BE450

Midterm Review

Practice Exercises
Chapters 1, 2, 5, 6, 7

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CHAPTER 1 Questions and Solutions

CHAPTER 1 QUIZ ANSWERS

True-False Multiple Choice

1. T 8. B

2. F 9. D

3. T 10. C

4. T 11. A

5. T 12. D

6. F 13. A

7. F 14. B

CHAPTER 1 QUIZ

TRUE-FALSE
_____1. A major purpose of personal financial planning is future economic security.

_____2. 2 Personal financial planning starts by creating a plan of action.

_____3. Interest rate risk and inflation risk can affect any financial decision.

_____4. Inflation reduces the buying power of a dollar.

_____5. Changes in interest rates affect your cost of borrowing and your return on investments,
thus it is one of the risks you face when making financial decisions.

_____6. Intermediate goals have a time frame of two to seven years.

_____7. The life cycle approach is the idea that an average person goes through three basic stages
in personal financial management.

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MULTIPLE CHOICE
_____8. _ Opportunity cost refers to

a. your personal values.

b. trade-offs when a decision is made.

c. current economic conditions.

d. commonly accepted financial goals.

_____9. _ The first step in the financial planning process is to

a. create a financial plan of action.

b. develop financial goals.

c. evaluate and revise your actions.

d. determine your current financial situation.

_____10. You need a place to live. You have determined that you can continue to rent an apartment,
move in with your parents, look at buying a condominium or look at buying a house. This
is an example of which step in the financial planning process?

a. Determining your current financial position

b. Developing financial goals

c. Identifying alternative courses of action

d. Evaluating alternatives

_____11. You want to budget your money so that you can see a movie once a month. This is an
example of:

a. A consumable products financial goal

b. A durable goods financial goal

c. An intangible goal

d. A long term financial goal

_____12. Economics refers to

a. setting personal financial goals.

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b. planning future financial security.

c. changes in prices due to supply and demand.

d. the study of wealth.

_____13. Career planning is the part of the __________ component of financial planning.

a. obtaining

b. sharing

c. saving

d. planning

_____14. Financial strategies refer to

a. the process of predicting your future financial situation.

b. courses of action to achieve financial goals.

c. resources an individual has available for investing.

d. ideas or principles that are considered correct, desirable, or important.

FINANCIAL PLANNING PROBLEMS

(Note: Some of these problems require the use of the time value of money tables in Appendix 1B)

1. Ben Collins plans to buy a house for $65,000. If that real estate property is expected to increase in
value by 5 percent each year, what will its approximate value be seven years from now?
$65,000  1.407 = $91,455
3. In 1998, selected automobiles had an average cost of $12,000. The average cost of those same motor
vehicles 10 years later is $16,000. What was the rate of increase for these items between the two time
periods?
($16,000 - $12,000) / $12,000 = .3333 (33.33 percent)
4. How much should you deposit today to have $7,000 in five years if your investment earns a rate of
3% per annum?
7000/(1.03)5 = $6,038.26

10. Using time value of money tables, calculate the following:

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a. The future value of $450 six years from now at 7 percent.

$450  1.501 = $675.45

b. The future value of $800 saved each year for 10 years at 8 percent.

$800  14.487 = $11,589.60

c. The amount that a person would have to deposit today (present value) at a 6 percent interest rate
in order to have $1,000 five years from now.

$1,000  .747 = $747

d. The amount that a person would have to deposit today in order to be able to take out $500 a year
for 10 years from an account earning 8 percent.

$500  6.710 = $3,355

11. Elaine Romberg prepares her own income tax return each year. A tax preparer would charge her $60
for this service. Over a period of 10 years, how much does Elaine save from preparing her own tax
return (assume that she earns 6 percent on a savings account)?
$60  13.181 = $790.86

CHAPTER 2 Questions and Solutions

CHAPTER 2 QUIZ ANSWERS

True-False Multiple Choice

1. F 9. A

2. T 10. C

3. T 11. D

4. T 12. B

5. T 13. C

6. T 14. B

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7. F 15. C

8. T 16. B

CHAPTER 2 QUIZ

TRUE-FALSE
_____1. Most financial records should be kept in a safe-deposit box.

