1 FINANCIAL LITERACY SAMPLE EXAM QUESTIONS These test questions were developed by Working in Support of Education (w!se). A descriptive test key, including answer rationale, has been provided. Copyright 2015 by Working in Support of Education (w!se), New York, New York. Each individual test item contained herein is the exclusive property of w!se. Items are licensed only for use as configured within this exam, in its entirety. Use of individual items for any purpose other than as specifically authorized in writing by w!se is prohibited. Posted online March 2015 by DECA Inc.
2 SAMPLE FINANCIAL LITERACY EXAM 1 1. In order to get spending under control, a person should first A. seek help on investing from a financial planner. B. consult a credit counseling service. C. create a budget of current income and expenses. D. subscribe to financial newsletters and magazines. 2. Comparison shopping for a car is necessary because A. each dealer sells cars with different colors. B. lenders want to be sure consumers get the best price. C. the price for the car can vary a great deal. D. it is a requirement to qualify for car insurance. 3. Financial planners generally stress the importance of starting to save and invest early because A. a person can stop saving at age 40. B. of the power of compounding and appreciation. C. there are fewer bills to pay when a person is young. D. a person will not need insurance. 4. An important feature of a good financial goal is that the goal A. has a specific time frame. B. is appropriate for the person s age. C. can last throughout the person s life. D. will take at least ten years for the person to achieve. 5. Purchasing power decreases and it costs more money to buy goods when there is A. a bear market. B. inflation. C. deflation. D. a bull market. 6. What strategy can help a person achieve her goal to buy a house? A. Using credit cards to pay for expenses. B. Paying for large purchases in cash. C. Following a budget that allows for savings. D. Applying for more credit cards to increase her credit score. 7. A college student has to live on a tight budget. Before making a decision to buy the newest cell phone, which question should he ask himself first? A. Is the new cell phone cheaper than the one being used? B. Is the new cell phone on sale? C. Is the new cell phone a need or a want? D. Will my friends like the new cell phone? 8. Which of the following quotes is sound financial advice? A. He who hesitates is lost. B. A penny saved is a penny earned. C. Don t put off today what can be done tomorrow. D. The window of opportunity may only open once. 9. Fixed expenses include A. food. B. vacations. C. entertainment. D. rent. Copyright 2015 by Working in Support of Education (w!se), New York, NY
3 SAMPLE FINANCIAL LITERACY EXAM Mandatory deductions from a person s paycheck include A. federal withholding tax and FICA. B. school taxes and contributions to a retirement account. C. regressive taxes and employee automatic savings. D. property taxes and employee benefits. 11. When should a person begin contributing to a retirement plan? A. Before deciding to start a family. B. As young as possible. C. At age 50. D. Upon collecting Social Security. 12. Which of the following is the source of income for most people aged 20-35? A. Dividends. B. Wages/salary. C. Rent. D. Mortgage payments. 13. The U.S. government agency responsible for the collection and enforcement of federal taxes is known as A. Federal Reserve System (Fed). B. Securities and Exchange Commission (SEC). C. U.S. Internal Revenue Service (IRS). D. Consumer Financial Protection Bureau (CFPB). 14. When a person has a balanced budget that includes savings then A. net income = discretionary income. B. total expenses = savings. C. total income = total expenses savings. D. total expenses + savings = total income. 15. Why do financial advisors recommend that a person save at least 10% of each paycheck? A. To have more money for wants not needs. B. To build wealth. C. To be able to pay bills on time. D. To be able to support worthwhile charities. 16. The time value of money means that A. money paid out today has less value than if the money is paid out in the future. B. money received today is worth more than the same amount of money received in the future. C. the more time a person has to save, the lower the return on the money. D. the longer money is held, the less likely it will be spent. 17. When a person receives a book store gift card, she can use it to A. buy a book at any store. B. buy a book from that store. C. pay for her rent. D. make a deposit into her savings account. 18. A person who dies will have his assets distributed as he wanted as long as he has A. a will. B. a doctor. C. an accountant. D. a financial plan.
