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INSTANT DOWNLOAD COMPLETE TEST BANK WITH ANSWERS

 

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

 

 

Sample  Questions

 

Chapter 3—Preparing Your Taxes

 

TRUE/FALSE

 

  1. The Federal personal income tax is a progressive tax.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The Federal personal income tax is a flat tax.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Tax avoidance is legal, tax evasion is illegal.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. One’s marginal tax rate is typical lower than one’s average tax rate.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Analysis

 

  1. One’s average tax rate is typically lower than one’s marginal tax rate.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Analysis

 

  1. If you have any earned income, you are required to file a tax return.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The main objective of tax planning is to maximize the amount of money you keep by minimizing the amount of taxes you pay.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Comprehension

 

  1. If you are eligible to receive a tax refund, you will have to file a tax return to get the refund.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Income tax refunds are automatically sent to those who qualify for refunds no later than April 15.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. As a single taxpayer with no dependents, one is generally eligible to file as “head of household.”

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Russ and Lois got married December 30. Since they were single for most of the year, however, they can legally file as married taxpayers in the year of the wedding.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Dwayne and Gayle were divorced September 29, have not remarried, and have no dependents. Their filing status for the year will each be “married” since they were married for more than half of the year.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. If you are married, you can legally file a single tax return.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. A husband and wife would be the only couple combination that could file a joint return.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. A couple will usually incur a lower tax liability if they choose “married, filing jointly” rather than “married, filing a separately.”

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The Internal Revenue Service is responsible for writing the federal income tax codes.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The Congress writes and passes the Internal Revenue Code.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Social security taxes are deducted from all wages and salaries earned in a year.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Social security taxes are paid on earned income but not on investment income.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. There is no limit on the amount of Social Security withheld annually.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The Medicare portion of the Social Security tax is paid on 100% of earnings.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Your marital status will affect the amount of social security you must pay in a year.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Social Security taxes are paid on earned income and investment income.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Child support received is included in gross income.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Alimony received is included in gross income for the receiver and a tax deduction for the payer.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Gifts received from family and friends are included in gross income.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Gross income minus tax exempt income equals adjusted gross income.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Dividends received from the stock you own will be taxable income.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Qualified dividends are taxed at the same rates as long-term capital gains.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Portfolio-related expenses can be written off against passive income.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. A short-term capital gain would be taxed at the same rate as your salary.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. A long-term capital gain, a investment held for more than 6 months, would be taxed at the same rate as earned income.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The sale of your home will rarely result in a taxable capital gain.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. An investment must be owned over one year in order to qualify for long-term capital gains treatment.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. An investment must be owned over two years in order to qualify for long-term capital gains treatment.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. One’s home must typically be owned at least three years to receive the most favorable capital gains treatment.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Adjustments to income will decrease your taxable income.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Analysis

 

  1. Itemized deductions could include certain taxes, medical expenditures, and home mortgage interest.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Application

 

  1. You should itemize deductions when total itemized deductions exceed the standard deduction.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Analysis

 

  1. You should itemize deductions when total itemized deductions are less than the standard deduction.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Analysis

 

  1. Mortgage interest and paid home property taxes are both itemized deduction items.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Qualifying interest on a student loan can be written off as an itemized deduction.

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. State income taxes and real estate taxes are both itemized deduction items.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. State income taxes and state sales taxes paid can both be included as itemized deductions in the same tax year.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Federal income taxes paid can be deducted the following year.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Personal exemptions are tax deductions based on the number of taxpayers and dependents in the taxpayer’s household.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The personal exemption for a student can be taken both by the parent and by the child.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. When a child qualifies as a dependent on her parent’s return, the child cannot take a personal exemption for herself.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The alternative minimum tax is an issue only for high-income taxpayers.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Tax credits are dollar-for-dollar reductions in taxable income.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Estimated tax payments must be made by those who do not have taxes deducted from their earnings.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. A person with a significant amount of investment income would have a high probability of needing to make estimated tax payments.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Application

 

  1. All taxpayers have an equal probability of having their tax returns audited.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. You have up to three years after mailing your tax return to file an amended tax return (1040X).

