UCF FIN3105 Midterm 2 Exam

Slippery roads after a rainstorm are an example of a:

Physical Hazard.

Morale Peril.

Physical Peril.

Morale Hazard.

Physical Hazard.

Which of the following statements is/are correct?

Loss frequency refers to the potential size or financial damage of a loss.

Loss severity is the expected number of losses that will occur within a given period of time.

2 only.

Neither 1 nor 2.

1 only.

Both 1 and 2.

Neither 1 nor 2.

Alanis, who is married and the mother of three, is 25 years old and expects to work until age 70. She earns $45,000 per year. Alanis expects inflation to be 3% over her working life, and the appropriate risk-free discount rate is 5%. Her personal consumption is equal to 25% of her after-tax earnings, and her combined federal and state marginal tax bracket is 15%. What is the amount of life insurance necessary for Alanis using the Human Life Value method?

$743,672.85.

$900,000.00.

$855,597.84.

$509,893.63.

$855,597.84.

Which of the following is NOT true of insurable risks?

A large number of similar exposures must exist.

Risks can be insured even if they are not measurable or determinable.

Insured loses must be accidental.

The loss must not pose a catastrophic risk for the insurer.

Risks can be insured even if they are not measurable or determinable.

Which of the following statements is/are correct?

Term life insurance is considered "pure insurance."

Term life insurance premiums are significantly more expensive than premiums for permanent policies.

Both 1 and 2.

2 only.

Neither 1 nor 2.

1 only.

1 only.

Which of the following is not a valid method for determining life insurance needs?

The Capitalization of Earnings Method.

The Dependency Method.

The Human Life Value Method.

The Financial Needs Method.

The Dependency Method.

In a disability policy, the time between the disability event and the point at which benefits, under the contract, begin is known as the:

Wait Room Period.

Discount Period.

Disabled Period.

Elimination Period.

Elimination Period.

Which part of the personal automobile policy (PAP) addresses uninsured or underinsured motorists?

Part A.

Part D.

Part C.

Part B.

Part C.

Which of the following measures is appropriate for a risk that has a low frequency of occurrence and a high severity?

Transfer/Share risk.

Reduce risk.

Retain risk.

Avoid risk.

Transfer/Share risk.

Insurance, as a contract, is adhesive, meaning:

The coverage is conditioned upon the payment of premiums.

Only the insurer is making a promise.

What is paid by the insured and paid out by the insurer may not be equal amounts.

The insured had no opportunities to negotiate terms.

The insured had no opportunities to negotiate terms.

Which of the following would be the lowest premium cost health insurance plan?

POS

HMO

PPO

HDHP

HDHP

Assume the following for a family of four.

Insured's salary = $100,000

Taxes paid = $25,000

Insured's share of after tax income = 30%

Investment return = 9%

Inflation = 3%

Working life expectancy = 30

What is the recommended amount of life insurance using the human life value?

$834,928

$788,968

$764,417

$400,673

$788,968

Life insurance paid to a beneficiary is partially taxable.

True

False

False

Which is the following options is generally the best for a beneficiary receiving life insurance proceeds?

None of the above

Leave the proceeds with the insurance company and receive interest

Select a lump sum payout

Select an annuity

Select a lump sum payout

Which type of health insurance plan allows the use of a Health Saving Plan (HSA)?

HMO

PPO

POS

HDHP

HDHP

How much will Medicare pay for nursing home costs?

Up to 100 days

Up to 50 days

Medicare covers all nursing home costs

Up to 365 days

Up to 100 days

Penelope pays qualified education expenses of $2,800 for her son, Morgan. How much of an American Opportunity Tax Credit (AOTC) is Penelope entitled to this year?

$2,200.

$2,250.

$2,500.

$2,800.

$2,200.

Which of the following is a qualified education expense for the purpose of tax-free scholarships?

Room and board.

Textbooks.

Transportation expenses.

Equipment not required for attendance.

Textbooks.

Ray and Debra would like to begin saving for their children's college education. They have four kids, ages 1, 5, 11, and 14. Each child will begin college at 18 and attend a private university for four years. Tuition is currently $22,000 per year and is increasing at 4% per year. They can earn an after-tax rate of return of 9%. How much must they save at the end of each year if they would like to make the last payment at the beginning of their youngest child's last year of college?

$16,479.

$19,271.

$22,868.

$24,434.

$22,868.

Which of the following is/are true regarding 529 Savings Plans?

