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

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

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 5—Making Automobile and Housing Decisions

 

TRUE/FALSE

 

1. An automobile is a personal use asset for most buyers.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

TOP:   Bloom’s: Comprehension

 

2. The greatest fixed cost involved with owning an automobile is usually the monthly loan payments.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

3. The greatest fixed cost involved with owning an automobile is usually the auto insurance payments.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

4. Gasoline is a variable cost of automobile ownership.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

5. Automobiles tend to decrease in value over time.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

6. Fixed automobile costs increase as the number of miles driven increase.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   L): 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

TOP:   Bloom’s: Analysis

 

7. Most new car warranties cover a minimum of the first 36,000 miles or 3 years of ownership.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

TOP:   Bloom’s: Knowledge

 

8. Most new car warranties cover a minimum of the first 72,000 miles or 6 years of ownership.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

9. A closed-end automobile lease is the most popular type of lease.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

10. Terminating a car lease before expiration is often difficult and costly.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

11. The largest single investment you will undertake in your lifetime will probably be the purchase of an automobile.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Synthesis

 

12. Less rapid depreciation is one advantage of buying a new car rather than a used car.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Synthesis

 

13. Low-balling is a sales technique where the salesperson quotes a low price for a car then tries to get you to purchase a different, more expensive vehicle.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

14. Low-balling is a sales technique where the salesperson quotes a low price for a car to get you to make an offer, and negotiates the price upward prior to signing the sales agreement.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

15. You should secure the trade in value of your current automobile before you start negotiating the final price on the car you are purchasing.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Application

 

16. Capitalized cost on an auto lease is similar to the interest rate on a loan.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Application

 

17. Capitalized cost on an auto lease is the same as the price of the car.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Analysis

 

18. The money factor on an auto lease is similar to the interest rate on a loan.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Analysis

 

19. Early termination clauses on an auto lease typically apply to cars that are stolen or totaled in an accident as well as when you just want to return the vehicle before the end of the lease.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

20. When buying a used car, it is very important to have it checked by a reputable mechanic.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

21. The sales contract on an automobile purchase contractually binds you to purchase the car at the price you offered in the contract.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

22. To make a legally binding offer on a car, you must sign a sales contract that specifies the offering price and all the conditions of your offer.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

23. One who leases an automobile is typically responsible for early termination costs, even when early termination is due to theft or auto accidents.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

24. The largest single investment you will undertake in your lifetime will probably be the purchase of a house.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

25. The term condominium refers to a style of architecture.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

26. Townhome, condominium and co-op owners can deduct real estate taxes and mortgage interest on their federal income taxes.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

27. Condominium and Townhome owners can deduct real estate taxes and mortgage interest on their federal income taxes but co-op owners cannot take these deductions.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

28. A condominium or townhome buyer will make monthly mortgage payments as well as pay a fee for services and maintenance of common areas.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

29. In a co-op, the buyer receives title to a unit and joint ownership of the common areas.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

30. In a condominium and townhome, the buyer receives title to an individual unit and joint ownership of the common areas.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

31. A significant legal difference between a cooperative and a condominium is that the condominium owner normally holds a title to the property.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

32. As a homeowner, the federal government may allow you to deduct interest expenses and taxes paid on the property.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

33. There are large regional differences in the price of housing.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

34. Condominiums and townhomes are generally less costly than single-family, detached homes.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

35. You can deduct mortgage interest and property taxes on your home to reduce your federal income taxes only if you itemize deductions.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

36. The federal income tax advantage gained from home ownership will depend on the amount of deductible interest and property taxes and your total income.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Analysis

 

37. The difference between the market value of your home and the balance of the mortgage is your equity in the property.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

38. A loan-to-value ratio of 80 percent would require a buyer to make a 20% down payment.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

39. A loan-to-value ratio of 90 percent would require a buyer to make a 90% down payment.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

40. A lender will generally require mortgage insurance if the down payment is less than 20 percent.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

41. Points paid to secure a mortgage to purchase a primary residence will generally be tax deductible as interest in the year they are paid.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

42. A 5 percent down payment will result in larger monthly mortgage payments than a 10 percent down payment on the same house for the same maturity mortgage.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Analysis

 

43. The monthly mortgage payment divided by your monthly gross income equals an affordability ratio.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

44. The market price of a house is $125,000 and the homebuyer will borrow $100,000. Two points will equal $2,000.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

45. The market price of a house is $125,000 and the homebuyer will borrow $100,000. Two points will equal $2,500.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

46. You will need to purchase homeowners insurance equal to the purchase price of the house you are buying.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

47. An inflation hedge is an asset that increases in value at a rate equal to or greater than the rate of inflation.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

48. The down payment is typically the only substantial housing cost that must be paid at the time of the purchase.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

49. First-time homebuyers can withdraw up to $10,000 from an IRA without penalty regardless of their age.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