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. If your AGI is less than $100,000 and you do not itemize deductions, the IRS will compute your taxes for you.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. A married couple filing a joint return has Ms. Cindy Cook, a CPA, complete their return. The IRS will hold only Ms. Cook responsible for any errors on the return.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Tax preparers must be licensed by either the state of federal government.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Anyone can legally prepare tax returns and charge a fee for that service.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Marginal tax and average tax rate refer to the same thing.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Analysis

 

  1. If you earn less than $15,000, you probably pay more in social security taxes than in federal income taxes.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

 

  1. Opening a traditional IRA would allow you to defer taxes on the earning.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Analysis

 

  1. Opening a traditional IRA would allow you to take advantage of tax free earnings.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Analysis

 

  1. Tax-deferred income is better than tax-free income.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Analysis

 

  1. Municipal bond investments typically provide tax-free interest income.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Most states generate the majority of their revenues from property taxes.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Tax avoidance is a legal means to minimize tax liabilities.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Tax evasion is a legal means to avoid tax liabilities.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Persons who work for more than one employer in any year will owe more Social Security taxes than if all their income was earned from a single employer.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Analysis

 

  1. The amount of one personal exemption in 2011 was $3,700.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The regular income tax filing deadline is April 1 of each year.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. By filing a tax extension, one does not have to pay his income tax liability until August 15.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Income shifting refers to the process of transferring income from the taxpayer to the IRS.

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Analysis

 

  1. The standard deduction in 2011 for a single filer is $5,800 and for married persons filing jointly is $11,600.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. A special tax provision reduced the social security portion for the individual taxpayer by 2% in 2011 and 2012.

 

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

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

 

  1. Most major software providers have free online versions for preparing federal taxes for all taxpayers.

 

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

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

 

  1. You are more likely to have your tax return audited if you work for a for-profit company, compared to a non-profit organization.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-4

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

 

  1. The tax year corresponds to the April 15 filing deadline, with a new tax year beginning April 16th.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-4

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

 

  1. The AMT includes in taxable income certain types of deductions otherwise allowed, such as state and local income and property taxes.

 

ANS:  T                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

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

 

MULTIPLE CHOICE

 

  1. The federal government gets the majority of its revenue from the ____ tax.
a. sales
b. property
c. excise
d. income
e. estate

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Over 75% of the revenue received by the federal government is from ____ and ____ taxes.
a. sales and income
b. income and excise
c. Social Security and estate
d. estate and sales
e. income and Social Security

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The federal income tax is
a. integrative.
b. regressive.
c. progressive.
d. flat rate.
e. none of the above.

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. A progressive tax system is one in which higher-income people pay ____ than lower-income people.
a. a higher dollar amount in taxes
b. tax at a higher rate
c. a lower dollar amount in taxes
d. tax at a lower rate
e. tax at the same rate

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Henry is married to Lillian, and they have two dependent children. Henry can legally file using which of the following filing statuses?
a. Single
b. Married filing jointly
c. Head of household
d. Qualifying widow
e. Any of the above

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Application

 

  1. Pete and Pam are married with four dependent children. Pete and Pam can legally file using which of the following filing statuses?
a. married filing separately
b. married filing jointly
c. head of household
d. a and b
e. a, b, and c

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Application

 

  1. Mandi and Thomas were married and had one child, age 7. Mandi died in 2011 leaving Thomas a single parent. In 2012, the most favorable filing status for Thomas will be
a. single
b. married filing separately
c. head of household
d. qualifying widow
e. any of the above

 

 

ANS:  D                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-1

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Analysis

 

  1. Molly and Jason were married. Their only “dependent” was Spot, their black standard poodle. Jason died in 2011. Assuming she does not remarry, in 2012 the only legal filing status for Molly will be
a. single
b. married filing separately
c. head of household
d. qualifying widow
e. any of the above

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Analysis

 

  1. For tax purposes, head-of-household refers to
a. the person with the larger income when a couple is filing a joint return.
b. a single individual with dependents.
c. a single individual who owns a home.
d. the spouse who has the only income for a couple filing a joint return.
e. a widow(er) with no dependents but with debts from death of spouse three years earlier.

