Personal Financial Planning 13th Edition by Lawrence J. Gitman – Test Bank

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Personal Financial Planning 13th Edition by Lawrence J. Gitman – Test Bank

Chapter 6—Using Credit

 

TRUE/FALSE

 

  1. Using credit is the ideal way to provide for financial emergencies.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. Saving is the preferred way to provide for financial emergencies.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. Paying only the minimum payment each time on a credit card usually enables one to pay off the balance fairly quickly.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. One can be overusing credit even though he can afford to make minimum monthly payments on time.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Credit should not consistently be used for non-durable goods.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Credit cards with very low minimum balance requirements are in the consumer’s best interest.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. One should not use credit to purchase food, clothing, and other non-durables, even if it is only for convenience and the balance will be totally paid upon billing.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. Never adding up all one’s bills is one of the signs that one may be headed for serious credit problems.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. Using more than 20 percent of one’s take-home income to pay off consumer debt is one of the signs that one may be headed for serious credit problems.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Having a checking account tells a creditor that you have some experience in managing your own funds.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Always paying cash is helpful in establishing a high level of creditworthiness.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. Having arranged and fully repaid a small loan should help improve creditworthiness.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. The purpose of a credit report is to evaluate the kind of risk you pose to the lender.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Credit report is routinely used to predict credit worthiness.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Paying a loan off much quicker than scheduled is one way to build a good credit rating.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. A debt safety ratio of 25% might be a signal of financial trouble ahead.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. A debt safety ratio of 5% would generally be a signal of financial trouble ahead.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. It is safe, and often required, to give your Social Security number as a form of identification when using a credit card.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. The most common forms of open account credit are bank credit cards and retail charge cards.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. The most common forms of open account credit are travel and entertainment cards.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Auto loans are an example of open-end credit since you can add to the debt when you purchase another vehicle.

 

ANS:  F                    PTS:   1                    DIF:    East                OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. A credit limit refers to the maximum amount the cardholder can owe the issuer at any point in time.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. The key to credit worthiness is to keep your debt safety ratio as high as possible.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Individuals with better credit ratings usually can secure higher credit limits.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Credit reports on individual borrowers are issued by credit unions reporting agencies.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Credit reports on individual borrowers are issued by credit card issuers.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Being late on credit payments only 2-3 times per year pay label you a “late payer” in your credit file.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. The required monthly payment on an open account will be the smaller of a minimum dollar amount or a specified percentage of the balance.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. Bank credit cards represent the most common kind of open account credit.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Bank credit card cash advances will begin accruing interest charges immediately.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Bank credit card purchases always begin accruing interest charges immediately.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Advantages of balance transfers can include lower interest rates and the convenience of consolidation.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. Balance transfers can be expensive, including fees and eventually high interest rates.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. Bank credit cards often offer features such as buyer protection plans for a fee to all customers.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Rebate credit cards work best for those who use the rebates, charge a lot, and do not carry high monthly balances.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. Generally speaking, the interest rates on credit cards are lower than any other form of credit.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. A revolving charge account requires the customers to pay off the debt 10 to 20 days after the billing date with no interest expense.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Thirty-day or regular charge accounts require the customers to pay off the debt 10 to 20 days after the billing date with no interest expense.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Interest rates on credit cards tend to be lower than most other forms of consumer credit.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Most organizations that issue credit cards have basically the same qualifications for card applicants.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Credit cards often have penalties for late payment and for exceeding credit limits.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Open account credit is a form of credit extended to a consumer in advance of any transaction.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. The most common method used by lenders to apply finance charges to credit cards is the average daily balance including new purchases method.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Nearly all credit cards have annual fees.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Credit card users can often avoid finance charges entirely by paying their total balances by the stated due date.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. The grace period on a credit card starts on the billing date and ends on the date the lender should receive the payment.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. Secured credit cards require that the card holder puts up collateral in order to get the card.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Student credit cards are structured much differently than regular credit cards.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Debit cards are a form of credit that is very convenient to use.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Debit cards look like credit cards, but they work like checks.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO:6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Prepaid cards are a form of credit that is very convenient to use and do not charge a service fee.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. Prepaid cards are used to pay for things, with the purchase amount electronically deducted from the card.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. Revolving credit lines are often accessed by writing checks.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. An overdraft protection line of credit allows one to routinely bounce checks with little or no adverse consequences.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. Unsecured lines of credit provide tax advantages if you itemize deductions.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. Unsecured lines of credit are easy to use and often use some form of collateral as default protection.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. The proceeds of a home equity loan can be used for just about any purpose, and the interest paid is usually tax deductible.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. One can lose his home if he does not repay his home equity line of credit.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. Home equity loans are one of the least expensive forms of consumer credit.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. For someone with a good credit rating, lenders will typically lend up to 100% of equity in a home using a home equity credit line.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. A credit applicant will be granted credit only after establishing a complete file at the local credit bureau.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. For a fee, credit bureaus can provide credit scores for prospective borrowers.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Credit bureaus provide information about prospective borrowers.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. One can and should check his credit bureau file regularly.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Application

 

  1. Credit bureau files often include information such as political and religious affiliations in addition to financial information.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Credit scoring systems are often used by lenders to determine your creditworthiness.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Chapter 7 bankruptcies remain in your credit file for 7 years.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Your credit limit is determined by a number of factors, such as financial position, earning power, etc.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. A credit card user’s credit rating will be harmed if she pays only the minimum monthly payment on a credit card.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. The more credit cards one has, the better one’s credit score.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. Generally, finance charges are computed only on the unpaid balance from previous months’ purchases.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. The most common method of computing finance charges on a credit card is the average daily balance method including new purchases.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. The amount of finance charges one pays on a credit card depends only on APR and the amount one charges.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. A woman’s income can legally be discounted when she applies for credit.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. The intent of a Wage Earner Plan is to eliminate most of the debtor’s obligations.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. A Chapter 13 bankruptcy filing would result in the discharge of most of your debts.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. Families who have a source of income and who want to retain their assets above the protected amount would select Chapter 13 rather than Chapter 7 bankruptcy.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. The majority of persons filing bankruptcy file Chapter 7 bankruptcy.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. The Wage Earner Planner requires debtors to give up most of their assets.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. Before filing for bankruptcy, debtors should consider seeking the help of a credit counselor.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Identity theft is a growing problem that could damage your credit rating.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. It is recommended that you never give your credit card account number out over the phone.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. If you initiated the telephone call, it is okay to give your credit card account number when ordering/purchasing from major catalog houses, airlines, hotels, and so on.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. Auto loans and mortgage loans are about equal in terms of their relative share of average household liabilities.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Knowledge