50. First-time homebuyers can withdraw up to $25,000 from an IRA without penalty if they are 30 years of age or less.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

51. A PITI payment is composed of principal, interest, real estate taxes, and insurance.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

52. Private Mortgage Insurance (PMI) protects the lender from loss on a loan.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

53. Security deposits are controlled by the tenant.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

54. A real estate sales contract contains the terms and provisions which establish the sale’s transaction.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO:5-5

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

55. Points paid when a home is refinanced can all be deducted as interest in the year they are paid.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

56. The cost of a title search and title insurance are typically part of the closing costs on a housing transaction.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-5

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

57. Earnest money deposits and contingency clauses are usually specified in the sale contract.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-5

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

58. If you are buying a house that is for sale by the owners, the earnest money goes directly to the seller.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

59. The job of a mortgage banker is to locate conventional loans for clients.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

60. If a buyer withdraws from a transaction without a valid reason after signing a sales contract, he typically loses his earnest money.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-5

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

61. To be legally binding, real estate buy-sell agreements must be in writing, but leases may be oral.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Synthesis

 

62. The interest rate charged on adjustable-rate mortgages will change from time to time based on a specified index.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-6

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

63. Negative amortization is possible with a fixed-rate mortgage.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

64. Negative amortization is possible with an adjustable-rate mortgage.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

65. A FHA loan is insured by the federal government.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-6

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

66. The Veterans Administration guarantees mortgage loans given to qualified veterans.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-6

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

67. The affordability ratios used to qualify applicants for FHA and VA loans are more stringent than those used for conventional loans.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

68. To refinance a mortgage, the lender typically requires at least 20% equity in the home.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-6

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

69. Other factors being equal, fixed-rate mortgages will have higher interest rates initially than adjustable-rate mortgages.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Analysis

 

70. Adjustable-rate mortgages with monthly payment caps can lead to negative amortization.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

71. Adjustable-rate mortgages with interest rate caps can lead to negative amortization.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

72. Graduated payment mortgages and growing equity mortgages are both examples of adjustable-rate mortgages.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Synthesis

 

73. Commercial banks are an important source of both mortgage loans and interim construction loans.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-6

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

74. One can increase the tax benefits of homeownership by selecting a shorter term mortgage, for example 15 years rather than 30 years.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Analysis

 

75. Balloon payment mortgages generally must be refinanced.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

76. According to federal law, private mortgage insurance on most loans currently made ends automatically once the mortgage is paid down to 78% of the original value of the house.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

77. According to federal law, private mortgage insurance on most loans currently made ends automatically once the mortgage is paid down to 80% of the original value of the house.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

78. An adjustable rate mortgage with a baseline rate of 4%, a margin of 1%, and an annual cap of 1% would have an initial mortgage rate no higher than 6%.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

79. An adjustable rate mortgage with a baseline rate of 5%, a margin of 2%, and an annual cap of 1% would have an initial mortgage rate of 7%.

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Analysis

 

80. The interest rate is lower on a 6-year auto loan than on a 3-year auto loan

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-2

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

 

81. The monthly payment is lower in a 6-year auto loan than on a 3-year auto loan.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-2

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

 

82. The “rent ratio” has fallen as home prices have fallen.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

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

 

83. An increase in the “rent ratio” indicates that renting is more affordable relative to housing prices.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

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

 

84. Renting affords more flexibility than home ownership.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3

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

 

85. A short sale does not affect a distressed homeowner’s credit score as much as a foreclosure.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-4

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

 

MULTIPLE CHOICE

 

1. Variable auto ownership costs are most dependent on

a.	driver behavior.
b.	mileage driven.
c.	city lived in.
d.	down payment.
e.	hours driven.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

2. ____ is a fixed auto ownership cost.

a.	Gasoline
b.	Installment loan payment
c.	Auto insurance
d.	Maintenance
e.	b and c

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

3. The loss of value in a car over time is called

a.	maintenance.
b.	loan payments.
c.	sales payments.
d.	commissions.
e.	depreciation.

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

4. The first step in the auto-buying process should be

a.	test drive several cars.
b.	begin negotiations.
c.	consider alternative buying strategies.
d.	decide whether to trade in your used car or to sell if yourself.
e.	analyze how much car you can afford.