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Your take-home pay is what you are left with after subtracting withholdings from your
a. gross earnings.
b. net earnings.
c. taxable income.
d. adjusted gross income.
e. tax exempt income.

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. ____ income is gross income less tax deductions and payments for insurance and retirement savings.
a. Take-home
b. EBIT
c. Adjusted gross
d. Taxable
e. Tax-exempt

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Your income tax withholding is dependent on
a. income level and deductions.
b. deductions and age.
c. income level and number of withholding allowances.
d. number of withholding allowances and deductions.
e. number of withholding allowances and dependents.

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The standard deduction is a blanket deduction that depends on the taxpayers
a. filing status
b. age
c. vision
d. all of the above.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. In 2011, the total Social Security tax was
a. 6.0%.
b. 6.75%.
c. 7.25%.
d. 11%.
e. 13.3%.

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Which of the following is NOT one of the three basic categories for individual income?
a. active income
b. passive income
c. gross income
d. portfolio income

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Ben and Jack both earned $60,000 this year. Ben (age 30) is married with two children, and Jack (age 68) is single with no dependents. Which of the following is true regarding the amount of Social Security taxes they will pay?
a. They will pay the same amount of Social Security taxes.
b. Ben will pay less Social Security taxes because he is married.
c. Ben will pay less Social Security taxes because he has children.
d. Jack will pay less Social Security taxes because he is single.
e. Jack will pay less Social Security taxes because he is over age 65.

 

 

ANS:  A                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. ____ income is subject to federal taxes.
a. Gross
b. Adjusted gross
c. Net
d. Take-home
e. Taxable

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. You would typically not include ____ in your gross income.
a. wages and salaries
b. life insurance death benefit payments
c. interest and dividends
d. pension income
e. gambling winnings

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Comprehension

 

  1. ____ would be considered taxable income.
a. An inheritance from your grandmother’s estate
b. A gift from your aunt
c. Child support payments
d. Alimony received
e. A tuition scholarship

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Application

 

  1. ____ would not be considered taxable income.
a. Child support payments
b. Proceedings from an employer retirement plan
c. Dividend income
d. a and b
e. a, b, and c

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. A capital gain is the result of
a. selling an asset for less than purchase price.
b. holding an asset that has appreciated.
c. selling an asset at the same price of purchase.
d. selling an asset for more than purchase price.
e. None of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The tax rate on capital gains for most people is
a. the same as on regular income.
b. dependent on the time the asset was owned.
c. dependent on the amount of profit earned.
d. higher than the rate on regular income.
e. None of these.

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Tom sold mutual fund shares he had owned 3 years so that he could use the proceeds to return to college. Tom is in the 15% marginal tax bracket and his capital gains from this sale were $11,000. How much tax would Tom owe on those gains?
a. $11,000
b. $  3,080
c. $  1,650
d. $  1,100
e. $    550

 

 

ANS:  E                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. Diana sold mutual fund shares she had owned 4 years so that she could use the proceeds to travel across Europe with her son. Diana is in the 35% marginal tax bracket and her capital gains from this sale were $30,000. How much tax would Diana owe on those gains?
a. $10,500
b. $  8,400
c. $  6,000
d. $  4,500
e. $  1,500

 

 

ANS:  D                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. You purchased and lived in your home 8 years. Now you have received an excellent promotion, but you will have to sell your home and move to another community. The capital gains on the home sold will
a. be taxable as ordinary income.
b. be taxable at the 15% tax bracket.
c. be taxable at the appropriate long-term capital gains rate.
d. not be taxable because the home was your principal residence.
e. not be taxable because this is a job-related move.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Murray (age 68, single) just sold his home of 35 years so that he could relocate nearer his grandchildren. He realized a $400,000 capital gain on the home. How much of this gain will Murray have to pay taxes on?
a. $400,000
b. $300,000
c. $250,000
d. $150,000
e. $           0

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. Maria and Ed just sold their home of 20 years so that they could purchase a smaller home. They realized a $400,000 capital gain on the home. How much of this gain will Maria and Ed have to pay taxes on?
a. $400,000
b. $300,000
c. $250,000
d. $100,000
e. $           0

