Chapter 1 Personal Financial Planning: An Introduction

True/False Questions

1) Financial planning has specific techniques that will be effective for every individual and household.

 

2. Opportunity costs refer to what a person gives up when making a decision.

 

3. Most decisions have only a few alternatives from which to choose.

 

4. Risks associated with most financial decisions are fairly easy to measure.

 

5. Developing financial goals is the first step in the financial planning process.

 

6. Analyzing your current financial position is a part of the first stage of the financial planning process.

             7. The financial planning process is complete once you implement your financial plan.

 

             8. Short-term goals are usually achieved within the next year or so.

 

9. Planning to buy a house is an example of an intangible goal.

 

10. Household size is a major influence on personal financial planning decisions.

 

 11. Increased demand for a product or service will usually result in lower prices for the item.

 

12. Inflation reduces the buying power of money.

 

13. Lenders benefit more than borrowers in times of high inflation.

 

14. Economics is the study of using money to achieve financial goals.

 

15. When prices are increasing at a rate of 6 percent, the cost of products would double in about 12 years.

 

16. A decrease in the demand for a product or service may result in a decrease in wages for people producing that item.

 

17. Higher inflation usually results in lower interest rates.

 

18. Opportunity costs refer to time, money, and other resources that are given up when a decision is made.

 

 

 19. Time value of money refers to changes in consumer spending when inflation occurs.

 

20. Interest on savings is calculated by multiplying the money amount times the opportunity cost times the annual interest rate.

 

21. Present value is also referred to as compounding.

 

22. Liquidity is the ability to convert financial resources into usable cash with ease.

 

23. Developing and using a budget is part of the "obtaining" component of financial planning.

 

24. A financial plan is another name for a budget.

 

Answer: False

Multiple Choice Questions

 

 

25. Personal financial planning has the main goal of
    1. savings and investing for future needs.
    2. reducing a person's tax liability.
    3. putting money to work and living within your means.
    4. spending to achieve financial objectives.
    5. savings, spending, and borrowing based on current needs.

 

26. The first step of the financial planning process is to
    1. develop financial goals.
    2. implement the financial plan.
    3. analyze your current personal and financial situation.
    4. evaluate and revise your actions.
    5. create a financial plan of action.

 

27. Opportunity cost refers to
    1. money needed for major consumer purchases.
    2. the trade-off of a decision.
    3. the amount paid for taxes when a purchase is made.
    4. current interest rates.
    5. evaluating different alternatives for financial decisions.

 

28.                          risk refers to the danger of lost buying power during times of rising prices.
    1. Trade-off
    2. Economic
    3. Personal
    4. Inflation
    5. Interest-rate

29. Which of the following is an example of opportunity cost?
    1. renting an apartment near school
    2. saving money instead of taking a vacation
    3. setting aside money for paying income tax
    4. purchasing automobile insurance
    5. using a personal computer for financial planning
30. The changing cost of money is referred to as                          risk.
    1. interest-rate
    2. inflation
    3. economic
    4. trade-off
    5. personal

 

31. The uncertainty associated with decision making is referred to as
    1. opportunity cost.
    2. selection of alternatives.
    3. financial goals.
    4. personal values.
    5. risk.

 

32. The financial planning process concludes with efforts to
    1. develop financial goals.
    2. create a financial plan of action.
    3. analyze your current personal and financial situation.
    4. review the financial plan.
    5. review and revise your actio

33. Using the services of financial institutions will be most evident in your effort to
    1. develop financial goals.
    2. evaluate and revise your actions.
    3. analyze your current personal and financial situation.
    4. implement the financial plan.
    5. create a financial plan of action.
34. Changes in income, values, and family situation make it necessary to
    1. evaluate and revise your actions.
    2. implement the financial plan.
    3. develop financial goals.
    4. analyze your current personal and financial situation.
    5. create a financial pla

 

35. As Jean Tyler plans to set aside funds for her young children's college education, she is setting a(n)                                            goal.
    1. intermediate
    2. long-term
    3. short-term
    4. intangible
    5. durable

 

36.                          goals relate to personal relationships, health, and education.
    1. Durable-product
    2. Short-term
    3. Consumable-product
    4. Intangible-purchase
    5. Intermedia

37. Brad Opper has a goal of "saving $50 a month for vacation." Brad's goal lacks
    1. measurable terms.
    2. a realistic perspective.
    3. specific actions.
    4. a tangible end.
    5. a time frame.

 

38. Which of the following goals would be the easiest to implement and measure its accomplishment?
    1. "Reduce our debt payments."
    2. "Save funds for an annual vacation."
    3. "Save $100 a month to create a $4,000 emergency fund."
    4. "Invest $2,000 a yar for retirement."

 

39. Higher prices are likely to result from
    1. lower demand by consumers.
    2. increased production by business.
    3. lower interest rates.
    4. increased spending by consumers.
    5. an increase in the supply of a product.

 

40. Who is most likely to benefit by inflation?
    1. retired people
    2. lenders
    3. borrowers
    4. low-income consumers
    5. government

41. Higher consumer prices are likely to be accompanied by
    1. lower union wages.
    2. lower interest rates.
    3. lower production costs.
    4. higher interest rates.
    5. higher exports.

 

42. With an inflation rate of 9 percent, prices would double in about                        years.
    1. 4
    2. 6
    3. 8
    4. 10
    5. 12

 

43. Increased consumer spending will usually cause
    1. lower consumer prices.
    2. reduced employment levels.
    3. lower tax revenues.
    4. lower interest rates.
    5. higher employment leve

 

44. Higher interest rates can be caused by
    1. a lower money supply.
    2. an increase in the money supply.
    3. a decrease in consumer borrowing.
    4. lower government spending.
    5. increased saving and investing by consumers.