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

5. Henry has $2,500 for a down payment and thinks he can afford monthly payments of $400. If he can finance a vehicle with an 8%, 3-year loan, what is the maximum amount Henry can spend on the car?

a.	$12,765
b.	$14,400
c.	$14,079
d.	$15,265
e.	$16,879

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

6. Kurt has $4,500 for a down payment and thinks she can afford monthly payments of $300. If he can finance a vehicle with a 7%, 4-year loan, what is the maximum amount Kurt can afford to spend on the car?

a.	$13,528
b.	$14,400
c.	$16,028
d.	$17,028
e.	$18,028

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

7. Jana has $1,500 for a down payment and thinks she can afford monthly payments of $300. If she can finance a vehicle with a 7%, 4-year loan, what is the maximum loan amount Jana can afford?

a.	$12,528
b.	$14,208
c.	$16,028
d.	$17,900
e.	$18,028

 

 

ANS:  A                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

8. Advantages of buying a used car rather than a new car include

a.	good mechanical condition.
b.	will depreciate more quickly.
c.	more choices available.
d.	less expensive.
e.	all of the above.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

9. Advantages of buying a used car rather than a new car include

a.	good mechanical condition.
b.	will depreciate less quickly.
c.	more choices available.
d.	cost.
e.	all of the above.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

10. One can arrange auto loans through

a.	auto dealers.
b.	banks.
c.	credit unions.
d.	consumer finance companies.
e.	all of the above.

 

 

ANS:  E                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

11. Leasing accounts for about ____ percent of all vehicles sold today.

a.	10
b.	14
c.	19
d.	23
e.	37

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

12. Which of the following are reasons people lease vehicles?

a.	Leasing is generally less expensive than buying.
b.	Monthly payments for leases are generally less expensive than loan payments.
c.	One can afford a more expensive car with the same monthly payment by leasing rather than buying.
d.	b and c only
e.	a, b, and c

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

13. To research used car prices, you can check one of the popular price guides including:

a.	National Automobile Dealers Association (NADA)
b.	Official Used Car Guide
c.	Edmunds Used Car Prices
d.	All of the above.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-1

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

14. At the end of your car lease period, you intend to turn in the car, and you will not pay extra at that time based on the residual value of the car. You have ____ lease.

a.	a residual
b.	an open-end
c.	a purchase option
d.	a closed-end
e.	none of these

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

15. The price of the car you are leasing is called the

a.	money factor.
b.	capitalized cost.
c.	residual value.
d.	purchase option.
e.	capitalized cost reduction.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

16. The financing rate on the car you are leasing is called the

a.	money factor.
b.	capitalized cost.
c.	residual value.
d.	purchase option.
e.	capitalized cost reduction.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

17. The down payment on the car you are leasing is called the

a.	money factor.
b.	capitalized cost.
c.	residual value.
d.	purchase option.
e.	capitalized cost reduction.

 

 

ANS:  E                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

18. In which of the following situations would you have to pay additional money when returning a vehicle using a closed-end lease?

a.	residual value is less than expected
b.	residual value is more than expected
c.	mileage limits were exceeded
d.	a and c
e.	b and c

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Analysis

 

19. In which of the following situations would you have to pay additional money when returning a vehicle using an open-end lease?

a.	residual value is less than expected
b.	residual value is more than expected
c.	mileage limits were exceeded
d.	a and c
e.	b and c

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Analysis

 

20. Anna purchased a vehicle six years ago for $25,000. She recently sold it for $5,000. Over the years, she paid a total of $5,800 on auto insurance, $4,800 on gas and maintenance, and $2,500 in interest. What was her depreciation cost on this vehicle?

a.	$  5,000
b.	$10,800
c.	$15,000
d.	$20,000
e.	$25,000

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

21. Reasons why auto leasing is so popular include all of the following except:

a.	lower monthly payments
b.	lower down payment
c.	lower total cost
d.	getting more expensive car for the same monthly payment
e.	rising new car prices

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Analysis

 

22. The capital cost reduction on a vehicle lease is

a.	like the down payment on a loan.
b.	the rate of interest on a lease.
c.	the residual value at the end of the lease.
d.	the depreciation on a lease.
e.	the same as the purchase option on a lease.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Synthesis

 

23. When shopping for a lease, you want a

a.	high capitalized cost
b.	low capitalize cost
c.	high money factor
d.	low residual value
e.	a and d

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

24. A money factor of 0.00360 on a lease is equivalent to an annual percentage rate of

a.	1.80.
b.	3.60.
c.	4.32.
d.	8.64.
e.	10.80.

 

 

ANS:  D                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

25. A money factor of 0.00280 on a lease is equivalent to an annual percentage rate of

a.	2.80.
b.	3.60.
c.	6.72.
d.	8.64.
e.	10.80.