Qualified distributions from a 529 plan can be used to pay for a computer.

There are no income limitations (phase-outs) on who can contribute to a 529 Savings Plan.

A federal income tax deduction is not permitted for contributions to a 529 Savings Plan.

All of the above.

All of the above.

Sheldon has an undergraduate degree and has decided to go back to school to pursue a graduate degree. He has incurred $6,500 in qualified expenses this year. What is the maximum Lifetime Learning Credit Sheldon can take this year?

$1,200.

$1,300.

$1,800.

$2,000.

$1,300.

Frank and Miranda would like to plan for their son's college education. They would like their son, who was born today, to attend a private university for 4 years beginning at age 18. Tuition is currently $70,000 per year and has increased at an annual rate of 6%, while inflation has only increased at 3% per year. They can earn an after-tax rate of return of 8%. How much must they save at the end of each year if they would like to make the last payment at the beginning of their son's first year of college?

$12,846.

$19,385.

$20,371.

$20,755.

$20,755.

Which of the following statements, if any, are correct?

1. Financial need is determined by the formula: cost of attendance minus scholarships and grants.

2. The process for receiving financial aid begins with filing the FAFSA.

1 only.

2 only.

Both 1 and 2.

Both 1 and 2.

2 only.

Which of the following is not a repayment method for a Stafford Loan?

Extended Repayment.

Graduated Repayment.

Success Repayment.

Income Based Repayment.

Success Repayment.

Which of the following statements, if any, are correct?

1. Grants are money provided to students that does not require repayment.

2. A Federal Pell Grant is need-based financial aid specifically for students who have already received an undergraduate degree and are pursuing a graduate degree.

1 only.

2 only.

Both 1 and 2.

Neither 1 nor 2.

1 only.

Which of the following is/are true regarding PLUS Loans?

PLUS Loans are based on the parent's credit history.

The dependent must be a full-time student.

The maximum PLUS Loan is $5,500 for first year students.

All of the above.

PLUS Loans are based on the parent's credit history.

What is Doug's weighted average expected return for the following portfolio?

Security Fair Market Value Expected Return

A $25,000 12%

B $5,000 3%

C $10,000 4%

D $10,000 7%

6.5%.

8.5%.

10.5%.

12%.

8.5%.

Which of the following is true of holding period return?

1. Holding Period Return is an annual return commonly used to evaluate investment performance.

2. Primarily useful when the holding period is one year.

1 only.

2 only.

Both 1 and 2.

Neither 1 nor 2.

2 only.

Given the annual returns below, which investment is the riskiest (using standard deviation as the risk measure)?

Investment A Investment B Investment C Investment D

Year 1 4% 8% 9% -6%

Year 2 -3% -7% -10% -9%

Year 3 8% 13% 23% 11%

Investment A

Investment B

Investment C

Investment D

Investment C

Which of the following is true of geometric return?

1. The geometric return is equal to the Internal Rate of Return (IRR).

2. The geometric return will generally be less than or equal to the arithmetic return.

1 only.

2 only.

Both 1 and 2.

Neither 1 nor 2.

Both 1 and 2.

Trey purchased a stock that has a beta of 0.8, a standard deviation of 10%, and returned 13% this year. The market's return was 8% with a standard deviation of 11%. If the risk-free rate is 3%, what is the alpha of Trey's stock?

-0.4.

0.06.

0.125.

0.45.

0.06.

All of the following statements regarding investment risk are true EXCEPT:

Systematic risk represents the risk that is inherent in the system and cannot be eliminated through diversification.

Reinvestment rate risk is the risk that inflation will cause prices to increase, and a dollar today will not be able to purchase the same amount of goods and services as a dollar tomorrow.

Country risk is the risk of political and economic stability or instability for a country that a company faces when doing business in that particular country.

Market risk is the risk that, in the short term, the daily fluctuations of the market tend to bring all securities in the same direction.

Reinvestment rate risk is the risk that inflation will cause prices to increase, and a dollar today will not be able to purchase the same amount of goods and services as a dollar tomorrow.

Which index should Reid use as a benchmark when evaluating the performance of his mutual fund?

Index 2 Index 3 Index 4 Index 5 Beta 0.56 0.96 1.56 0.75 r-squared 0.65 0.83 0.74 0.98

Index 1.

Index 2.

Index 3.

Index 4.

Index 4.

The ideal correlation for portfolio construction is:

+0.25.