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. Which of the following can be adjustment(s) to gross income on the 1040 form?
a. Health insurance premiums paid by self-employed individuals
b. Alimony paid
c. Moving expenses
d. a and b only
e. a, b, and c

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Which of the following cannot be adjustment(s) to gross income on the 1040 form?
a. Health insurance premiums paid by self-employed individuals
b. Alimony paid
c. Moving expenses
d. Traditional IRA contributions
e. Child care deductions

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Molly and Justin are considering contributing $5,000 to their favorite, tax deductible charity. This contribution will bring their total itemized deductions to $20,000. Assuming they are in the 28% marginal tax bracket, how much will they save in taxes by contributing this $5,000 to charity?
a. $       0
b. $   840
c. $1,400
d. $2,000
e. $5,000

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. John and Charlotte are considering contributing $1,000 to their church. This contribution will bring their total itemized deductions to $2,000. Assuming they are in the 15% marginal tax bracket, how much will they save in taxes by contributing this $1,000 to their church?
a. $       0
b. $   150
c. $   300
d. $   500
e. $1,000

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. Medical and dental expenses may be included as itemized deductions
a. when they exceed 4% of adjusted gross income.
b. up to a maximum of $7,500 per individual per tax year.
c. only if they do not exceed 7% of gross income.
d. only in the amount in excess of 7.5% of adjusted gross income.
e. always.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Mr. and Mrs. Davenport have three children ages 3, 6, and 13. Their financial matters for 2011 are as follows:

 

Adjusted Gross Income $65,000
Un-reimbursed Medical Expenses $  5,250

 

How much would the Davenports’ medical expenses contribute to their total itemized deductions?

a. $       0
b. $   375
c. $3,500
d. $2,750
e. $4,500

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. Mr. and Mrs. Sanborn are retired and have had several medical problems this year. Their financial matters for 2008 are as follows:

 

Adjusted Gross Income $65,000
Un-reimbursed Medical Expenses $14,500

 

How much would the Sanborns’ medical expenses contribute to their total itemized deductions?

a. $         0
b. $  4,875
c. $  7,500
d. $  9,625
e. $14,500

 

 

ANS:  D                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. Buddy Slaton has only one itemized deduction item, the $3,000 he gave to his church. His standard deduction this year is $5,450, and he is in the 15% marginal tax bracket. How much will his contribution to the church save Buddy in taxes this year?
a. $4,400
b. $3,000
c. $   660
d. $   450
e. $       0

 

 

ANS:  E                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. Itemized non-business expenses do not include
a. charitable contributions.
b. state income taxes.
c. residential mortgage interest.
d. medical expenses.
e. life insurance premiums.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. If you do not wish to itemize deductions, you can use the
a. pay-as-you-go amount.
b. bracket deduction.
c. standard deduction.
d. exemption.
e. withholding allowance.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Connie is a 20 year old college student who earned $8,000 and spent it all on her support during the year. Her parents may claim her as a tax dependent as long as
a. they contribute more than half her support for the year.
b. she is under 21.
c. she makes under $10,000.
d. she lives at home.
e. all these things are true.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. Jackson is a 25 year old college student whose parents contribute to his support. His parents may claim him as a tax dependent in 2011 as long as
a. they contribute more than half of his support for the year.
b. he is under 30.
c. he makes under $500.
d. a and c.
e. a, b, and c.

 

 

ANS:  A                    PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. For 2011, each personal exemption reduced taxable income by
a. $2,800
b. $3,000
c. $3,700
d. $3,900
e. $4,000

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The total amount that you owe for income tax in one year is your tax
a. withholdings.
b. credit.
c. rate.
d. refund.
e. liability.

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Tax credits reduce your
a. tax liability.
b. adjusted gross income.
c. tax refund.
d. tax withholding.
e. taxable income.