 

 

ANS:  C                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

26. At the end of the lease period, you may be required to

a.	purchase the vehicle at its residual value.
b.	pay for unreasonable wear and tear.
c.	pay for additional mileage.
d.	b and c.
e.	a, b, and c.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

27. At the end of the lease period, you are never required to

a.	purchase the vehicle at its residual value.
b.	pay for unreasonable wear and tear.
c.	pay for additional mileage.
d.	b and c.
e.	a, b, and c.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-2

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

28. The first choice in housing in the United States is

a.	single-family home.
b.	condominium.
c.	cooperative apartment.
d.	manufactured home.
e.	rental apartment.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

29. The highest average cost housing to purchase would be a

a.	cooperative apartment.
b.	condominium.
c.	single-family detached home.
d.	row house.
e.	manufactured home.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

30. When you receive title to an individual unit and joint ownership of any common areas and facilities, you have purchased a

a.	single family home.
b.	cooperative.
c.	condominium.
d.	row house.
e.	mobile home.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

31. When you lease your apartment from the corporation that owns the building and your lease is an ownership share, your apartment is

a.	expensive.
b.	a cooperative.
c.	a condominium.
d.	a duplex.
e.	permanent.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

32. ____ is a reason for owning your own home.

a.	Pride of ownership
b.	A feeling of permanence
c.	A sense of stability
d.	A tax shelter
e.	All of these are reasons.

 

 

ANS:  E                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

33. For most homeowners, the most important financial reason for owning a home is

a.	security for loans.
b.	an inflation hedge.
c.	a tax shelter.
d.	a cash flow item.
e.	psychic income.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

34. ____ is an ongoing cost of home ownership.

a.	The down payment
b.	Closing costs
c.	Property taxes
d.	Sales taxes
e.	Points

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

35. ____ is an up-front, one-time cost of home ownership.

a.	The down payment
b.	Closing costs
c.	Property taxes
d.	Insurance
e.	a and b

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

36. Which of the following is true regarding cooperative apartments?

a.	They are essentially the same as condominiums.
b.	It may be more difficult to get a home mortgage than for other types of housing.
c.	They tend to be more expensive than single-family dwellings.
d.	They produce more tax advantages than other types of homes.
e.	All of the above

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

37. Phil and Christina are recently married and are unsure of where they will be relocated after Christina finishes her residency in 9 months. Based on this information, which of the following housing recommendations would be most appropriate for them?

a.	Rent a home
b.	Buy a condominium
c.	Buy a single-family dwelling
d.	Buy a cooperative apartment
e.	Lease a car

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

38. ____ could be deducted on your Federal income taxes.

a.	Rent payments
b.	Mortgage interest
c.	Homeowner’s insurance
d.	Utility bills
e.	None of these

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

39. ____ could be deducted on your Federal income taxes.

a.	Rent payments
b.	Homeowner’s insurance
c.	Real estate taxes
d.	Utility bills
e.	None of these

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

40. Jackie is in the 28% marginal tax bracket and has no other itemized deductions except those related to her home. If her standard deduction is $4,750 and she incurs the following costs related to housing, how much tax savings will she receive as a result of her home purchase?

 

Mortgage interest	$14,000
Principal repayment	$     800
Homeowner’s insurance	$  1,000
Real estate taxes	$  4,000
Homeowner’s association fees	$  1,200

 

a.	$13,250
b.	$  5,040
c.	$  3,710
d.	$  2,800
e.	none

 

 

ANS:  C                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

41. If the maximum loan-to-value ratio that a lender will accept on a $100,000 loan is 90 percent, then the borrower must make

a.	a minimum down payment of $10,000 plus closing costs.
b.	a minimum down payment including closing costs of $10,000.
c.	closing costs plus points of $10,000.
d.	a maximum down payment of $10,000.
e.	none of these.

 

 

ANS:  A                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

42. If the maximum loan-to-value ratio that a lender will accept on a $100,000 loan is 80 percent, then the borrower must make a down payment of at least

a.	$100,000.
b.	$  80,000.
c.	$  50,000.
d.	$  20,000.
e.	none of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

43. If you made a down payment of $11,000 on a $110,000 house, the lender no doubt will require ____ as a result of the size of the down payment.

a.	closing points
b.	a bond
c.	mortgage insurance
d.	application fees
e.	homeowner’s insurance

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Application

 

44. A lender will usually require a loan-to-value ratio of ____ or less for you to avoid having to pay private mortgage insurance (PMI).

a.	75%
b.	80%
c.	85%
d.	90%
e.	95%

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

45. What is the maximum amount a first-time home buyer who is not 59  years old can withdraw from an IRA without penalty?

a.	$25,000
b.	$15,000
c.	$10,000
d.	$  5,000
e.	$  2,000

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

46. Which of the following is not associated with buying a home with a lower-than-typical down payment?

a.	Adjustable-rate mortgage
b.	Fannie 3/2
c.	Fannie 97
d.	FHA mortgage
e.	VA mortgage

 

 

ANS:  A                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

47. The following is/are major source(s) of home mortgages:

a.	Commercial Banks
b.	Thrift Institutions
c.	Mortgage Bankers and Brokers
d.	Credit Unions
e.	All of the above

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

48. A fee charged by lenders as a condition of a mortgage loan that effectively raises the interest rate is called

a.	mortgage points.
b.	a down payment.
c.	a commission.
d.	an add-on charge.
e.	loan fee.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

49. If you purchase a $110,000 and make a 10% down payment, how much would 1 point cost at closing?

a.	$   765
b.	$   990
c.	$1,100
d.	$1,530
e.	$1,800

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

50. One would be more likely to pay discount points if she expected

a.	to live in the house a short period of time.
b.	to live in the house a long period of time.
c.	interest rates to go up.
d.	interest rates to go down.
e.	interest rates to remain constant.

