Deck 1: The Financial Planning Process

Question 1

Personal finance is a specialized area of study that focuses

A) exclusively on investments and retirement planning.
B) on financial management, household budgets, and investments.
C) exclusively on investment management and household budgets.
D) on individual and household financial decisions, such as budgeting, saving, spending, tax planning, insurance, and investments.

Answer 1

on individual and household financial decisions, such as budgeting, saving, spending, tax planning, insurance, and investments.

Question 2

Critical to the success of building a comprehensive financial plan is that you approach its creation in a logical order. The steps to success, in the correct order, are as follows:

A) Secure basic needs, build and protect wealth, and establish a firm foundation.
B) Secure basic needs, establish a firm foundation, and build and protect wealth.
C) Build and protect wealth, establish a firm foundation, and secure basic needs.
D) Establish a firm foundation, secure basic needs, and build and protect wealth.

Answer 2

Establish a firm foundation, secure basic needs, and build and protect wealth.

Question 3

The financial planning process includes five steps. Four of the steps are listed next:
.Analyze your current financial status.
.Implement your financial plan.
.Monitor your progress and revise your plan as needed.
.Organize your financial information and set short-term and long-term goals.
What is the missing step?

A) Identify and evaluate alternative strategies for meeting your goals.
B) Understand the personal financial planning process.
C) Acquire the necessary decision-making skills and tools.
D) Build wealth and protection against emergencies.

Answer 3

Identify and evaluate alternative strategies for meeting your goals.

Question 4

An effective financial plan must be adaptable to changing circumstances. Which would not be a reason to take you back to Step 1 of the financial planning process?

A) Changes in economic conditions
B) Birth of a child
C) Purchase of life insurance
D) Marriage

Question 5

Personal financial planning does not include which of the following?

A) Buying insurance
B) Deciding which make and model of car to buy
C) Budgeting
D) Assessing attitude toward risk

Question 6

Which is not a necessary activity in securing your basic needs?

A) Making purchase and credit decisions
B) Managing cash for liquidity and emergencies
C) Selecting financial institutions for checking and savings accounts
D) Investing to achieve long-term goals

Question 7

Which is not a necessary activity in establishing a firm foundation?

A) Protecting income and wealth from losses
B) Acquiring necessary decision-making skills and tools
C) Understanding the personal financial planning process
D) Setting short-term and long-term goals

Question 8

Which is not a necessary activity in building and protecting wealth?

A) Writing a will
B) Investing to achieve long-term goals
C) Buying property and liability insurance
D) Managing cash for liquidity and emergencies

Question 9

As you build your financial plan, you'll need to consider the unique characteristics of your household that may influence spending and saving. Which of these factors is not unique to your household?

A) Life cycle stage
B) Family makeup
C) Inflation and interest rates
D) Values and attitudes

Question 10

If your ____ are larger than your _____, your wealth is negative.

A) expenses; debts
B) debts; assets
C) assets; debts
D) assets; income

Question 11

A person's fundamental beliefs concerning what is important in life are referred to as

A) judgments.
B) values.
C) attitudes.
D) opinions.

Question 12

When the consumer price index (CPI) increases,

A) you can buy goods and services cheaper.
B) the prices of goods and services are more expensive.
C) the value of the dollar is high.
D) you will earn less on your investments.

Question 13

As inflation _______, the spending power of money______.

A) increases; increases
B) decreases; decreases
C) increases; decreases
D) decreases; remains the same

Question 14

Your salary was $32,000 in 2019. It increased to $35,000 in 2020. What was the percentage increase in your salary from 2019 to 2020?

A) 8.57%
B) 9.14%
C) 9.38%
D) 33.5%

Question 15

Your salary was $28,000 in 2018 and $30,000 in 2019. In 2020, your salary was $34,000. What was the percentage increase in your salary from 2018 to 2020?

A) 7.14%
B) 11.76%
C) 14.29%
D) 21.43%

Question 16

Your salary increased from $20,000 to $30,000 in five years. What is the percentage increase?

A) 33%
B) 50%
C) 100%
D) 150%

Question 17

Your salary has increased 50% in 5 years. What is the annual percentage increase?

A) 8.5%
B) 8.7%
C) 10%
D) 11.2%

Question 18

The Federal Reserve often __________ the __________ rate to stimulate the economy.

A) lowers; prime
B) lowers; federal funds
C) raises; federal funds
D) raises; prime

Question 19

Why do interest rates on different types of borrowing, such as federal funds and mortgages, tend to track each other and the inflation rate?

A) They are all long-term maturities.
B) They are all short-term maturities.
C) They are all affected similarly by economic conditions.
D) They all have the same risks.

Question 20

The federal funds rate is the rate that

A) banks charge customers for short-term loans.
B) the Federal Reserve charges banks for short-term loans.
C) banks charge each other for short-term loans.
D) credit card issuers use as the teaser rate.

Question 21

An expansion is a phase in the economic cycle that is characterized by _____ business investment and ______ employment opportunities.

A) decreasing; decreasing
B) increasing; increasing
C) decreasing; increasing
D) increasing; decreasing

Question 22

Which of the following are parts of the economic cycle? (Select any two)

A) Expansion
B) Extension
C) Decline
D) Inflation
E) Recession
F) Unemployment

Question 23

Which of the following is not one of the recommended SMART guidelines for personal financial goals?

A) Realistic
B) Attainable
C) Manageable
D) Specific

Question 24

Rosa graduated at the top of her high school class, and has set the following goal as part of her financial plan: "graduate from college with a B. S. in Business Management." Which aspect of the SMART goal model is missing from her goal?