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Analysis

 

  1. Mr. and Mrs. McMurray have three children ages 3, 6, and 12 for which they paid $6,000 in child care expenses this year. Assume the McMurray’s tax liability is initially calculated to be $10,000. Then apply a 20% tax credit for child care expenses within limits normally allowed. How much will their final tax liability be?
a. $  8,000
b. $  8,500
c. $  8,800
d. $  9,040
e. $10,000

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. Jamil and Vicki have one child, age 3, for which they paid $2,500 in child care expenses this year. If they are eligible for the 20% dependent care credit plus the child tax credit, how much will these two credits reduce their tax liability?
a. $   500
b. $1,500
c. $2,000
d. $2,500
e. $3,000

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. You have no employer provided pension plan; your IRA contributions are treated as
a. an adjustments to gross income.
b. an additional personal exemption.
c. part of the standard deduction.
d. an itemized deduction.
e. a tax credit.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. A ____ would be most likely to have to pay estimated taxes.
a. school teacher
b. manager for a major industrial firm
c. self-employed plumber
d. union worker
e. corporate attorney

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Application

 

  1. On which of the following types of income would you normally have income tax withheld?
a. Tips
b. Interest
c. Dividends
d. Capital gains
e. Self-employment income

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Application

 

  1. A declaration of estimated taxes is made by filing
a. Schedule B.
b. Form 1040 EZ.
c. Schedule Z.
d. Form 1040 ES.
e. Form 1040 A.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. You made an error when you filed your tax return last year. You can correct this error by filing Form
a. 1040ES.
b. 1040X.
c. 1040E.
d. Schedule A.
e. Schedule D.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. A tax audit is a(n)
a. IRS revision of previously filed return.
b. IRS attempt to verify accuracy of return.
c. IRS charge of illegal action.
d. U.S. Tax Court action.
e. U.S. Tax Court decision.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Which of the following offer tax preparation services?
a. National and local tax services
b. Certified Public Accountants (CPAs)
c. Enrolled Agents (EAs)
d. Tax Attorneys
e. All of the above can offer tax preparation services

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. You are preparing your own tax return. The least costly source for answering your questions would be
a. IRS 800 numbers.
b. private preparation service.
c. tax accountant.
d. tax lawyer.
e. local post office.

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Your average tax rate is your
a. adjusted gross income divided by tax withheld.
b. adjusted gross income divided by tax liability.
c. tax liability divided by taxable income.
d. taxable income divided by tax withheld.
e. gross income divided by tax refund.

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The proper name of the so-called short form is
a. Schedule A.
b. Schedule B.
c. 1040.
d. 1040A.
e. 1040EZ.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-4

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. The Robertsons, a couple with an AGI of $28,500, decided to contribute the maximum amount possible towards their IRAs even though Mr. Robertson had a pension plan at work. He named his wife as beneficiary of the IRA. What is such a tax strategy called?
a. tax deferral since he’ll have to pay taxes later when he withdraws the money
b. tax avoidance since he’ll never have to pay taxes on the IRA contribution
c. tax evasion since this is illegal
d. tax ignorance since he can’t deduct the contribution anyway due to his pension plan at work
e. income shifting to another person in a lower tax bracket

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Evaluation

 

  1. Which of the following are legal methods of reducing your current tax liability?
a. not reporting taxable income you receive
b. investing in a tax deferred annuity
c. shifting income to your children
d. writing off deductions above the actual amount(s) spent
e. b and c

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Application

 

  1. The income shifting tax strategy is least effective when income producing gifts are given to persons
a. over age 65.
b. over age 50.
c. under age 14.
d. under age 25.
e. Age is not an issue.

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Application

 

  1. Itemized deductions are listed on Schedule
a. A.
b. B.
c. C.
d. D.
e. F.

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Local governments get most of their tax revenue from
a. property taxes.
b. sales taxes.
c. licensing fees.
d. excise taxes.
e. income taxes.

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Typically state governments get most of their tax revenue from
a. property taxes and excise taxes.
b. sales taxes and income taxes.
c. licensing fees and income taxes.
d. excise taxes and sales taxes.
e. income taxes and property taxes.

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Which of the following state and local taxes are deductible on federal income taxes for those that itemize deductions?
a. property taxes and excise taxes.
b. sales taxes and income taxes.
c. licensing fees and income taxes.
d. excise taxes and sales taxes.
e. income taxes and property taxes.