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Analysis

 

51. Points can be deducted from federal income taxes in the year paid when they are used to

a.	finance a first home.
b.	finance a second home.
c.	refinance a first home.
d.	refinance a second home.
e.	a and c only

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

52. The seller of the house typically pays the

a.	loan application fee.
b.	real estate agent’s commission.
c.	appraisal fee.
d.	points.
e.	title search and insurance.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

53. The majority of each monthly payment at the beginning of the loan goes to pay

a.	principal.
b.	interest.
c.	real estate taxes.
d.	homeowner’s insurance.
e.	private mortgage insurance.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Analysis

 

54. Most lenders do not want mortgage payments to exceed ____ percent of your gross monthly income.

a.	10-15
b.	15-18
c.	25-30
d.	30-33
e.	33-38

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

55. Most lenders do not want mortgage payments plus other debt payments to exceed ____ percent of your gross monthly income.

a.	10-15
b.	15-18
c.	25-30
d.	30-33
e.	33-38

 

 

ANS:  E                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

56. An escrow account is used to collect ____ from one’s monthly mortgage payment.

a.	interest
b.	principal
c.	real estate taxes
d.	homeowner’s insurance
e.	c and d only

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

57. Homeowner’s insurance will cost about ____ percent of the market value of the home.

a.	1/4
b.	1/4 to 1/2
c.	1/2
d.	1/2 to 3/4
e.	3/4

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

58. A financial advantage of renting compared to purchasing housing is

a.	income tax treatment.
b.	no need for a down payment.
c.	required security deposit.
d.	the legal obligation.
e.	stable monthly payments.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Synthesis

 

59. Terms of renting a housing unit may be contained in a contract called a

a.	deposit requirement.
b.	renewal option.
c.	lease.
d.	housing code.
e.	housing standard.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

60. The ____ would be included in a rental contract or lease agreement.

a.	amount of the monthly payment
b.	payment date
c.	length of lease agreement
d.	deposit required
e.	all of these would be included

 

 

ANS:  E                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

61. ____ is a reason for preferring to rent rather than to buy.

a.	Mobility
b.	No maintenance worries
c.	Lower monthly cash flows
d.	Down payment money better used elsewhere
e.	All of these are reasons

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Synthesis

 

62. Generally, renting would be preferred to buying when

a.	you have no money to make a down payment.
b.	you know your job will be temporary.
c.	you have just gone through a divorce.
d.	all of these.
e.	none of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-3

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Synthesis

 

63. A real estate sales contract will include

a.	the amount you are willing to pay for the property.
b.	the terms of the mortgage loan.
c.	deed restrictions.
d.	market value of the property.
e.	none of the above.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 5-5

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

64. Earnest money is the sum of money the home buyer deposits with the

a.	realtor to view homes.
b.	realtor for finding the desired home.
c.	lender to originate the loan.
d.	seller to indicate intent of purchase.
e.	lender to guarantee the purchase.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-5

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

65. The most popular mortgage loan for financing a home purchase is a(n)

a.	conventional fixed-rate loan.
b.	FHA loan.
c.	VA loan.
d.	adjustable-rate loan.
e.	Fannie Mae loan.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-6

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

66. The interest rates and monthly mortgage payments will not change over the life of your mortgage; you have a(n)

a.	reverse-annuity mortgage.
b.	fixed-rate mortgage.
c.	adjustable rate mortgage.
d.	rollover mortgage.
e.	graduated-payment mortgage.

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

67. The monthly interest on your mortgage was $690; you paid $650. The result is

a.	growing equity.
b.	negative amortization.
c.	fixed interest expense.
d.	shrinking principal.
e.	indexed equity.

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

68. The FHA ____ high loan-to-value ratio mortgages.

a.	guarantees
b.	insures
c.	subsidizes
d.	grants
e.	allows

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

69. The act requiring mortgage lenders to give borrowers HUD booklets and good faith estimates of the closing costs is called the

a.	Equal Credit Opportunity Act.
b.	Truth-in-Lending Act.
c.	Real Estate Settlement Procedures Act.
d.	Mortgage Lenders Act of 1980.
e.	None of the above.

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

70. When refinancing your mortgage, you should consider

a.	the interest rates of the old and new mortgages.
b.	the years you expect to remain in the home.
c.	any prepayment penalties on the old mortgage.
d.	closing costs of the new mortgage.
e.	all of these.