 

  1. The majority of reduction in consumer indebtedness is due to home and consumer loan defaults.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Knowledge

 

The decline in housing prices made it harder for households to refinance their mortgages.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Analysis

 

Discount store and online sales have dropped in the aftermath of the recession.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Knowledge

 

  1. After the Credit Card Act of 2009 was passed, late payments dropped but defaults increased.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Knowledge

 

MULTIPLE CHOICE

 

  1. Appropriate reasons to use credit include for
a. convenience.
b. durable expenses.
c. investments.
d. emergencies.
e. all of the above

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. It is not a good idea to use credit for
a. convenience.
b. durable expenses.
c. consumable items.
d. investments.
e. improving one’s credit rating.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. It is not a good idea to use credit to
a. buy a home.
b. live beyond one’s means.
c. spread payments within a budget.
d. purchase expensive items.
e. replace a check for small items.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. ____ would be a proper use of credit.
a. Purchase of a house
b. A financial emergency
c. Shopping convenience
d. Investing
e. All of these

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. ____ is a benefit of borrowing.
a. The ability to buy expensive goods while spreading the payments over time
b. Providing payments that fit into a budget
c. Having a permanent record of transactions
d. Being able to purchase goods and services when checks are not acceptable
e. All of these are benefits.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. To establish creditworthiness you probably should first
a. open savings and checking accounts.
b. use credit extensively.
c. arrange a small loan.
d. pay cash for all purchases.
e. arrange a large loan from close relatives.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. ____ would be an indication of overspending.
a. Your checks are bouncing.
b. Collection agencies are calling you frequently .
c. All your credit cards are charged up to their limits.
d. You have no cash reserves and must borrow for incidentals.
e. All of the above.

 

 

ANS:  E                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. All of the following are useful ways to build a strong credit rating except
a. Open checking and savings accounts.
b. Open and use a charge account.
c. Apply for a long-term loan and occasionally be late with a payment.
d. Make payments on time.
e. Talk with the lender if you foresee difficulty in making a payment.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. As a percent of take-home pay, monthly consumer credit payments should not exceed
a. 25%.
b. 20%.
c. 15%.
d. 10%.
e. 5%.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. If your monthly before-tax income is $2,000 and your monthly take-home pay is $1,500, your maximum monthly consumer credit payments should not exceed
a. $600.
b. $450.
c. $400.
d. $300.
e. $200.

 

 

ANS:  D                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. Clare’s gross salary is $36,000 annually and her after-tax income is $28,800. What is Clare’s maximum recommended monthly consumer credit payment?
a. $600.
b. $480.
c. $450.
d. $360.
e. $200.

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. Open account credit is characterized by
a. no credit limit.
b. a monthly credit statement.
c. annual billing.
d. minimum balance requirements.
e. none of the above.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. With open account credit, one can often avoid interest charges if
a. the account balance is paid in full every month.
b. at least half the account balance is paid every month.
c. the minimum payment is made every month.
d. the account is a revolving credit account.
e. the balance is below the credit limit.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. Mike has a MasterCard with an annual fee of $25, 18% interest, and a $1,000 credit limit. He always pays the total outstanding balance monthly. His most recent monthly statement lists last month’s payment, new charges this month totaling $1,500, and a $30 fee. That fee is most likely the result of
a. interest charges.
b. his annual fee.
c. an over-the-limit fee.
d. a late payment.
e. transaction fees on purchases.

 

 

ANS:  C                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Synthesis

 

  1. ____ are not a type of open account credit.
a. Retail charge cards
b. 30-day charge accounts
c. Travel and entertainment cards
d. Bank credit cards
e. Bank debit cards

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Interest will almost always begin to accrue immediately when you use a bank credit card to
a. make purchases.
b. send payments.
c. compute finance charges.
d. get cash advances.
e. all of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. William uses his bank credit card frequently; however, he always pays off the total balance on the card each month. What should William look for in a credit card given the way he uses a credit card?
a. Low annual fee and short grace period
b. Low annual fee and low interest rate
c. No annual fee and short grace period
d. No annual fee and long grace period
e. High annual fee and low interest rate

 

 

ANS:  D                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-5

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. Ann Marie accumulated a large balance on her credit card while in college. She is trying to get it paid off as quickly as possible and wants to roll the balance onto a new credit card. She now uses a credit card only for emergencies. What should Ann Marie look for in a credit card given the large balance and the way she plans to use the card?
a. low annual fee
b. low APR
c. long grace period
d. average daily balance method excluding purchases
e. two-cycle average daily balance method

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-5

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. When comparing credit cards, a person who pays his total outstanding balance off monthly would want a card with
a. a low required minimum payment percentage.
b. a low interest rate.
c. an adequate grace period.
d. no annual fee
e. c and d

 

 

ANS:  E                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-5

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. Rebate card work best for those who use the rebates and
a. charge large amounts on the card.
b. pay the total card balance off monthly.
c. carry high monthly balances.
d. travel internationally
e. a and b

 

 

ANS:  E                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-5

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. Interest rates on ____ are typically lower than on any other form of consumer credit.
a. travel and entertainment cards
b. debit cards
c. credit cards
d. home equity loans
e. unsecured personal credit

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. As well as being among the cheapest forms of consumer credit, these offer shelters from taxes:
a. Automobile loans
b. Home Equity loans
c. Credit cards
d. Unsecured personal credit

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. ____ cards offer the cardholder a way to contribute to a worthy cause, sometimes described as “painless philanthropy.”
a. Travel and entertainment
b. Debit
c. Credit
d. Affinity
e. Rebate

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Persons with very poor credit ratings can still get ____ credit cards.
a. secured
b. student
c. prestige
d. affinity
e. rebate