+1.0.

0.0.

-1.0.

-1.0.

Which of the following statements is/are correct?

1. A dollar-weighted return is the IRR based on the investor's actual cash flows.

2. The time-weighted return is the IRR based on the security's cash flow.

1 only.

2 only.

Both 1 and 2.

Neither 1 nor 2.

Both 1 and 2.

Jasmine purchases a stock at $40, receives a $3.00 dividend, and later sells the stock for $44. What is her holding period return for this investment?

7.5%.

10.0%.

15.4%.

17.5%.

17.5%.

Jordan is 55 and wants to retire in 12 years. His family has a history of living well into their 90s. Therefore, he estimates that he will live to age 97. He currently has a salary of $100,000 and expects that he will need about 82% of that amount annually if he were retired. He can earn 9 percent in his portfolio and expects inflation to be 3 percent. Jordan currently has $325,000 invested for his retirement. His Social Security retirement benefit in today's dollars is $30,000 per year at normal age retirement of age 67. How much does he need to save each year at year end to meet his retirement goals?

$6,245.

$7,659.

$8,432.

$9,252.

$9,252.

Luna, a self-employed accountant, currently earns $100,000 annually. Luna has been able to save 18% of her annual Schedule C net income. Assume that Luna paid $11,000 in Social Security taxes, and that she plans to pay off her mortgage at retirement, thereby relieving her of her only debt. Luna presently pays $1,500 per month toward the mortgage principal and interest. Based on the information provided herein, what do you expect Luna's wage replacement ratio to be at retirement?

49%.

53%.

59%.

63%.

53%.

Allison, age 40, earns $95,000 annually; her wage replacement ratio has been determined to be 70%. She expects inflation will average 3% over her entire life expectancy. She expects to work until 67 and live until 95. She anticipates a 7.5% return on her investments. Allison does not expect to receive any Social Security retirement benefits.

Calculate Allison's annual retirement needs in today's dollars.

$29,000.

$55,000.

$66,500.

$95,000.

$66,500.

Allison, age 40, earns $95,000 annually; her wage replacement ratio has been determined to be 70%. She expects inflation will average 3% over her entire life expectancy. She expects to work until 67 and live until 95. She anticipates a 7.5% return on her investments. Allison does not expect to receive any Social Security retirement benefits.

What is the amount of Allison's first retirement distribution at age 67?

$110,825.08.

$143,576.36.

$147,715.72.

$210,981.86.

$147,715.72.

Which of the following expenditures will most likely decrease during retirement?

Home maintenance.

Health care costs.

Vacation and travel costs.

Retirement savings.

Retirement savings.

Chen is 30 years old and spends $75 per week on groceries. If inflation averages 3% per year, how much will Chen spend on the same groceries when he is 65?

$77.

$103.

$211.

$245.

$211.

Allison, age 40, earns $95,000 annually; her wage replacement ratio has been determined to be 70%. She expects inflation will average 3% over her entire life expectancy. She expects to work until 67 and live until 95. She anticipates a 7.5% return on her investments. Allison does not expect to receive any Social Security retirement benefits.

Calculate Allison's capital needed at retirement age 67.

$1,709,569.80.

$1,837,787.53.

$2,359,975.87.

$2,463,081.61.

$2,463,081.61.

The period of time a person is expected to be in the work force is referred to as:

Retirement life expectancy.

Work life expectancy.

Adult years.

None of the above.

Work life expectancy.

Which of the following statements regarding retirement planning is correct?

A client's lifetime is made up of pre-work life expectancy, work life expectancy, and retirement life expectancy.

As a general rule, an individual beginning to save for retirement at age 30 should expect to save at least 10-13% of gross pay to meet his/her normal retirement goals.

As retirement life expectancy (RLE) increases, so do the retirement needs.

All of the above are correct.

All of the above are correct.

Which of the following statements regarding retirement analysis is correct?

Performing a Monte Carlo Analysis will eliminate the risks associated with retirement planning.

Small inaccuracies in the earnings rate or inflation rate will not have much impact over a long period of time.

Sensitivity analysis consists of rotating each variable assumption toward the undesirable side of the risk to determine the negative impact a small change will have on the overall plan.

A Monte Carlo Analysis calculates three scenarios: a best case, an expected case, and a worst case basis.

Sensitivity analysis consists of rotating each variable assumption toward the undesirable side of the risk to determine the negative impact a small change will have on the overall plan.