_____2. A personal balance sheet reports the financial position of a person or family on
a given date.

_____3. Current liabilities represent amounts owed to others that are intended to be
paid within the next year.

_____4. Planning your spending is essential to successful personal financial

management.

_____5. A budget deficit exists when actual spending exceeds projected spending.

_____6. You have a positive net worth when the value of your assets is larger than the
value of your debt.

_____7. Financial advisors suggest that a good rule of thumb for an emergency fund is
to have three to six weeks of living expenses saved.

_____8. Spending less than your income will increase net worth.

MULTIPLE CHOICE

_____9. A(n) __________ is a specific plan for spending.

a. budget

b. balance sheet

c. income statement

d. bank statement

_____10. An example of a liquid asset would be

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a. a home.

b. an automobile.

c. a bank account.

d. retirement account.

_____11. __________ represent amounts owed to others.

a. Current assets

b. Expenses

c. Mutual funds

d. Liabilities

_____12. A personal cash flow statement presents

a. amounts earned from savings.

b. income and payments.

c. assets and liabilities.

d. amounts owed to others.

_____13. Which of the following will not increase your net worth?

a. increasing savings.

b. decreasing spending.

c. reducing value of assets owned.

d. reducing amounts owed.

_____14. Which of the following is part of the investment records you should keep?

a. Home repair records

b. Records of mutual fund purchases

c. Warranties on major appliances

d. Checking account statements

_____15. _________ are those liabilities that you do not have to pay in full for more
than a year from now.

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a. Liquid Assets

b. Personal Possessions

c. Long term liabilities

d. Current liabilities

_____16. Definite financial obligations are referred to as

a. variable expenses.

b. fixed expenses.

c. equity.

d. investment assets.

3. Use the following data and calculate the total assets, total liabilities, and the net worth. (Obj. 3)

Stock Investments = $1,800

Credit card balance = $500

Jewellery = $1,000

House furniture = $800

Consumer loan balance = $600

Current value of automobile = $6,000

Cash in chequing account = $1,200

Balance in savings account = $3,500

Other liabilities = $750

Total Assets = $14,300 ($1,800 + $1,000 + $800 + $6,000 + $1,200 + $3,500)

Total Liabilities = $1,850 ($500 + $600 + $750)

Net Worth = $12,450 ($14,300 - $1,850)

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9. Use future value and present value calculations (see tables in Appendix) to determine the following:

a. The future value of a $500 savings deposit after eight years at an annual interest rate of 7 percent.

$500 ´ 1.718 = $859

b. The future value of saving $1,500 a year for five years at an annual interest rate of 8 percent.

$1,500 ´ 5.867 = $8,800.50

c. The present value of a $2,000 savings account that will earn 6 percent interest for four years.

$2,000 ´ .792 = $1,584

10. Hal wants to establish a savings fund from which a community organization could draw $800 a year
for 20 years. If the account earns 6 percent, what amount would he have to deposit now to achieve
this goal?
$800 ´ 11.470 = $9,176
CHAPTER 5 Questions and Solutions

CHAPTER 5 QUIZ ANSWERS

True-False Multiple Choice

1. T 9. D

2. F 10. B

11. B

3. F 12. B

4. T 13. A

5. T 14. C

6. T 15. D

7. T 16. C

8. T

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TRUE-FALSE
_____1.
CHAPTERCredit
5 QUIZencourages overspending and ties up future income.

_____2. With revolving credit, the borrower pays back a onetime loan in a specified
period of time and with a specified number of payments.
_____3. With consumer loans, the borrower is permitted to take loans on a continuous
basis and is billed for partial payments periodically.
_____4. General rules for measuring credit capacity are the debt payments-to-income
ratio and the GDS and TDS ratios.
_____5. Creditors determine credit worthiness on the basis of character, capacity,
capital, collateral, and conditions.