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. Student credit cards typically require that one be enrolled in a 2- or 4-year college/university and
a. a parent’s signature.
b. own a vehicle.
c. hold a job.
d. have some form of income.
e. take at least nine hours.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. ____ does not represent a line of credit.
a. Retail credit card
b. Debit card
c. Overdraft protection
d. Home equity LOC
e. Unsecured personal credit

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Theresa is a bit of a spendthrift. She has trouble saying no when it comes to buying things. Which of the following cards would keep her out of debt?
a. debit
b. credit
c. affinity
d. rebate
e. prestige

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. Cards that can be used to pay for selected items and the amount of the transaction is automatically subtracted from the card value are called ____ cards.
a. debit
b. credit
c. affinity
d. prepaid
e. prestige

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. The ____ is really a second mortgage on your home.
a. affinity card
b. unsecured personal credit line
c. home equity line of credit
d. preferred Visa card
e. platinum American Express card

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Sheldon has a home valued at $108,000 and an outstanding mortgage of $70,000. If his lender is willing to provide a home equity loan of up to 80% of market value, how much could Sheldon borrow using a home equity loan?
a. $86,400
b. $80,000
c. $38,000
d. $30,400
e. $16,400

 

 

ANS:  E                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. Russ and Lois have a home valued at $96,000 and an outstanding mortgage of $60,000. If their lender is willing to provide a home equity loan of up to 75% of market value, how much could they borrow using a home equity loan?
a. $         0
b. $12,000
c. $27,000
d. $28,000
e. $36,000

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. A problem with home equity loans is the
a. high rate of interest on these loans.
b. difficulty in qualifying for these loans.
c. short-term nature of these loans.
d. temptation to spread payments over a long term.
e. tax disadvantages of these loans.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. The lender uses a credit application to determine whether the borrower has the ____ to handle the debt.
a. character and confidence.
b. confidence and capacity.
c. acumen and capacity.
d. character and capacity.
e. credit and character.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Application

 

  1. The quality of your credit rating is maintained by
a. only using cash to make purchases.
b. making credit payments early.
c. seldom questioning billing errors.
d. using multiple credit cards.
e. meeting credit obligations as contracts require.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Application

 

  1. A ____ is an agency that provides credit information about individual borrowers to lenders.
a. credit bureau
b. consumer bureau
c. credit statement
d. bank
e. credit scoring house

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. If the information on your credit report is in dispute, you are entitled to
a. correct it.
b. sue.
c. erase it.
d. supply your own explanation about the dispute.
e. withdraw from the credit bureau.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Application

 

  1. Borderline credit risks would most likely receive
a. delayed reconsideration for credit application.
b. a limited line of credit.
c. a negative credit rating.
d. credit only as applied for.
e. credit only in emergency situations.

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. Which of the following are true regarding credit scoring systems?
a. Lower scores are better than higher scores.
b. Scoring systems are based on statistical studies.
c. Credit unions calculate and sell credit scores to lenders.
d. Females receive higher score than males.
e. All of the above.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Application

 

  1. The following information provides insight to a lender about the applicant’s credit worthiness except:
a. personal/family matters
b. housing
c. employment
d. income
e. all of the above provide insight

 

 

ANS:  E                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Synthesis

 

  1. All of the following are key items lenders look at in granting credit except
a. income.
b. outstanding debt.
c. stability in employment and housing.
d. religious affiliations.
e. credit history.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Finance charges on two credit cards with the same stated APR
a. will always be the same.
b. by federal law must be calculated the same way.
c. will be determined by the type of credit card used.
d. will be determined by the method used to calculate balances.
e. none of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Analysis

 

  1. For a person who sometimes pays his entire credit balance and sometimes pays the minimum payment, which calculation method would be the least expensive?
a. average daily balance including new purchases
b. average daily balance excluding new purchases
c. two-cycle average daily balance including new purchases
d. two-cycle average daily balance excluding new purchases
e. both b and d would produce the same, low finance charge

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. A credit card can provide an interest-free loan if you
a. pay for purchases within six months.
b. pay the minimum payment.
c. pay the entire balance on or before the due date.
d. pay the previous balance by the due date.
e. receive a cash advance.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Comprehension

 

  1. A monthly credit card statement need not include information about the
a. size of the payment.
b. payment due date.
c. type of the goods purchased.
d. annual percentage rate.
e. finance charge if any.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Application

 

  1. Anna uses her credit card regularly, but she pays the total balance monthly. Anna should look for a credit account with
a. no annual fee.
b. low interest rates.
c. long grace period.
d. a and b.
e. a and c.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-5

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. Joe and Jane have a tendency to build up large balances on their credit cards. Which of the following would be least important for them?
a. no annual fee.
b. low interest rates on balances.
c. long grace period.
d. method of calculating balances.
e. a and b.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-5

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Evaluation

 

  1. When canceling a credit card, you should cut up the card and ____ that you are canceling your account.
a. inform the issuer in writing
b. call the issuer and tell them
c. inform the credit bureau in writing
d. call the credit bureau and tell them
e. all of the above

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. When paying for something with a check, don’t give your ____ number.
a. Social Security
b. credit card
c. drivers license
d. a and b
e. a, b, and c

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Which of the following household appliances could help you protect yourself against identity theft?
a. VCR
b. cell phone
c. shredder
d. home computer
e. telephone answering machine

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Personal insolvency can be legally satisfied by
a. Chapter 13 bankruptcy.
b. relinquishing all credit cards.
c. Chapter 7 bankruptcy.
d. b and c above.
e. a and c above.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Chapter 7 bankruptcy will
a. eliminate all financial obligations.
b. result in the loss of all one’s assets.
c. stay on one’s credit record up to 10 years.
d. a and c
e. a, b, and c

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Chapter 7 bankruptcy will typically
a. eliminate most debt obligations.
b. require monthly payments to a bankruptcy trustee.
c. stay on one’s credit record up to 10 years.
d. a and c
e. a, b, and c

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. A type of bankruptcy that allows one to wipe out his unsecured debt and restructure his secured debt is called
a. the wage earner plan.
b. Chapter 11 bankruptcy.
c. Chapter 20 bankruptcy.
d. Chapter 7 bankruptcy.
e. Chapter 13 bankruptcy.