 

 

ANS:  E                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. Tax practitioners that are Federally licensed are called
a. Certified Public Accountants
b. Certified Financial Planners
c. Tax Attorneys
d. Enrolled Agents
e. None of the above

 

 

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

NAT:  BUSPROG: Analytic skills             STA:   DISC: Taxes

KEY:  Bloom’s: Knowledge

 

  1. A special tax provision reduced the social security portion for the individual taxpayer in 2011 and 2012 by
a. 1.0%
b. 2.0%
c. 3.0%
d. 4.0%
e. 5.0%

 

 

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

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

 

  1. All major software providers have online versions for preparing federal taxes.  This software is
a. free to all tax filers
b. free to qualified tax filers
c. for a fee for all tax filers
d. available on a free trial to all tax filers
e. available on a free trial to qualified tax filers

 

 

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

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

 

  1. Who would be most likely to have to pay estimated taxes?
a. insurance salesman
b. teacher
c. corporate manager
d. state worker
e. state police

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-4

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

 

  1. A taxpayer can file for an automatic extension of ___ months.
a. 2
b. 4
c. 6
d. 9
e. 12

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   LO: 3-4

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

 

  1. To qualify for the capital gain exclusion on a home sale, the seller must have resided in the residence for ___ of the previous 5 years.
a. 1
b. 2
c. 3
d. 4
e. 5

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2

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

 

COMPLETION

 

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

 

  1. Tax [avoidance | evasion] is a perfectly legal practice.

 

ANS:  a

 

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

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

 

  1. Tax [avoidance | evasion] focuses on reducing taxes in ways that are legal and compatible with the intent of Congress.

 

ANS:  a

 

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

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

 

  1. Tax [avoidance | evasion] involves failure to accurately report income or deductions, and, in extreme cases, a failure to pay taxes altogether.

 

ANS:  b

 

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

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

 

  1. The major source of revenue for the federal government is [income | Social Security] taxes.

 

ANS:  a

 

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

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

 

  1. Tax planning is [confined to the first quarter of the year | a year-round activity].

 

ANS:  b

 

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

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

 

  1. The lowest marginal tax rate is currently [10% | 35%].

 

ANS:  a

 

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

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

 

  1. The highest marginal tax rate is currently [35% | 28%].

 

ANS:  a

 

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

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

 

  1. Your income tax filing status is determined primarily by your [income | marital] status.

 

ANS:  b

 

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

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

 

  1. Federal income taxation is [progressive | regressive].

 

ANS:  a

 

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

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

 

  1. Christy lives by herself with her dog, Tex. She [can | cannot] use the Head of Household filing status.

 

ANS:  b

 

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

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

 

  1. Usually a married couple will pay less income tax if they file [jointly | separately].

 

ANS:  a

 

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

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

 

  1. The common name for Federal Insurance Contribution Act payments is [income taxes | social security].

 

ANS:  b

 

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

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

 

  1. [Both you and your employer | Only your employer] will make social security contributions based on your wages.

 

ANS:  a

 

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

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

 

  1. When matching Social Security contributions, employers pay [the same | a lesser] amount of Social Security taxes as/than the employee.

 

ANS:  a

 

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

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

 

  1. Your marital status [will | will not] have an effect on the amount of social security tax you pay.

 

ANS:  b

 

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

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

 

  1. The IRS definition of [gross | adjusted] income is “all income that is subject to federal taxes.”

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. [Alimony | Child support] would be reported as taxable income.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. Dividends received from stocks are known as [passive | portfolio] income.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. Earnings from real estate investments are an example of [active | passive] income.

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. Qualified dividends are taxed at the same rates as [earned income | long-term capital gains].

 

ANS:  b

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. You will have to list and be able to prove [standard | itemized] deductions if audited.

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. [All | Some] of your medical expenses during the year could be taken as an itemized deduction.

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. Interest you paid on your [car | house] loan could be deducted.

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. Interest you paid on your [vacation home | stereo] loan could be deducted.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. Your tax filing status [would | would not] be a factor in determining the amount of standard deduction you could take.

 

ANS:  a

 

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

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

 

  1. My son, age 21, earned $5,000 last year. He still lives at home, and I provide over 50% of his support. I [can | cannot] claim him as a dependent on my tax return if he is a full time college student.