 

45. A risk premium associated with interest rates refers to
    1. expanded exports.
    2. lower consumer prices.
    3. higher earnings due to uncertainty.
    4. a loan with a short maturity.
    5. expected lower inflation.

 

46. Which of the following would increase the risk of a loan?
    1. higher consumer prices
    2. a short time to maturity
    3. lower consumer prices
    4. constant interest rates
    5. a good credit rating

 

47. The stages that an individual goes through based on age, financial needs, and family situation is called the
    1. financial planning process.
    2. budgeting procedure.
    3. personal economic cycle.
    4. adult life cycle.
    5. tax planning process.

 

 

48. The study of how wealth is created and distributed is
    1. financial planning.
    2. opportunity cost.
    3. inflation.
    4. economics.
    5. a market economy.

49. The main economic influence that determines prices is
    1. the stock market.
    2. interest rates.
    3. employment.
    4. government spending.
    5. supply and demand.
50. The Fed refers to
    1. government regulation of business.
    2. Congress.
    3. the Federal Reserve System.
    4. the Federal Deposit Insurance Corporation.
    5. spending by the federal government.

 

51. The main responsibility of The Fed is to
    1. regulate the money supply.
    2. approve spending by Congress.
    3. set federal income tax rates.
    4. determine illegal business activities.
    5. maintain a balanced budget for the federal governmen

 

52. Reduced funds available for investment in our economy could result from
    1. expanded savings by consumers.
    2. higher exports than imports.
    3. reduced spending for consumer goods.
    4. higher imports than exports.

 

53. Which of the following would cause prices to drop?
    1. increased taxes on business
    2. higher levels of demand by consumers
    3. a demand for higher wages
    4. a reduction in the money supply
    5. increased production by busines
54. An example of a personal opportunity cost would be
    1. interest lost by using savings to make a purchase.
    2. higher earnings on savings that must be kept on deposit a minimum of six months.
    3. lost wages due to continuing as a full-time student.
    4. time comparing several brands of personal computers.
    5. having to pay a tax penalty due to not having enough withheld from your monthly salary

 

55. The time value of money refers to
    1. personal opportunity costs such as time lost on an activity.
    2. financial decisions that require borrowing funds from a financial institution.
    3. changes in interest rates due to changes in the supply and demand for money in our economy.
    4. increases in an amount of money as a result of interest.
    5. changing demographic trends in our society

 

56. The amount of interest is determined by multiplying the amount in savings by the
    1. annual interest rate.
    2. time period.
    3. number of months in a year.
    4. time period and number of months.
    5. annual interest rate and the time period.

57. If a person deposited $50 a month for 6 years earning 8 percent, this would involve what type of computation?
    1. simple interest
    2. future value of a single amount
    3. future value of a series of deposits
    4. present value of a single amount
    5. present value of a series of deposits
58. Which type of computation would a peon use to determine current value of a desired amount for the future?
    1. simple interest
    2. future value of a single amount
    3. future value of a series of deposits
    4. present value of a single amount
    5. present value of a series of deposits
59. Future value calculations are also referred to as
    1. discounting.
    2. add-on interest.
    3. compounding.
    4. simple interest.
    5. an annuity.

 

60. If you put $1,000 in a saving account and make no further deposits, what type of calculation would provide you with the value of the account in 20 years?
    1. future value of a single amount
    2. simple interest
    3. present value of a single amount
    4. present value of a series of deposits
    5. future value of a series of deposits

61. Attempts to increase income are part of the                          component of financial planning.
    1. planning
    2. obtaining
    3. saving
    4. sharing
    5. protecting

 

62. A major activity in the planning component of financial planning is
    1. selecting insurance coverage.
    2. evaluating investment alternatives.
    3. gaining occupational training and experience.
    4. allocating current resources for spending.
    5. establishing a line of credit.

 

63. Liquidity refers to
    1. the earnings on savings.
    2. the risk of an investment.
    3. the ease of converting a financial resource into cash.
    4. the amount of insurance coverage a person has.
    5. a person's inability to pay his or her debts.

 

64. The ability to convert financial resources into usable cash with ease is referred to as
    1. bankruptcy.
    2. liquidity.
    3. investing.
    4. saving.
    5. opportunity cost.

 

65. The problem of bankruptcy is associated with poor decisions in the                             

component of financial planning.

1. 1. sharing
   2. saving
   3. obtaining
   4. borrowing
   5. protecting

 

66. A question associated with the saving component of financial planning is:
    1. Do you have an adequate emergency fund?
    2. Is your will current?
    3. Is your investment program appropriate to your income and tax situation?
    4. Do you have a realistic budget for your current financial situation?
    5. Are your transportation expenses minimized through careful planning?

 

67. A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends a direction for your financial activities is a(n)
    1. insurance prospectus.
    2. financial plan.
    3. budget.
    4. investment forecast.
    5. statement.

 

68. The major function of a financial plan is to
    1. reduce taxes.
    2. increase savings.
    3. achieve financial goals.
    4. improve your credit rating.
    5. obtain adequate insurance pro

69. The success of a financial plan will be determined by
    1. the amount of income available.
    2. the stage of the adult life cycle.
    3. a person's tax status.
    4. how resources are used.
    5. current economic conditions.

 

70. Which of the following is usually considered a long-term financial strategy?
    1. creating a budget
    2. using savings to pay off a loan early
    3. renting an apartment to save for the purchase of a home
    4. investing in a growth mutual fund to accumulate retirement funds
    5. purchasing auto insurance to cover the needs of dependents

Essay Questions

 

 

71. What types of risks are commonly associated with personal financial decisions? How can these risks be evaluated and minimized to reduce personal and financial difficulties

 

72. People are commonly overwhelmed by the many influences on personal financial decisions. What are the factors affecting financial planning