 

 

ANS:  C                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Synthesis

 

  1. Credit bureaus
a. will send you a free copy of your credit report whenever you ask.
b. may charge up to $20 for a copy of your credit report.
c. are required to correct errors only when a creditor asks them to.
d. All of these
e. None of these

 

 

ANS:  E                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. The following are methods used to obtain personal information for identity theft except:
a. lost or stolen wallet/credit card
b. family, friends, acquaintances
c. corrupt employees
d. stolen mail
e. all the above are methods used

 

 

ANS:  E                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: Capital Budgeting and Cost of Capital

KEY:  Bloom’s: Knowledge

 

  1. Indebtedness relative to household income decreased due to all but
a. home sales d. consumer loan defaults
b. home foreclosures e. surge in home mortgage refinancing
c. fewer consumer loans  

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Analysis

 

  1. Most of the reduction in household indebtedness is due to
a. fewer new loans d. loan  workout agreements
b. loan defaults e. c and d
c. accelerated payment schedules  

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Knowledge

 

  1. The “deleveraging” by consumers resulted, in part, from all but
a. reduced use of installment credit d. looser credit conditions
b. reduced use of revolving credit e. voluntary credit restraint
c. reduced supply of credit  

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Knowledge

 

In the year after the Credit Card Act of 2009 went into effect

a. credit card balances rose d. there was a drop in the use of debit cards relative to credit cards
b. late payments increased e. a, b, and c are correct.
c. payment defaults declined  

 

 

ANS:  C                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-1

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Knowledge

 

COMPLETION

 

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.

 

  1. Using [credit | savings] to handle financial emergencies is the recommended choice.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 6-1          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Comprehension

 

  1. An improper use of extended credit would be to buy a [car | vacation].

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-1          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Comprehension

 

  1. A proper use of open account credit would be to buy a [food | washing machine].

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-1          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Comprehension

 

  1. The first step to take in establishing a credit history is to [get a credit card | open checking and savings accounts].

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. Most creditors [will | will not] be willing to work something out with you if you are having difficulty meeting your payments.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. You are likely to have financial difficulty if your personal credit obligations exceed [15% | 20%] of your take home pay.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 6-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. Nancy’s take-home income is $3,000 per month, and she currently has $700 monthly consumer debt. According to the general rules of thumb, Nancy [is | is not] in a position to take on additional consumer debt.

 

ANS:  b

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Evaluation

 

  1. An example of open account credit would be a bank [debit | credit] card.

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. Most bank credit cards have interest rates that will [remain the same as long as you hold the card | be adjusted as interest rates in general rise and fall].

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. A major difference between bank credit cards and travel and entertainment credit cards is [the travel and entertainment | the bank] cards expect balances to be paid in full each month.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 6-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. Rebate cards are most useful for consumers who charge a lot and [maintain | do not maintain] large balances of their cards.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 6-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Analysis

 

  1. Student credit cards usually [do | do not] require parental or guardian guarantees.

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Comprehension

 

  1. One condition of a secured credit card is that the holder must [pay a higher rate of interest | deposit an amount equal to the credit line in a savings account].

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 6-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. Interest paid on a [home equity line of credit | credit card] would be deductible if you itemize your deductions on your federal tax return.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. A person who pays his credit balance off every month should look for a credit card with a [long | short] grace period.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 6-5          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Analysis

 

  1. A person who pays her credit balance off every month should look for a credit card with [a low interest rate | no annual fee].

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 6-5          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Analysis

 

  1. The decision whether or not to grant you credit will be made by [individual creditors | the credit bureau].

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. A home equity lines of credit is one of the [most | least] expensive forms of consumer credit.

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. Your chances of being approved for a loan [increase | decrease] the higher your credit score.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. [The Wage Earner Plan | Straight Bankruptcy] involves some type of debt restructuring.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 6-6          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. Most of your debts would be totally discharged under Chapter [7 | 13] of the federal bankruptcy law.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 6-6          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. The most expensive method of determining finance charges on revolving credit would be [two cycle ADB w/purchases | ADB excluding purchases].

 

ANS:  a

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Evaluation

 

  1. A credit scoring system might assign points according to your annual income and [gender | age].

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 6-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. The “preferred” way of stealing from consumers now is [through your credit card | stealing your car].

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-6          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. The first step to take if you are having credit difficulties would be to [talk to creditors | consult a credit counselor].

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 6-6          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Knowledge

 

  1. In terms of overall household liabilities, [auto | home] loans comprise the largest share.

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-1          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Knowledge

 

  1. The majority of reduction in consumer indebtedness is due to [loan defaults | loan repayments]

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 6-1          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Knowledge

 

The decline in housing prices made it [harder | easier] for households to refinance their mortgages.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-1          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Knowledge

 

Discount store and online sales have [decreased | increased] as consumers look for more bargains.

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 6-1          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Knowledge

 

  1. In the year after the Credit Card Act of 2009 was passed, there was a(n) [increase | decrease] in the use of debit cards relative to credit cards.

 

ANS:  a

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-1          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Knowledge

 

  1. In the year after the Credit Card Act of 2009 was passed, there was a(n) [increase | decrease] in defaults.

 

ANS:  b

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-1          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Knowledge

 

  1. In the year after the Credit Card Act of 2009 was passed, there was a(n) [increase | decrease] in late payments.

 

ANS:  b

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-1          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Knowledge

 

PROBLEM

 

  1. Lindsey has a job with monthly take-home pay of $3,500. Using the suggested maximum debt safety ratio, what maximum debt burden per month can she assume? (Show all work.)

 

ANS:

The maximum debt safety ratio is 20 percent. Therefore, Lindsey’s maximum debt burden is 0.20 ´ $3,500 = $700 per month

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Evaluation

 

  1. Ted and Karen have a combined take-home income of $4,500. Their total monthly payments on consumer debt are $875. What is their debt safety ratio? Are they exhibiting any sign of approaching credit problems?