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

71. Sean and Lisa (age 25 and 28, respectively) are purchasing their first home for $200,000 with a 5% down payment. They will withdraw the down payment from Lisa’s IRA. They will have to pay ____ on the IRA withdrawal.

a.	federal income taxes
b.	an early withdrawal penalty
c.	Social Security taxes
d.	a and b
e.	a, b, and c

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

72. Mike (age 40) is purchasing his second home for $200,000 with a 25% down payment. He will withdraw some of the down payment from his IRA. He will have to pay ____ on the IRA withdrawal.

a.	federal income taxes
b.	an early withdrawal penalty
c.	Social Security taxes
d.	a and b
e.	a, b, and c

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

73. Which of the following is tax deductible if one itemizes deductions?

a.	Principal, interest, real estate taxes, and insurance
b.	Principal, interest, and real estate taxes
c.	Principal and interest
d.	Interest, real estate taxes, and insurance
e.	Interest, PMI, and real estate taxes

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

74. ____ and ____ are often paid as part of one’s house payment and held in an escrow account.

a.	Closing costs; interest
b.	Insurance; real estate taxes
c.	Principal; interest
d.	Insurance; utilities
e.	Utilities; real estate taxes

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Knowledge

 

75. Barb and Bob want to purchase a new home but don’t know how much mortgage they can qualify for. The lender requires total installment loan payments not exceed 35% of gross monthly income. Based on Barb and Bob’s financial data below, what is the maximum monthly mortgage payment for which they can qualify?

 

Monthly Gross Income	$4,000
Car payment	350
Student loan payment	200

 

a.	$1,400
b.	$1,208
c.	$1,050
d.	$   850
e.	$   500

 

 

ANS:  D                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

76. Pete and Pam want to purchase a new home but don’t know how much mortgage they can qualify for. The lender requires total installment loan payments not exceed 32% of gross monthly income. Based on Pete and Pam’s financial data below, what is the maximum monthly mortgage payment for which they can qualify?

 

Monthly Gross Income	$5,000
Car payment	400
Student loan payment	300
Current rent payment	1,000

 

a.	$1,700
b.	$1,600
c.	$   900
d.	$   600
e.	$   500

 

 

ANS:  C                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-4

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Evaluation

 

77. The type of mortgage that will most likely need to be refinanced is the ____ mortgage.

a.	fixed-rate
b.	adjustable-rate
c.	balloon-payment
d.	graduated-payment
e.	growing-equity

 

 

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

NAT:  BUSPROG: Analytic skills              STA:   DISC: Investments

KEY:  Bloom’s: Comprehension

 

78. Which of the following is true regarding auto loans?

a.	Longer term, lower rate, lower payment
b.	Shorter term, lower rate, lower payment
c.	Longer term, higher rate, lower payment
d.	Shorter term, higher rate, higher payment

 

 

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

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

 

79. As home prices have fallen in recent year, the rent ratio

a.	has increased and rent affordability has increased
b.	has decreased and rent affordability has decreased
c.	has increased and rent affordability has decreased
d.	has decreased and rent affordability has increased

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-3

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

 

80. Homeowners may be allowed to deduct the following on their taxes

a.	homeowners insurance
b.	mortgage interest
c.	home improvements
d.	mortgage principal

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3

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

 

81. A declining rent ratio indicates

a.	lower housing prices relative to renting
b.	lower rent relative to housing prices
c.	higher housing prices relative to renting
d.	none  of the  above

 

 

ANS:  A                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-3

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

 

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. The first major expenditure most people make is to buy a [house | car].

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

2. The biggest fixed cost of owning a car is [the loan payment | insurance].

 

ANS:  a

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

3. A major variable cost of owning a car is [the loan payment | gasoline].

 

ANS:  b

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

4. If you drive a lot of miles each year rather than a few, the operating cost per mile will [increase | stay the same | decrease].

 

ANS:  c

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Analysis

 

5. With a [closed-end | open-end] lease, you turn in the car at the end of the term and have no additional financial obligation as a result of the residual value.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Comprehension

 

6. The most popular type of lease is the [closed-end | open-end] lease.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Comprehension

 

7. Terminating a lease early is typically [difficult | easy].

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 5-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

8. The average cost of owning is typically much less than leasing if you own the vehicle over [two | four] years.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Synthesis

 

9. With a(n) [closed-end | open-end] lease, one owes more at the end of the lease if the car is worth less than its projected value at the end of the lease.

 

ANS:  b

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Comprehension

 

10. It would make sense to purchase a vehicle at the end of a close-end lease period if the residual value in the lease agreement was [more | less] than the car’s market value.