 

ANS:  a

 

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

STA:   DISC: Taxes                                   KEY:  Bloom’s: Application

 

  1. My son, age 26 and a full-time college student, earned $5,000 last year. He still lives at home, and I provide over 50% of his support. I [can | cannot] claim him as a dependent on my tax return.

 

ANS:  b

 

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

STA:   DISC: Taxes                                   KEY:  Bloom’s: Application

 

  1. If you are claimed as a dependent on your parents’ tax return, you [may also | may not] claim yourself on your tax return.

 

ANS:  b

 

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

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

 

  1. A tax credit would result from [an IRA contribution | child care expenses].

 

ANS:  b

 

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

STA:   DISC: Taxes                                   KEY:  Bloom’s: Application

 

  1. A tax credit could result from [owning a home | adopting a child].

 

ANS:  b

 

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

STA:   DISC: Taxes                                   KEY:  Bloom’s: Application

 

  1. A tax credit is subtracted from your [taxable income | tax liability].

 

ANS:  b

 

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

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

 

  1. You are single with no dependents, age 30. Based on this information, you [could | could not] use the 1040EZ.

 

ANS:  a

 

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

STA:   DISC: Taxes                                   KEY:  Bloom’s: Application

 

  1. You will itemize your deductions. You [could | could not] use the 1040A.

 

ANS:  b

 

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

STA:   DISC: Taxes                                   KEY:  Bloom’s: Application

 

  1. There is a [high | low] chance that one’s tax return will be audited in a given year.

 

ANS:  b

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 3-4          NAT:  BUSPROG: Analytic skills

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

 

  1. The higher your income, the [greater | smaller] the probability you will be audited.

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 3-4          NAT:  BUSPROG: Analytic skills

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

 

  1. If you ask the IRS a tax question and are given an incorrect answer, [you will still have to pay any additional tax owed | the IRS will forgive any additional taxes].

 

ANS:  a

 

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

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

 

  1. If you pay a professional to prepare your taxes, any errors on the return will be [your | the preparer’s] responsibility.

 

ANS:  a

 

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

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

 

  1. The terms “tax free” and “tax deferred” [do | do not] mean the same thing.

 

ANS:  b

 

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

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

 

  1. The date by which your tax liability must be paid in order to avoid late payment penalties and/or interest is [April 15 | August 15].

 

ANS:  a

 

PTS:   1                    DIF:    Easy               OBJ:   LO: 3-4          NAT:  BUSPROG: Analytic skills

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

 

  1. When one gives a child an income producing asset, one is [maximizing their deductions | income shifting].

 

ANS:  b

 

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

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

 

  1. Excise taxes are similar to [real estate | sales] taxes.

 

ANS:  b

 

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

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

 

  1. Tax credits directly reduce a taxpayer’s [taxes due | taxable income].

 

ANS:  a

 

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

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

 

  1. The standard or itemized deduction, reduces the taxpayer’s [taxable income | taxes due].

 

ANS:  a

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. A special tax provision reduced the social security portion for the individual taxpayer in 2011 and 2012 from [6.2% to 4.2% | 4.2% to 2.2%].

 

ANS:  a

 

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

KEY:  Bloom’s: Knowledge

 

  1. Major software providers have online versions for preparing federal taxes which is [free to all tax filers | free to qualified tax filers].

 

ANS:  b

 

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

KEY:  Bloom’s: Knowledge

 

  1. A special tax provision reduced the social security portion for the individual taxpayer by [1% | 2%] in 2011 and 2012.

 

ANS:  b

 

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

KEY:  Bloom’s: Knowledge

 

  1. If you earn less than $15,000, you likely pay more in [federal income tax | social security taxes].

 

ANS:  b

 

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

KEY:  Bloom’s: Analysis

 

  1. The tax year corresponds to the [April 15 filing deadline | calendar year].

 

ANS:  b

 

PTS:   1                    DIF:    Moderate       OBJ:   LO: 3-4          NAT:  BUSPROG: Analytic skills

KEY:  Bloom’s: Knowledge

 

PROBLEM

 

  1. Jamie has taxable income of $45,000. She is single and her tax rates are 10% on the first $7,000 of taxable income, 15% of the amount over $7,000 up to $28,400 of taxable income and 25% on the remainder. What is Jamie’s tax liability, her marginal tax rate, and her average tax rate? (Show all work.)