 

ANS:

$875/$4,500 = 19.4%

 

They are approaching the maximum recommended level of consumer debt so they are exhibiting signs of potential credit problems. Ted and Karen should avoid taking on additional consumer debt.

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Evaluation

 

  1. You have a $926 balance on your credit card account. The minimum payment on your account is 2 percent of the latest balance or $20, whichever is greater. What will be the minimum payment this month?

 

ANS:

$926 ´.02 = $18.52

 

Since 2% of the balance is less than $20, the minimum payment is $20.

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 6-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Evaluation

 

  1. The APR on this account is 18%. Assuming the $926 does not include any interest charge, how much of your minimum payment will be used for interest?

 

ANS:

$926 ´.18/12 = $13.89 will be needed for interest

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Evaluation

 

  1. The market value of your house is $175,000 and you have a first mortgage balance of $100,000. If a lender requires a 80% loan-to-market value ratio, how large could your home equity loan be?

 

ANS:

($175,000 ´ 0.80) – $100,000 = $40,000

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 6-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Evaluation

 

  1. Denise (a single taxpayer) contributes $6,000 annually to her church. In addition, she owns a home in which she has $20,000 equity, and she itemizes deductions. If she pays $1,000 interest on credit cards, $6,000 interest on her home equity loan, and is in the 26% marginal tax bracket, calculate Denise’s tax savings from these interest payments.

 

ANS:

$6,000 ´ 0.26 = $1,560. The credit card interest is not deductible.

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 6-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Capital Budgeting and Cost of Capital                  KEY:  Bloom’s: Evaluation

 

 

Chapter 7—Using Consumer Loans

 

TRUE/FALSE

 

  1. Consumer loans are often used by individuals today to purchase nondurable items.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    TOP:   Bloom’s: Knowledge

 

  1. Consumer loans, like open account credit, result from a rather informal process.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Comprehension

 

  1. Consumer loans are most commonly used to obtain durable goods.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. The most common use of consumer loans are to purchase automobiles.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. From a financial planning perspective, you should ask yourself how low of a payment you can get when considering using consumer loans.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. A personal, unsecured consumer loan is most frequently used to help borrowers straighten out a critical financial situation.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. Collateral is an item of value used to secure the principal portion of a loan.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. The cash value of a whole life insurance policy can be used as a source of loan collateral.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Consolidation loans are used to purchase new furniture and appliances when many items are needed at the same time.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Comprehension

 

  1. Consolidation loans are often used to help borrowers straighten out a critical financial situation.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Borrowing to pay for a college education is a legitimate use of credit.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Comprehension

 

  1. College costs have been escalating faster than the overall rate of inflation.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. College costs have been escalating, but not as rapidly as the overall rate of inflation.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. The student loans with the lowest rates of interest and the best loan terms are the PLUS loans.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Synthesis

 

  1. The student loans with the best loan terms are the Stafford and the Perkins loans.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Synthesis

 

  1. PLUS loans are made to parents or legal guardians rather than to the student.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Student loans are made by banks and other financial institutions, but students apply for these loans through their universities.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. In order to receive student loans, the student must be making satisfactory progress in his academic program.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. 529 Plans are the newest type of student loans.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. The student loans with the lowest rates of interest and the best loan terms are the PLUS loans.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Earnings on 529 college savings plans can be tax free when used for qualifying college education expenses.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Student loan debt can be discharged by filing for bankruptcy.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Single payment loans are used mostly for short-term financing.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Installment loans are typically repaid in one payment.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Comprehension

 

  1. Installment loans are typically repaid in monthly payments.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Comprehension

 

  1. The repayment period on most installment loans is six to twelve months.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. The majority of consumer loans are set up with fixed interest rates.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. When the market interest rate goes up, the rate on variable rate loans goes up.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. Variable rate loans are desirable if interest rates are expected to fall in the future.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. Both single-payment and installment loans can have variable interest rates.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Synthesis

 

  1. Commercial banks are generally more selective in granting loans than finance companies.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Credit unions dominate the consumer loan market.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Savings and loan associations dominate the consumer loan market.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Consumer finance companies usually charge lower rates of interest than commercial banks.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Most loans made by consumer finance companies are for larger amounts and are made to low risk borrowers.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Credit unions grant loans only to members of the credit union.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Credit unions offer some of the most attractive loan terms available.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. The primary type of loan made by a savings and loan association is the long-term installment loan used for the purchase of a home.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Savings and loan associations are allowed to make loans for things like cars, boats, and motorcycles.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Sales finance companies commonly purchase the retail installment contracts of businesses that sell big-ticket items such as automobiles, furniture, and appliances.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. GMAC is an example of a captive sales finance company.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Application

 

  1. Cash value loans are available from all types of life insurance policies.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Loans from whole life insurance policies are structured so that the interest rate on the loan is set at the time the loan is made.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Life insurance loans are income tax-free.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Because no written contract is usually required, borrowing from friends and relatives is advisable.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. When loaning money to a friend or family member, it is advisable to lend only the amount that you can afford to give away.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. When comparing two installment loans with the same principal and APR, the loan with the longer maturity will have the lower monthly payment and the higher total costs.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. When comparing two installment loans with the same principal and APR, the loan with the shorter maturity will have the lower monthly payment and the lower total costs.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. It is becoming increasingly frequent for longer-term installment loans to carry variable interest rates.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Generally speaking, variable rate loans are desirable if interest rates are expected to increase over the course of the loan.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. Rebates are almost always more cost effective than the lower interest rate offered on automobile loans.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. Generally, collateral for an installment loan may be seized and liquidated by the lender if the borrower has paid the loan in full.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. If a loan has a prepayment penalty, there will be an additional cost to repay the loan early.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. A chattel mortgage is a legal claim that gives lenders the right to liquidate specific personal property to satisfy their claims in the event of default.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. When simple interest is used, the stated rate of interest on single payment loans is equal to the annual percentage rate (APR).