 

ANS:  b

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-2          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Comprehension

 

11. The term condominium/townhome refers to a type of [architecture | ownership].

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

12. The condominium/townhome buyer shares joint ownership of [common areas | his living space].

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Comprehension

 

13. In the same geographic area, the cost of a [detached home | condo] will usually be lower.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

14. When buying a home, the [emotional | financial] factors often carry the greatest weight.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

15. There is direct ownership of your living space in a [condo | co-op apartment].

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

16. As a homeowner, you can deduct the mortgage interest and [property taxes | property insurance] if you itemize on your federal taxes.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

17. A lender gives you a choice of an 80% loan-to-value ratio or a 90% loan-to-value ratio. The interest rate for the 80% loan-to-value ratio loan will typically be [higher | lower] than the 90%.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Analysis

 

18. The purchase price of the house you are buying is $140,000. A loan-to-value ratio of 80% will require a down payment of [$34,000 | $28,000].

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Evaluation

 

19. The purchase price of the house you are buying is $180,000. A loan-to-value ratio of 90% will produce a mortgage amount of [$162,000 | $180,000].

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Evaluation

 

20. If your lender charges 1 1/2 mortgage points on a house selling for $100,000 on which there is to be a $90,000 loan, the points will cost you [$1,350 | $1,500].

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Evaluation

 

21. You have a choice of a 25-year or 30-year mortgage. Your monthly payments will be [more | less] with the 30-year loan.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Analysis

 

22. The total amount of interest you would have to pay would be less with a [25 | 20] year mortgage.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Analysis

 

23. Most lenders do not want your monthly installment loan payments to exceed [36 | 50] percent of your monthly income.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

24. You are paying on a car loan, a furniture loan, and a student loan. This will have [an | no] effect on the lender’s decision to grant you a mortgage loan.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

25. [Lessor | Lessee] is another term for landlord.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 5-3          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

26. The choice of the index used with an ARM will make [much | little] difference in the volatility of your payment changes.

 

ANS:  a

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Analysis

 

27. A real estate agent will typically be paid by the [buyer | seller] of the house.

 

ANS:  b

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

28. Seeking mortgage preapproval [is | is not] recommended when you begin your house search.

 

ANS:  a

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

29. The earnest money deposit is a payment to the [real estate agent for his services | seller to show good faith when making an offer to buy].

 

ANS:  b

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

30. With most ARMs, the interest rate over the lifetime of the loan can [increase to any level | increase only up to the pre-stated maximum].

 

ANS:  b

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

31. The interest rate on an ARM can be increased [automatically every year | only when a designated index increases].

 

ANS:  b

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

32. You made an $800 mortgage payment. The interest on the mortgage for this month was $850. You have just experienced [negative | positive] amortization.

 

ANS:  a

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Comprehension

 

33. You made an $900 mortgage payment. The interest on the mortgage for this month was $850. You have just experienced [negative | positive] amortization.

 

ANS:  b

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Comprehension

 

34. Using an FHA mortgage to finance your home would require a [lower | higher] down payment than a conventional loan.

 

ANS:  a

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

35. The Real Estate Settlement Procedures Act [limits the amount of closing costs a lender can charge | requires advance disclosure of closing costs].

 

ANS:  b

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

36. If you qualify, you might be able to buy a home with no down payment with [an FHA | a VA] loan.

 

ANS:  b

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

37. The [longer | shorter] the period of time you expect to live in a house, the more likely refinancing is a sound financial decision.

 

ANS:  a

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Analysis

 

38. Paying mortgage points to get a lower rate of interest makes more sense if you expect to live in a home for a [longer | shorter] period of time.

 

ANS:  a

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Analysis

 

39. The Real Estate Settlement Procedures Act governs [mortgage regulations | mortgage closings].

 

ANS:  b

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Knowledge

 

40. A convertible ARM will have a [higher | lower] interest rate than a traditional ARM.

 

ANS:  a

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Comprehension

 

41. The 11^th District Cost of Funds index is much [more | less] volatile than LIBOR and CD-based indexes.

 

ANS:  b

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Comprehension

 

42. Shorter term auto loans offer the benefit of [lower payments | lower interest rate]

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-2          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Comprehension

 

43. Longer term auto loans have a [lower rate but higher payment | higher rate but lower payment]

 

ANS:  b

 

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

KEY:  Bloom’s: Comprehension

 

44. As home prices have fallen the “rent ratio” has [increased | decreased].

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-3          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Analysis

 

45. A decrease in the “rent ratio” indicates that housing is relatively [more | less] affordable than renting.

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-3          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Analysis

 

46. Homeowners may be able to deduct from their taxable income [mortgage principal | mortgage interest]

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Knowledge

 

47. For most homeowners, the most important financial reason for owning a home is for the [inflation hedge | tax shelter].

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Knowledge

 

PROBLEM

 

1. Janice wants to buy a new car. The cost is $30,000. At the end of six years, the car is expected to be worth 20% of the original price. (Show all work.)

 

a.	What will the car value be in six years?
b.	What is the annual depreciation on the car?