_____6. One thing you can do to protect yourself from credit card fraud is to sign your
credit card as soon as you receive it.

_____7. Car financing at a bank may require a minimum down payment.

_____8. A person has the right to know the contents of his/her credit bureau file at any
time

MULTIPLE CHOICE
_____9. An example of a consumer loan is

a. incidental credit.

b. revolving check credit.

c. credit cards.

d. installment loans.

_____10. An example of revolving credit is

a. installment sales credit.

b. revolving line of credit.

c. mortgage loans.

d. automobile loans.

_____11. A credit arrangement that has no extra costs and no specific repayment plan is
called a(n)

a. Open-end credit

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b. Incidental credit

c. Close-end credit

d. Consumer loan

_____12. Which one of the following is not one of the five Cs of credit?

a. Conditions

b. Climate

c. Character

d. Capacity

_____13. Most of the information in your credit file may be reported for only
__________ years.

a. 7

b. 15

c. 20

d. 23

_____14. Which of the following is not an example of consumer credit?

a. car loan

b. credit card

c. home mortgage
d. personal line of credit

_____15. _______________ is an arrangement to receive cash, goods or services today

and pay for them in the future.

a. Personal Financial Planning

b. Debit Cards

c. Money Management

d. Credit

_____16. Which of the following is not a step you can take to recognize fraud over the
internet?

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a. Use a secure browser

b. Keep records of your online transactions

c. Give payment information to all businesses

d. Read policies of website you visit

2. A few years ago, Maria Ramundo purchased a home for $400,000. Today, the home is worth
$600,000. Her remaining mortgage balance is $270,000. Assuming that Maria can borrow up to 80
percent of the market value of her home, what is the maximum amount she can borrow?
Present market value of Maria’s home = $600,000. Maria can borrow up to 80 percent of the market
value, or $480,000. Maria still owes $270,000 mortgage on her home. Therefore, she can borrow an
additional $210,000 ($480,000 - $270,000).

3. Louise Gendron’s monthly gross income is $3,000. Her employer withholds $450 in federal and
provincial income taxes and $134 in CPP contributions per month. Louise contributes $100 per
month to her RRSP. Her monthly credit payments for VISA and MasterCard are $55 and $35
respectively. Her monthly payment on an automobile loan is $285. What is Louise’s debt payments-
to-income ratio? Is Louise living within her means?
Louise’s Gross Income = $3,000

Less: Income taxes = -450

Less: CPP contribution = -134

Less: RRSP contribution = -100

Net take-home pay = $2,316

Her monthly payments on VISA, MasterCard, and a car loan add up to $375 per month. Louise’s
debt payments to income ratio is 375 to 2,316, or 16.19 percent. This ratio is under the recommended
20 percent figure. Therefore, Louise is NOT overextended. Her maximum monthly loan and credit
card payments should not be over $463.20 (20 percent of $2,316).

CHAPTER 6 Questions and Solutions

CHAPTER 6 QUIZ ANSWERS

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True-False Multiple Choice

1. T 9. B

2. T 10. D

3. T 11. D

4. F 12. C

5. T 13. A

6. F 14. A

7. T 15. D

8. F 16. C

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CHAPTER 6 QUIZ
TRUE-FALSE
_____1. Parents or family members are often sources of the least expensive loans.
_____2. A float period enables cheaper credit purchases.
_____3. The APR is the percentage cost (or relative cost) of credit on a yearly basis.
_____4. The most basic method of calculating interest is the compound interest formula.
_____5. Providing collateral can help you negotiate a lower interest rate for your loan.