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Comprehension

 

  1. With the discount method, the finance charges are calculated and then added to the amount borrowed.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Comprehension

 

  1. An installment purchase agreement typically includes a sales contract, a security agreement, a note, and an insurance agreement.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-5

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Simple interest on an installment loan is charged only against the initial loan principal.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-5

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. The add-on method is less expensive than the simple interest method when stated rates of interest are identical.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-5

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. If the add-on method is used to calculate a finance charge of $150.80 on a $2,200 loan, the amount to be repaid is $2,200.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-5

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. If the add-on method is used to calculate a finance charge of $100.80 on a $1,800 loan, the amount to be repaid is $1,900.80.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-5

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. If the discount method is used to calculate a finance charge of $250.60 on a $2,400 loan, the amount to be disbursed to the borrower is $2,400.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. If the discount method is used to calculate a finance charge of $250.60 on a $2,400 loan, the amount to be repaid is $2,400.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. The most accurate method currently available for calculating the annual percentage rate (APR) on an add-on loan is the Rule of 78.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. If a 12-month installment loan is prepaid at the end of 6 months, less than one half of the interest would be saved.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. In most cases, lenders will liquidate the collateral until the loan is paid.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Comprehension

 

  1. The purchase of credit life insurance is highly recommended by most financial planning experts.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Comprehension

 

The average annual cost of a college education at a state school is about $33,000.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Knowledge

 

  1. About one in four student loans are past due.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Knowledge

 

  1. The best loan rates for consumer loans are usually from consumer finance companies.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Synthesis

 

  1. Finance companies are generally more selective in granting loans than credit unions.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Synthesis

 

MULTIPLE CHOICE

 

  1. Long-term financial goals often depend on borrowing funds. The type of loan that does not fulfill the long-term goal achievement is ____ loans.
a. consumer
b. installment
c. automobile
d. mortgage
e. single payment

 

 

ANS:  E                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. A characteristic of consumer loans is that they
a. include a negotiated contract.
b. are arrived at through a formal process.
c. include a repayment schedule.
d. are used to purchase big-ticket durable goods and other items.
e. are all of these.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. A consumer loan probably would not be used to
a. purchase an auto.
b. pay for college tuition.
c. consolidate several loans into one.
d. finance a special vacation.
e. buy back-to-school clothes.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Comprehension

 

  1. The most popular use of consumer loans is to
a. purchase a car.
b. finance a college education.
c. finance a vacation.
d. buy a house.
e. buy furniture.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. A personal consumer loan could be used to
a. consolidate several loans into one.
b. purchase a car.
c. cover a temporary cash shortfall.
d. buy a mobile home.
e. do all these things.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Consumers whose debt burden has become very heavy might apply for a(n)
a. personal loan.
b. single payment loan.
c. buy-down loan.
d. consolidation loan.
e. interim financing.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Application

 

  1. To qualify for a Stafford loan, you must
a. demonstrate financial need.
b. have a good credit rating.
c. make satisfactory academic progress.
d. all of the above
e. a and c only

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. To qualify for a Perkins loan, you must
a. demonstrate financial need.
b. visit the financial institution.
c. apply through your parents.
d. all of the above
e. a and c only

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Regarding student loans, which of the following is not true?
a. They are available for both undergraduate and graduate students.
b. Applications can be filled out on the Internet.
c. There is no limit on how much can be borrowed.
d. There is no limit on the number of loans one can have.
e. Interest may be tax deductible.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Regarding student loans, which of the following is true?
a. They are available only for undergraduate.
b. Parents (or legal guardians) must cosign.
c. There is a limit on how much can be borrowed.
d. There is a limit on the number of loans one can have.
e. Interest does not have to be repaid.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. ____ loans do not have to be repaid until after you graduate from college.
a. Stafford and Perkins
b. Stafford and PLUS
c. Perkins and PLUS
d. PLUS and SLS
e. Perkins and SLS

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Which of the following is accurate concerning 529 college savings plans?
a. Contributions are tax deductible for both state and federal income taxes.
b. Earnings are tax-free when used for qualifying educational expenses.
c. They have no impact on qualifying for financial aid.
d. There is no limit on how much can be contributed.
e. All of the above.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. If your installment loan has a variable interest rate,
a. the rate will remain the same over the life of the loan.
b. the amount you borrowed will change with interest rates.
c. you cannot accurately predict the total interest you will pay on the loan.
d. you can calculate the total interest you will pay on the loan.
e. your monthly loan payment will change every month.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. Commercial banks generally charge lower interest rates than other lending institutions because
a. they make shorter term loans.
b. they usually take only the best credit risks.
c. depositors require lower rates.
d. they get their funds in the open credit market.
e. they make secured loans only.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. A ____ is often a source of low-rate automobile financing on specific models of vehicles.
a. savings and loan association
b. credit union
c. commercial bank
d. consumer finance company
e. captive finance company

 

 

ANS:  E                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. If you needed a loan to buy furniture, the lowest interest rate would usually be available from a
a. savings and loan association.
b. pawn shop.
c. captive finance company.
d. consumer finance company.
e. credit union.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. The highest interest rate installment loans are usually made by
a. consumer finance companies.
b. commercial banks.
c. credit unions.
d. savings and loan associations.
e. life insurance companies.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Credit unions lend money to qualified people who are
a. employees.
b. members.
c. previous borrowers.
d. policyholders.
e. stockholders.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. The majority of loans made by savings and loan associations are ____ loans.
a. home improvement
b. auto
c. mortgage
d. education
e. consolidation

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Sales finance companies
a. lend money to retailers.
b. buy installment loans from retailers.
c. sell installment loans to retailers.
d. lend money to consumers.
e. sell installment loans to banks.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. A loan from the cash value of your life insurance policy would be characterized by
a. increased death benefits to beneficiaries.
b. increased premiums.
c. unchanged death benefits available to beneficiaries.
d. no specific repayment date.
e. annual percentage rates higher than other sources.

 

 

ANS:  D                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Bob Shockey borrowed $25,000 from his $250,000 cash value life insurance policy to send his daughter to private college. Assuming he pays interest as in accrues, if Bob dies before the debt is repaid his beneficiary will receive
a. $275,000.
b. $250,000.
c. $225,000.
d. $  25,000.
e. Taxable income.