 

 

ANS:

a.	Value of car = 0.20 ´ $30,000 = $6,000
b.	Annual depreciation =  = $4,000
	or: $30,000 – $6,000 = $24,000/6 = $4,000

 

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Evaluation

 

2. Leslie has been offered the choice of either a $1,000 rebate or a 5.5%, 48-month loan for the new car she is purchasing. If Leslie will be financing $15,000 and she can get a 7.5%, 48-month loan at her credit union, should she take the $1,000 rebate or the 5.5% loan? (Show all work.)

 

ANS:

7.5% loan:  PV=15,000, I=7.5/12, N=48, PMT=362.68	362.68 ´ 48 =	17,408.64
5.5% loan:  PV=15,000, I=5.5/12, N=48, PMT=348.85	348.85 ´ 48 =	16,744.80
		663.84

 

Take the $1,000 rebate since the 5.5% loan saves only $663.84 over the life of the loan.

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Evaluation

 

3. Patrick would like to know the monthly payments and the total finance charges on the following 2 loans: (Show all work.)

 

a.	$30,000, 9%, 36 months
b.	$30,000, 9%, 48 months

 

 

ANS:

a.	36 month loan: PV=30,000, I=9/12, N=36, PMT=953.99 (953.99 ´ 36) – 30,000 = 4,344
b.	48 month loan: PV=30,000, I=9/12, N=48, PMT=746.55 (746.55 ´ 48) – 30,000 = 5,834

 

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Evaluation

 

4. Greg has negotiated a $20,000 price on a new pick-up truck. The manufacturer is offering a $1,500 rebate or 3.9 %, three-year financing. Greg is also able to get 7 %, three-year financing at his credit union. If Greg plans to finance $18,000 over three years, should he take the rebate or the 3.9 % financing? (Show all work.)

 

ANS:

7.9% loan: PV=18,000, I=3.9/12, N=36, PMT=530.63	530.63
8.0% loan: PV=18,000, I=7.0/12, N=36, PMT=555.79	555.79
Difference: 25.16 ´ 36 months =	$905.76

 

Since the 3.9 % financing saves Greg only $905.76 over the loan period, he should take the $1,500 rebate and finance his new truck through the credit union.

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Evaluation

 

5. Judy has $2,000 for a down payment on a vehicle and she can afford monthly payments of $400. She wants to finance a vehicle over no more than 4 years. If lenders are currently offering 6 percent interest on 5-year loans, what is the maximum price Judy can pay for a vehicle?

 

ANS:

PMT= $400, I=6/12, N=60, PV = $20,690 + $2,000 = $22,690

 

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

STA:   DISC: Investments                          KEY:  Bloom’s: Evaluation

 

6. Your mortgage payment is $1,500 per month. Of this amount, insurance is $50, property taxes are $200, and interest is about $1,100. Assuming you have other itemized deductions that already exceed your standard deduction and that you are in the 31% marginal tax bracket, what is the reduction in your tax liability as a result of owning a home with this mortgage. (Show all work.)

 

ANS:

Monthly tax deduction = $200 + $1,100 = $1,300.

 

Annual tax deduction = $1,300 ´ 12 = $15,600.

 

Reduction in taxes = $15,600 ´.31 = $4,836.

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Evaluation

 

7. Dick and Jane (and their dog Spot) have just purchased a house and are calculating how much money they will need when the closing day rolls around. The purchase price is $200,000. They will make a 20% down payment, and they must pay 2 points on the loan. Closing costs should be 3% of the purchase price. What is the total dollar amount they will need at closing? (Show all work.)

 

ANS:

Down payment = .20 ´ $200,000	$40,000
Points = .02 ´ $160,000	3,200
Closing costs = .03 ´ $200,000	6,000
Total Needed	$49,200

 

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Evaluation

 

8. Billy and Suzie want to calculate the difference in monthly payments on a $110,000 home as a result of a $5,000 down payment or a $10,000 down payment. Use your financial calculator to figure the monthly payments, assuming they get a 6.5%, 30-year mortgage.

 

ANS:

$  5,000 down payment: PV = $105,000, I = 6.5/12, N = 30 ´ 12, PMT = $663.67

$10,000 down payment: PV = $100,000, I = 6.5/12, N = 30 ´ 12, PMT = $632.07

 

The difference in monthly payments = $31.60

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Evaluation

 

9. If a lender requires that mortgage payments cannot exceed 30% of gross income and total loan payments cannot exceed 38% of gross income, calculate the monthly payment for which a person with the following financial data could qualify.

 

Gross Income	$5,500
Stereo loan payment	250
Furniture loan payment	200
Auto loan	400

 

 

ANS:

$5,500 ´ 0.3 = $1,650

$5,500 ´ 0.38 = $2,090 – $250 – $200 – $400 = $1,240

 

The maximum monthly payment would be $1,240.

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 5-4          NAT:  BUSPROG: Analytic skills

STA:   DISC: Investments                          KEY:  Bloom’s: Evaluation