_____6. Making only the minimum monthly payment on your credit card is a wise decision.

_____7. The most expensive loans are loans received from retailers.

_____8. An APR of 8 percent compounded quarterly, has an EAR of 8.50%.

MULTIPLE CHOICE
_____9. The best method of comparing credit cost is the

a. time value of money.

b. finance charge and the APR.

c. declining balance method.

d. add-on and adjusted balance method.

_____10. Which consumer credit source has been viewed historically as a lender of last
resort?

a. Chartered bank

b. Trust company

c. Credit union

d. Finance company
_____11. You can obtain expensive loans from

a. chartered banks and credit unions.

b. parents or family members.

c. banks through credit cards.

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d. finance companies and retailers.
_____12. Some creditors add finance charges after subtracting payments made during the
billing period, this is called the

a. previous balance method.

b. average daily balance method.

c. adjusted balance method.

d. annual percentage rate method.

_____13. Consumer credit counselling services

a. are nonprofit organization that help families with severe financial difficulties.

b. extend consolidation loans.

c. sell credit insurance.

d. are lending institutions.

_____14. _____________ is any type of insurance that ensures repayment of the loan in the
event the borrower is unable to repay it.

a. Credit Insurance

b. Life Insurance

c. Property and Casualty Insurance

d. Health Insurance

_____15. A __________ loan is when you pledge property or other assets as collateral.

a. Upfront Cash

b. Collateral Loan

c. Fixed-Rate Loan

d. Secured Loan

_____16. The fairest method that creditors use to calculate the balance on which they apply
interest charges is the

a. Adjusted balance method

b. Previous balance method

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c. Average daily balance method

d. Declining balance method

1. Dave borrowed $500 and paid $50 in interest when he repaid the principal after one year. The bank
also charged him a $5 service fee on a discount basis. What was the effective cost of his loan? (Obj.
2)

Solution:

Total interest cost = $50

Total funds available = $500 - $5 = $495

Effective cost = $50 ÷ $495 = 0.101 or 10.1%

2. If the 5% interest rate quoted on Dave’s loan had been compounded monthly, what would have been
the effective annual interest rate charged on the loan? (Obj. 2)

Solution:

EAR = (1 + 0.05/12)12 – 1 = 0.0512 or 5.12%

3. The CLSP has agreed to lend you funds to complete your 3 years bachelor’s degree. The government
will lend you $3,800 today if you agree to repay the loan five years from now with a lump-sum
payment of $6,000. What annual interest is CLSP charging you? (Obj. 2)

Using the Present Value and Future Value computation (Appendix 1B), the annual interest rate is
9.57%. Using your calculator, PV=-3800, PMT=0, FV=6000, N=5, CPT I/Y = 9.5654%

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4. If Dave had borrowed the $500 for one year at an APR of 5%, compounded monthly, what would
have been his monthly loan payment? What would have been the breakdown between interest and
principal of the fifth payment? (Obj. 2)

Solution:

Monthly interest rate = 0.05 ÷ 12 = 0.004167

PMT = $500 ÷ {[1 – (1 ÷ 1.004167)12] / 0.004167} = $42.80

The balance after the fourth payment would be:

Balance = $42.80 {[1 – (1 ÷ 1.004167)8] / 0.004167} = $336.10

The components of the fifth payment would be:

Interest = $336.10 x (0.05 ÷ 12) = $1.40

Principal = $42.80 - $1.40 = $41.40

CHAPTER 7 Questions and Solutions

CHAPTER 7 QUIZ ANSWERS

True-False Multiple Choice

1. F 9. A

2. F 10. C

3. T

4. T 11. B

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5. F 12. B

6. F 13. C

7. F 14. C

8. T 15. B

16. B

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CHAPTER 7 QUIZ

TRUE-FALSE
_____1. Several financial benefits are associated with renting your place of residence.

