgages.

b) 15 year fixed rate mortgages.

c) 5 year adjustable rate mortgages (ARM).

d) Home equity line of credit (HELOC)

d) Home equity line of credit (HELOC)

Fixed rate home mortgages should be refinanced when interest rates

a) Increase.

b) Decrease.

c) The US dollar strengthens.

d) The US dollar weakens.

b) Decrease

Assume you pay $3,000 in closing costs to refinance your mortgage at a new rate of 4%. You will save $100 per month for the next 30 years. How long must the homeowner stay in the house using TVM breakeven?

a) 30 months

b) 31.66 months

c) 33 months

d) 35.78 months

b) 31.66 months

Which of the following statements is TRUE?

a) Early in the life of a mortgage, most of the payment goes toward principal with very little being applied to interest.

b) Early in the life of a mortgage, most of the payment goes toward interest with very little being applied to principal.

c) Each mortgage payment has an equal amount of money applied to principal and interest.

b) Early in the life of a mortgage, most of the payment goes toward interest with very little being applied to principal.

The primary risk of having an adjustable rate (ARM) mortgage is:

a) Interest rates could fall.

b) Interest rates could increase.

c) The Federal Reserve might start a quantitative easing program.

b) Interest rates could increase.

Which of the following are features of a conventional or conforming mortgage?

a) The interest rate is fixed.

b) Homeowners can refinance if interest rates decrease.

c) The interest rate will be higher than adjustable rate mortgages.

d) All of the above.

d) All of the above.

Which of the following closing costs are paid by the seller?

a) Title insurance.

b) Appraisal fees.

c) Doc stamps.

d) Real estate commissions.

d) Real estate commissions.

When purchasing homeowners insurance you should always:

a) Select the replacement cost option.

b) Consider a supplemental umbrella policy over both your auto and homeowners insurance

c) Take measures to reduce your insurance costs

d) All of the above.

d) All of the above.

If you need life insurance because of a large mortgage or dependent children, you should normally buy:

a) Whole life because it's cheaper.

b) Whole life even though it's more expensive.

c) Term life because it's cheaper.

d) Term life even though it's more expensive.

c) Term life because it's cheaper.

Assume you are seeking a mortgage, and a bank uses a back-end total debt ratio of 35%. Your monthly car and student loan payments total $500/month. Your income is $5,000/month. How large of a house payment can you afford (PITI)?

a) $1,750

b) $1,250

c) $1,000

d) $500

b) $1,250

True or False?

When purchasing a home, homeowners should always get a building inspection in advance and purchase title insurance.

True

Individuals should normally have at least _______ months of pay or living expenses in emergency savings.

a) 2

b) 3

c) 6

d) 9

b) 3

Emergency savings money is best invested in:

a) Stocks

b) US Treasury Bonds

c) Real estate

d) Bank savings accounts

d) Bank savings accounts

True or False?

The key to successful investing is asset class allocation, diversification, and appropriate use of taxable, tax deferred and tax free accounts.

True

Assume a student has 4 individual stocks worth $2,500 each. In this case:

a) The student is well diversified.

b) The student should add 1 more stock to the portfolio to be well diversified.

c) The student is not adequately diversified.

c) The student is not adequately diversified.

Which type of investment provides an ownership in the company?

a) Fixed income investment.

b) Equity investment.

c) Leveraged lease.

d) Bridge financing.

b) Equity investment.

The total return on a stock is the total of the:

a) Dividend yield plus bond yield.

b) Dividend yield plus CAPM gain.

c) Dividend yield and capital gain yield.

d) None of the above.

c) Dividend yield and capital gain yield.

A stock pays a quarterly dividend of $1.00/share. The stock trades at $100 per share, and has a book value of $50 per share.

What is the annual dividend yield?

a) 1%

b) 4%

c) 0.5%

d) 2%

b) 4%

What type of stock has greater risk and often does not pay dividends?

a)Large cap stocks.

b) Mid cap stocks.

c) Small cap stocks.

d) Large cap international stocks.

c) Small cap stocks.

If a company's earnings do not vary much with the economy, it would be called a ____ stock.

a) Blue chip

b) Income

c) Cyclical

d) Defensive

d) Defensive

The risks of the overall market that can't be diversified by adding more stocks to a portfolio is called _____ risk.

a) Non-systematic

b) Systemic

c) Systematic or market

d) Liquidity

c) Systematic or market

True or False?

Average returns should always be used when evaluating stock performance since they are more accurate than geometric returns.

False

Over the long term, which asset class provided the highest rate of return?

a) Money markets

b) Corporate bonds

c) Government bonds

d) Stocks

d) Stocks

The historical equity risk premium or excess market return for stocks over risk free investments is _____.

a) 1% - 2%

b) 4% - 6%

c) 8% - 10%

d) A negative 3%

b) 4% - 6%

The returns on Real Estate Investment Trusts (REITs) is in the same range of returns as ______.

a) Money markets.

b) Corporate bonds.

c) Government bonds.

d) Stocks.

d) Stocks.

The US stock market is essentially a ___________ market.

a) Large cap

b) Mid cap

c) Small cap

d) Micro cap

a) Large cap

A stock with a beta of 2.0 would be a _______ stock.

a) High risk

b) Low risk

c) Market risk

d) None of the above

a) High risk

Assume a bond with a 4% coupon.

If interest rates move up, then which type of bond would have the greatest sensitivity to the change in interest rates?

a) 30 year bond.

b) 20 year bond.

c) 10 year bond.

d) 5 year bond.

a) 30 year bond.

For long term investments, a 30 year old should have about ___ invested in equity securities.

a) 100%

b) 80%

c) 60%

d) 40%

b) 80%

Which type of mutual fund would maintain a reasonably appropriate allocation of stocks and bonds for your age?

a)Actively managed fund.

b) Balanced fund.

c) Blended fund.

d) Targeted retirement date fund.

d) Targeted retirement date fund.

If interest rates decrease, the price of a bond will:

a) Increase

b) Decrease

c) Remain the same

d) You can't answer the question without knowing the term of the bond.

a) Increase

Which of the following is NOT an attribute of mutual funds?

a) Diversification

b) Professional management

c) Guaranteed returns

d) All of the above

c) Guaranteed returns

True or False?

If an investment advisor is acting as a fiduciary, then he or she is obligated to offer you financial products that are in your best interest.

This means that fiduciaries are NOT likely to offer you "load" funds or mutual funds with high fees since these types of funds provide high commissions to the advisor and are not usually in your best interest.

True

True or False?

Most professional portfolio managers can't beat the returns of index funds over the long term.

True

The best predictor of future mutual fund performance is:

a) Whether it's a load fund

b) The fund's current manager

c) The expense ratio

d) Prior results vs. the benchmark averages

c) The expense ratio