 

ANS:

Tax liability = .10 ($7,300) + .15($29,700 – $7,300) + .25($45,000-$29,700)

= $730+ $3,360 + $3,825 = $7,915

 

Marginal tax rate = 25%

 

Average tax rate =  = .1759 or 17.59%

 

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

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

 

  1. Shawn earned $65,000. If the total Social Security tax rate is 15.3% then how much was his social security tax? How much would his employer pay in social security taxes for Shawn? (Show all work.)

 

ANS:

Alex paid social security tax of $4,973 (.0765 ´ $65,000).

 

Alex’s employer would also pay $4,973.

 

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

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

 

  1. From the information given below, determine Marcie’s gross income for tax purposes:

 

salary $ 40,000
interest (checking account) $        50
cash received as birthday gift $      900
dividends (mutual funds) $      500
inheritance received on father’s death $ 22,000
cash received from insurance for accident claim settlement $   3,200
cash dividend from stock $      750

 

 

ANS:

$40,000 + 50 + 500 + 750 = $41,300

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. From the information given below, determine Steve’s gross income for tax purposes:

 

salary $ 32,000
interest (checking account) $        25
cash received as birthday gift $   1,000
dividends (mutual funds) $   5,500
child support payments received from ex-wife $ 24,000
life insurance benefits received from aunt’s death $ 50,000

 

 

ANS:

$32,000 + 25 + 5,500 = $37,525

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. Sue and Tim are married taxpayers in the 33% marginal tax bracket. In 2011, they sold common stock shares for a long-term capital gain of $3,800. They also sold some technology stock for a long-term capital loss of $9,000. In addition, they sold the home they had lived in for the past 10 years and experienced a $75,000 gain on the house. How much will their net capital gains (or losses) be for 2011? How much will they pay (or save) in taxes as a result of these transactions?

 

ANS:

$3,000 capital loss this year with a $2,200 capital loss carryover for next year. The capital gain on the house is tax-free, and they are limited to a $3,000 net loss/year.

 

$3,000 ´ .33 = $990 tax savings in 2011 as a result of the loss

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. Hector is a single taxpayer in the 28% marginal tax bracket. In 2011, he sold stock shares for a long-term capital gain of $8,500. He also sold some financial services stock for a long-term capital loss of $2,000. In addition, he sold the home that he had lived in for the past 3 years and experienced a $15,000 gain on the house. How much will his net capital gains (or losses) be for 2011? How much will he pay (or save) in taxes as a result of these transactions?

 

ANS:

$6,500 long-term capital gain this year. The capital gain on the house is tax-free.

 

$6,500 ´ .15 = $975 tax liability in 2011 as a result of the gain

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. George has the following expenses that he wants to include as itemized deductions for the year. His adjusted gross income is $60,000. What is the total itemized deduction he can take? (Show all work.)

 

Medical expenses $4,500
Home mortgage interest 8,000
Credit card interest 450
Charitable contributions 1,500
State property taxes 2,400
Job related expenses 1,900

 

 

ANS:

Medical expenses $         0
{$4,500 – (.075 ´ $60,000)}
Home mortgage interest 8,000
Credit card interest (not allowed)
Charitable contributions 1,500
State property tax 2,400
Job related expenses        700
{$1,900 – (.02 ´ $60,000)}
$12,600

 

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

  1. George, from the previous problem, is single and his standard deduction for the year is $5,800. If he is in the 25% marginal tax bracket, how much tax would he save by using his itemized deductions?

 

ANS:

($12,600 – 5,800) ´ .25 = $1,700.00

 

PTS:   1                    DIF:    Challenging    OBJ:   LO: 3-2          NAT:  BUSPROG: Analytic skills

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

 

 

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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. ____ 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. ____ 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

 

  1. 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

 

  1. ____ 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

 

  1. ____ 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

 

  1. 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

 

  1. 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

 

  1. ____ 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

 

  1. ____ 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. ____ 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. ____ 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. [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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. The 11th 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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