A) The goal is not specific.
B) The goal is not measurable.
C) The goal is not attainable.
D) The goal is not time-specific.

Question 25

Andre graduated from college this year and obtained a well-paid job with a large accounting firm. Andre has developed the following goal: "save for retirement." This goal meets which criteria of the SMART goal model?

A) Specific
B) Measurable
C) Time-Specific
D) None

Question 26

Your goals will differ depending on your stage in the life cycle and your family makeup. Which is not an appropriate short-term savings goal?

A) Spring break vacation
B) Emergency fund
C) Down payment on a home
D) Life insurance

Question 27

For many households, repayment of high-interest debt is an important financial goal. Using the following table, estimate the payments necessary to pay off $2,500 in credit card debt in two years at 15% APR.

A) $113
B) $121
C) $226
D) $242

Question 28

Financial planners must have a

A) college degree with an emphasis or major in business.
B) college degree and two years of experience in finance.
C) securities license from the state of federal government.
D) willingness to provide financial advice.

Question 29

Which of the following should not be a major factor when choosing a personal financial planner?

A) Affiliation
B) Certification
C) Education
D) Reputation

Question 30

Which of the following has passed a comprehensive examination covering all the topic areas considered necessary in the practice of consumer financial planning and has at least three years of work experience in the field?

A) Accredited Financial Planner (AFC)
B) Certified Public Accountant (CPA)
C) Certified Financial Planner (CFP)
D) Chartered Financial Consultant (ChFC)

Question 31

Integrity of the profession is essential to its long-term success. Which professional is not required to pass a comprehensive exam and adhere to a rigorous code of ethics?

A) Certified Public Accountants (CPAs)
B) Attorneys
C) Certified Financial Planner (CFP®)
D) All these professionals are required.

Question 32

In a __________ arrangement, the planner is compensated for every financial product sold but does not receive any payment for developing a personal financial plan.

A) Fee-only
B) Commission-only
C) fee plus commission
D) fee offset by commission

Question 33

In a fee-only arrangement, the planner is typically compensated with an annual fee that is based on the

A) number of financial products purchased.
B) value of financial products purchased.
C) number of meetings with the client.
D) value of the client's assets being managed.

Question 34

Dolores's purchased 1,000 shares of the S&P 500 index (SPY) at $300 per share, inside her $1.1 million fee-only account this year. The planner's firm charges commissions of $0.27 per share and 1% on fee-based accounts. How much does her planner charge this year?

A) $270
B) $3,000
C) $11,000
D) $11,270

Question 35

Henry pays his financial planner a one percent fee based on the value of the assets in his investment account. He noticed on his year-end statement that the firm rebated a $1,200 credit to his account. His planner said that was because the firm made $1,200 in dealer concessions from an IPO that he purchased. What type of fee arrangement is this?

A) Fee-based
B) Fee-only
C) Fee plus commission
D) Fee offset by commission

Question 36

One of the biggest mistakes people make in their finances is that they are too _____ in their assumptions.

A) specific
B) optimistic
C) pessimistic
D) conservative

Question 37

If you are considering working part-time at a second job in addition to your regular one, you should only consider

A) total costs and benefits of both jobs.
B) total costs and benefits of each job.
C) marginal costs and marginal benefits.
D) marginal costs of each job and total benefits.

Question 38

You are considering adding a wood shop to your home. You enjoy woodworking and could make some items for sale. In considering this addition, you only look at the extra cost of the shop and the potential benefits of having the shop. This is an example of

A) opportunity cost consideration.
B) sensitivity analysis.
C) marginal reasoning.
D) reasonable assumptions.

Question 39

In deciding whether to attend graduate school full-time, estimating your lost earnings while you are in school is an example of

A) marginal reasoning.
B) sensitivity analysis.
C) future value.
D) opportunity cost.

Question 40

Desiree currently works as a manager of an electronics store earning an annual salary of $50,000. She noticed an internal job opening for a regional manager that pays $100,000 salary, but an MBA is required for consideration. The cost for a full-time MBA program in two years is $60,000. What is her opportunity cost for attending graduate school, without consideration for time value of money?

A) $100,000
B) $120,000
C) $160,000
D) $220,000

Question 41

Which type of decision maker is spontaneous and often makes "gut" decisions?

A) Rational decision maker
B) External decision maker
C) Internal decision maker
D) Intuitive decision maker

Question 42

Holly is uncomfortable with change. She spends a lot of time thinking over alternatives, even for relatively inconsequential decisions. She is a typical

A) agonizer.
B) antagonizer.
C) intuitive decision maker.
D) analytical decision maker.

Question 43

You are calculating your potential return on your stock investments. If you calculate different possible returns based on assuming a variety of interest rates and stock market conditions, this is an example of

A) reasonable assumptions.
B) sensitivity analysis.
C) marginal analysis.
D) opportunity cost.

Question 44

You have estimated that, if your investments earn 10 percent per year, you can retire at age 65. If you reestimate your retirement date assuming a lower investment return, you are using

A) average reasoning.
B) sensitivity analysis.
C) marginal reasoning.
D) opportunity cost.

Question 45

If you must seek advice from a number of people before making a decision, you would be considered a (an)

A) rational decision maker.
B) intuitive decision maker.
C) external decision maker.
D) internal decision maker.

Question 46

Which of the following is a possible negative consequence for overly rational decision makers?

A) Reduced investment returns
B) Difficulty staying on a budget
C) Too much debt
D) Avoiding professional help

Question 47

Which type of decision maker is most likely to have trouble sticking to a budget and, as a result, may fall into debt?

A) Rational decision maker
B) External decision maker
C) Intuitive decision maker
D) Internal decision maker