 

 

ANS:  C                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Evaluation

 

  1. Which of the following are recommended if you loan money to a friend or relative?
a. Charge a market rate of interest.
b. Have a lawyer draft a loan contract.
c. Put the agreement in writing.
d. Make the loan due within one year or less.
e. All of the above

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Which of the following are recommended if you loan money to a friend or relative?
a. Do it in a business-like fashion.
b. Charge interest if the loan is not to be quickly repaid.
c. Be sure both parties understand it is a loan, not a gift.
d. Lend only money you can afford to give away.
e. All of the above

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Besides the finance charge, you should also consider ____ when you shop for a consumer loan.
a. loan maturity
b. total cost of the loan
c. collateral
d. repayment penalties
e. all of the above

 

 

ANS:  E                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-3

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. A single-payment loan is advantageous only if
a. the interest rate is less than on an installment loan.
b. funds will be available to repay the lump sum.
c. figured with discount method.
d. figured with simple interest method.
e. it is unsecured.

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. A single payment loan
a. is generally unsecured by collateral.
b. usually matures in one year or less.
c. usually matures in five to seven years.
d. is generally used to finance auto purchases.
e. is provided by sales finance companies.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. If you borrow money on a single payment loan and discover you cannot pay it back when it is due you should
a. let the payment become past due.
b. consolidate the loan.
c. convert the loan to installments.
d. negotiate a rollover
e. file bankruptcy

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. When the simple interest method is used to determine finance charges, the interest is calculated based on the
a. ending balance of the loan.
b. average outstanding balance.
c. actual balance of the loan.
d. beginning balance of the loan.
e. none of these.

 

 

ANS:  C                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Annual percentage rate is equivalent to
a. dollar cost of credit method.
b. discount method.
c. average loan balance method.
d. add-on method.
e. simple interest method.

 

 

ANS:  E                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. The annual percentage rate (APR) on a single payment loan for $1,000 at a simple interest rate of 12% is
a. 10%.
b. 12%.
c. 15%.
d. 18%.
e. 24%.

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Comprehension

 

  1. Purchasing credit life or disability insurance protection is usually
a. required in order to make the loan.
b. non-negotiable.
c. at the lender’s option.
d. very costly.
e. a good idea for the borrower.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Comprehension

 

  1. When credit life or disability insurance protection is required as a condition of a loan, the cost
a. must be added to the finance charge.
b. must be included in the APR calculation.
c. is generally very reasonable.
d. a and b
e. a, b, and c

 

 

ANS:  D                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. A(n) ____ clause gives the lender legal recourse in collecting the debt if the borrower does not pay.
a. add-on
b. sales
c. acceleration
d. garnishment
e. balloon

 

 

ANS:  D                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Installment loans using the simple interest method
a. have the highest finance charges of any method.
b. have interest charged only on the monthly loan balance.
c. do not have balloon payments.
d. have a lower APR than the stated interest rate.
e. have a higher APR than the stated interest rate.

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. You want to borrow $1,000 at an interest rate of 10%. The most expensive method of calculating the dollar cost of the interest on this installment loan will be the
a. add-on method.
b. double declining balance method.
c. discount method.
d. simple interest method.
e. past-due balance method.

 

 

ANS:  A                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Synthesis

 

  1. The monthly payment on an 8%, 36-month, add-on loan for $10,000 would be
a. $278
b. $300
c. $314
d. $344
e. $380

 

 

ANS:  D                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Evaluation

 

  1. Home equity loans are similar to other installment loans except
a. interest rates are generally higher.
b. the interest paid is generally tax deductible.
c. no home equity is required.
d. they are typically unsecured debts.
e. a and c

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Sometimes it may be better to use savings rather than borrow to make a purchase. This would be recommended when
a. the borrower has adequate savings.
b. interest rates are rising.
c. interest rates are falling.
d. the cost of borrowing is greater than the interest earned on the savings.
e. interest earned on savings is greater than the interest paid on the loan.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. A legal claim that allows creditors to liquidate loan collateral is a
a. loan.
b. note.
c. security claim.
d. lien.
e. none of these

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-6

NAT:  BUSPROG: Analytic skills             STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. The average student loan in 2012 was
a. $5,200 d. $18,400
b. $10,600 e. $26,300
c. $12,800  

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Knowledge

 

  1. Before taking out students loans, all the following should be considered except
a. grants d. personal resources
b. federal student aid e. all of the above
c. scholarships  

 

 

ANS:  E                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Knowledge

 

  1. Which of the following loan sources is the most expensive?
a. Commercial banks d. Savings and loan associations
b. Credit unions e. None of the above
c. Consumer finance companies  

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Knowledge

 

  1. Which source of consumer loans often has the most favorable terms?
a. Commercial banks d. Savings and loan associations
b. Credit unions e. None of the above
c. Consumer finance companies  

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Knowledge

 

  1. Which source of consumer loans specializes in home mortgage lending?
a. Commercial banks d. Savings and loan associations
b. Credit unions e. None of the above
c. Consumer finance companies  

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   LO: 7-2

NAT:  BUSPROG: Analytic skills             KEY:  Bloom’s: Knowledge

 

COMPLETION

 

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.

 

  1. Consolidation loans are generally [inexpensive | expensive].

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Loan repayment of a [Perkins | PLUS] loan would not begin until a student is out of school.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Loan repayment of a [PLUS | Stafford] loan would begin a month after the loan is received.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. To get a government-backed student loan, one should contact his [bank | university].

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. The interest paid on a student loan [is sometimes | is not] tax deductible.

 

ANS:  a

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. There is a limit on the [number | dollar amount] of student loans you can have.

 

ANS:  b

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. 529 plans are best suited for a child [already in college | with several years left before going to college].

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Comprehension

 

  1. A 529 plan is a [savings | lending] plan.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. The majority of consumer loans are made with [fixed | variable] interest rates.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. When interest rates are rising, you would prefer a [fixed-rate | variable-rate] loan.

 

ANS:  a

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. When interest rates are falling, you would prefer a [fixed-rate | variable-rate] loan.

 

ANS:  b

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. The majority of single payment loans [are | are not] secured by collateral.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Almost half of all consumer loans are made by [commercial banks | finance companies].