_____2. A lease is mainly designed to protect the rights of the landlord.

_____3. Financial risks are associated with the purchase of a home.

_____4. Cooperative housing and condominiums are forms of home ownership.

_____5. Higher property values result in lower property taxes.

_____6. Refinancing and a second mortgage are essentially one and the same.

_____7. There is no ability to negotiate on the price of a home you are interested in
purchasing.

_____8. A variable rate mortgage usually has a lower initial interest rate than a fixed
rate mortgage.

MULTIPLE CHOICE
______9 A common advantage associated with home ownership is

a. financial benefits.

b. ease of mobility.

c. limited financial risks.

d. low initial costs.

______10 Most real estate professionals believe that the most important factor in
selecting a home is

a. price.

b. style.

c. location.

d. desired features.

______11 The major factor that affects a person’s qualification for a mortgage is

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a. current interest rates.

b. the applicant’s credit rating.

c. the value of the property being purchased.

d. the source of the down payment funds.

______12 Most lending institutions believe that a person can afford a monthly payment
of about __________ percent of gross income less any long-term debts.

a. 20

b. 30

c. 40

d. 50

______13 A __________ mortgage allows a person to borrow on the paid-up value of a

home.

a. conventional

b. growing equity

c. second

d. share appreciation
______14 One of the advantages of owning your own home is:

a. The easy ability to move

b. Few or no responsibilities for maintenance

c. The growth in equity while you own the home

d. Lower initial costs

______15 A(n) ____________ is a form of home ownership that consists of individually

owned units and shared common areas.

a. Single family dwelling

b. Condominium

c. Cooperative

d. Duplex

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______16 The ____________ ratio is your monthly shelter costs as a percentage of your
gross monthly income.

a. TDS

b. GDS

c. Loan to value

d. Gainful debt service

4. Calculate the gross debt service (GDS) and the total debt service (TDS)
ratios for the following data. (Obj. 3)

Monthly mortgage payment = $2100

Property taxes = $200

Heating costs = $115

Other housing costs = $70

Personal loan payment = $150

Car loan payment = $200

Credit card payment = $150

Gross monthly household income = $7800

GDS = ($2100 + $200 + $115 + $70) / $7800

GDS = 31.86 %
TDS = ($2100 + $200 + $115 + $70 + $150 + $200 + $150) / $7800
TDS = 38.27 %

5. Estimate the affordable monthly mortgage payment, the affordable

mortgage amount, and the affordable home purchase price for the
following situation:

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Monthly gross income, $2,950
Down payment to be made, 15 percent of purchase price
Other debt (monthly payment), $160
Monthly estimate for property taxes and insurance, $210
25-year loan at 6.5 percent.

Based on example A (with other debts), Exhibit 7-7

Affordable monthly mortgage payment, $810 (($2,950 x 0.40) - $160 -
$210)
Affordable mortgage amount, $120,896 (($810/6.70) x $1000)
Affordable home purchase, $142,230($120,896/ (1-0.15))

6. Based on Exhibit 7-7, what would be the monthly mortgage payments for
each of the following situations?
a. A $100,000, 15-year loan at 7.5% APR compounded semi-annually

b. A $200,000, 25-year loan at 9% APR compounded semi-annually

c. A $165,000, 20-year loan at 10% APR compounded semi-annually

What relationship exists between the length of the loan and the monthly
payment? How does the mortgage rate affect the monthly payment?

Solution

a. $9.21 ´ 100 = $921

b. $8.28 ´ 200 = $1,656

c. $9.52 ´ 165 = $1,570.80

The longer the maturity of the loan, everything else constant, the smaller
the payment. The size of the monthly payment is affected by the principal
amount borrowed, the maturity of the loan and the mortgage rate (higher
the rate, the higher the payment)

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THIS DOCUMENT IS FOR PERSONAL EDUCATIONAL USE ONLY. SHARING
THIS DOCUMENT VIA ANY SERVICE ONLINE OR OTHERWISE WITH ANYONE
IN ANY FORMAT IS STRICTLY PROHIBITED AND VIOLATES COPYRIGHT
LAWS.

24