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 7-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. You must be a member of a [credit union | S&L] in order to borrow money there.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. [Consumer finance companies | Credit unions] obtain funds from their shareholders and through open market borrowing.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. A [sales finance company | captive finance company] purchases notes drawn up by sellers of typically big-ticket items.

 

ANS:  a

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Borrowing from relatives is [highly | seldom] recommended by financial advisors.

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 7-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Loans to relatives and friends should be [verbal | written] agreements.

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 7-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Your budget should be considered [before | after] taking on a large consumer loan.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 7-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. The longer the loan maturity, the [lower | higher] the monthly payments will be.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. If you want to calculate whether to take the rebate or the low interest rate on an auto financing deal, it would be most useful to have [time value of money tables | a financial calculator].

 

ANS:  b

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Evaluation

 

  1. The longer the loan maturity, the [lower | higher] the total finance costs will be.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. You are borrowing $1,000, APR is 10%, and the loan maturity is one year. Total interest charges will be higher if [you pay off the loan in 12 monthly installments | you make one payment in full at the end of the year].

 

ANS:  b

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Evaluation

 

  1. It is [legal | illegal] for a lender to charge a pre-payment penalty.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 7-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Borrowers are more likely to ask for a(n) [single payment | installment payment] consumer loan.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-5          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Comprehension

 

  1. [Interim financing | Single-payment loan] is used in situations where the funds to be used for repayment are known to be forthcoming.

 

ANS:  a

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-5          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Synthesis

 

  1. Calculating interest using the [discount | simple interest] method will result in the higher APR on a single-payment loan.

 

ANS:  a

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-5          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Synthesis

 

  1. If the proceeds from the sale of your repossessed collateral are insufficient to pay the balance due on your loan, the lender usually [can | cannot] collect the deficiency from you.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Credit life insurance [is | is not] a good financial deal from the perspective of the borrower.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. An [add-on | acceleration] clause allows the lender to demand repayment of the entire debt if the borrower defaults on his payments.

 

ANS:  b

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. The legal method of getting an employer to pay a portion of the borrower’s wages to the lender is known as wage [withholding | garnishment].

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Knowledge

 

  1. Using [simple | add-on] interest would be less expensive for the borrower when determining the total to be paid to the lender.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-6          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. The Rule of 78 is used to calculate [APR | balance due] when an installment loan is paid off early.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-6          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Application

 

  1. A finance company uses the discount method of calculating interest. The loan principal is $5,000, the interest rate is 10%, and repayment is expected in two years. You will receive [$5,000 | $4,000] from the lender.

 

ANS:  b

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Evaluation

 

  1. You are borrowing $5,000 at 9%. You may choose a 24 or 36 month repayment plan. Monthly payments will be higher with the [24 | 36] month plan.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. You are borrowing $5,000 at 9%. You may choose a 24 or 36 month repayment plan. The total finance cost will be higher with the [24 | 36] month plan.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. When the interest rate on savings is higher than the interest rate on a loan, it is less expensive to [borrow | use savings] to make a purchase.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-6          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

  1. When the interest rate on savings is lower than the interest rate on a loan, it is less expensive to [borrow | use savings] to make a purchase.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-6          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Analysis

 

The average annual cost of a college education at a private college is about [$15,000|$51,000|$40,000].

 

ANS:  c

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Knowledge

 

  1. About [27% | 47%] of student loans are past due.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Knowledge

 

  1. There are now about [$1billion | $1 trillion] in student loans outstanding.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Knowledge

 

  1. The best loan rates for consumer loans are usually from [savings and loan associations | consumer finance companies].

 

ANS:  c

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-2          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Analysis

 

  1. Students borrowing to pay for college should base the amount borrowed on [current income | future income].

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-1          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Analysis

 

  1. [Public lenders | private lenders] are more flexible in providing financial relief when borrowers are under pressure.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 7-2          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Knowledge

 

PROBLEM

 

  1. Jamil is purchasing a new truck for $30,000. Jamil is making a $2,000 down payment, and he will make 60 monthly payments of $541 each. What are the total finance costs on this loan?

 

ANS:

Loan amount = $28,000 ($30,000 – $2,000)

Total monthly payments = $32,460 ($541 ´ 60)

Total cost of loan = $4,460

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-5          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Evaluation

 

  1. Jamie is going to buy some furniture with a single payment loan that is discounted. The loan will be for $5,000 for 2 years at 10% interest. Calculate the APR on this loan. (Show all work.)

 

ANS:

Finance charge = $5,000 ´ .10 ´ 2 = $1,000

Annual finance charge = $1,000/2 = $500

Average loan = $5,000 – $1,000 = $4,000

 

APR =  = .125 or 12.5%

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Evaluation

 

  1. Calculate the average percentage rate (APR) for an add-on loan with 36 monthly installments. The principal is $4,000; the stated interest rate is 6%. (Show all work.)

 

ANS:

 

where: M = number of payments in a year
  N = number of payments over entire loan
  F = total finance charges
  P = principal
  F = $4,000 ´.06 ´ 3 = $720

 

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Evaluation

 

  1. Calculate the finance charge and the monthly payment on a $20,000 add-on installment loan with an interest rate of 9% and a term of 5 years. (Show all work.)

 

ANS:

Finance charge = $20,000 ´.09 ´ 5 = $9,000

 

Monthly payment =  = $483.33

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-6          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Evaluation

 

  1. Downward Motors has offered Vicki either a $2,500 rebate or a 2%, 4-year loan on the new SUV she is purchasing for $33,000 with a $3,000 down payment. Vicki has done her homework and knows that she can get a 6%, 4-year loan at his credit union. Should Vicki take the rebate or the 2% loan from the dealer? (Show your key strokes.)

 

ANS:

PV = 30,000 PMT = (651) $30,000 $27,720
I = 2/12 I = 6/12 –   2,500 – 27,500
N = 4 ´ 12 N = 4 ´ 12 $27,500 $     220
PMT = $651 PV = 27,720    

 

Taking the rebate and financing the SUV through the credit union will save Vicki $220. She should take the rebate.

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 7-6          NAT:  BUSPROG: Analytic skills

STA:   DISC: TVM    KEY:  Bloom’s: Synthesis

 

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