4 SAMPLE FINANCIAL LITERACY EXAM A person has assets worth $15,000 and loans totaling $5,000. Her net worth is A. $ 5,000. B. $10,000. C. $15,000. D. $20, Don and Bill work together in the finance department of the same company and earn the same salary. Bill spends his free time taking work-related classes to improve his computer skills. Don spends his free time socializing with friends or watching TV. After five years, what is most likely to be true? A. Don will make more because he is more physically fit. B. Don will make more because Bill is likely to become over qualified. C. Bill will likely make more money because he is more valuable to his company. D. Don and Bill will continue to make the same amount of money. 21. Which of the following is an example of a long-term debt? A. A student loan. B. A debit card purchase. C. A term life insurance policy. D. A stock portfolio. 22. A person earned a salary of $70,000 last year. Additionally, he had $1,000 in interest income and $2,000 in dividend income. His total income for this year is A. $70,000. B. $71,000. C. $72,000. D. $73, An example of an opportunity cost is A. buying a dress at a sale price instead of paying the original price. B. using coupons when food shopping. C. buying concert tickets instead of buying a textbook for a course. D. using a credit card when making a large purchase. 24. A person strongly feels that going into debt is wrong. This is an example of the influence of A. values on decisions. B. age and stage in life. C. marketing and advertising. D. general economic conditions. 25. Which of the following describes what happens during a depression? A. Businesses produce more goods and services. B. Very few individuals are having financial problems. C. Unemployment is extremely high. D. More individuals are buying homes. 26. When the amount of income on a budget is greater than the amount actually spent on expenses, the person has a A. surplus. B. deficit. C. balanced plan. D. new liability. 27. When interest is computed once on a dollar amount (the principal), it is A. simple interest. B. principal interest. C. the APY. D. compound interest.
5 SAMPLE FINANCIAL LITERACY EXAM A person decided to have six months of income in an emergency savings account. Is this a good decision? A. No, because he should place the money in a diversified portfolio. B. No, because emergency accounts are no longer advisable. C. Yes, because the money can be used as a down payment when buying a used car. D. Yes, because the money in the emergency account can be used if he loses his job. 29. Students applying for financial aid to attend college usually need to A. complete a Free Application for Federal Student Aid (FAFSA) form. B. obtain a transcript. C. write an essay. D. send a credit report from one of the three credit reporting agencies. 30. A person choosing a mortgage usually selects a fixed-rate loan because she knows that A. the interest rate remains the same for the life of the mortgage. B. her income will increase within the next three years. C. the interest rates are going down. D. her homeowners insurance premiums will be lower. 31. Why does a bank pay interest to a depositor? A. The bank is able to use deposits to earn profits. B. It is a requirement of the Federal Deposit Insurance Corporation (FDIC). C. It helps the bank invest in the local community. D. It is a benefit of having a bank credit card. 32. It is generally better for a person to buy a home that she can afford than to rent an apartment because she will A. build equity. B. have fixed insurance needs. C. have a lower debt to credit ratio. D. avoid bankruptcy. 33. Which of the following would be considered an asset? A. Credit card account. B. Checking account. C. Car loan. D. Student loan. 34. Paying yourself first is a strategy to A. revise goals. B. make impulse purchases. C. create a budget. D. build savings. 35. What kind of income can a person earn from savings accounts at a commercial bank? A. Wage. B. Dividend. C. Interest. D. Capital gains. 36. Sally won a $200 cash prize at the school science competition. She wants to save the money for her senior trip in three years. It is best for her to save the money during the three years in a A. checking account, because it is easy to withdraw funds. B. drawer at home, because it would be safe. C. savings account, because it would earn interest. D. certificate of deposit (CD), because it generally earns higher interest.
6 SAMPLE FINANCIAL LITERACY EXAM John needs $3,000. He is withdrawing the money today from a $3,000 certificate of deposit (CD) which will reach maturity in six months. It is likely that he will have to A. pay the Internal Revenue Service (IRS) a penalty. B. pay the bank a penalty for early withdrawal. C. pay both the IRS and the bank a penalty. D. wait for the CD to mature. 38. When a check is returned due to insufficient funds, the check is said to have A. been postdated. B. been voided. C. bounced. D. cleared. 39. A form of payment that is guaranteed to be as good as cash is a A. personal check. B. bank check. C. credit card charge. D. promissory note. 40. Deposits in bank savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to A. $ 50,000. B. $100,000. C. $150,000. D. $250, Which one of the following statements is the most accurate about the use of ATM cards? A. A person can generally get an interest free loan at any bank ATM with no fee. B. A person can always charge a purchase using an ATM card. C. A person can get cash anywhere in the world using an ATM with no fee. D. A person must have a bank account to have an ATM card. 42. Which of the following financial products is good to have so that a person can cover cash needs today? A. Bonds. B. Individual Retirement Account (IRA). C. Life insurance. D. Regular checking account. 43. A person writes a check for more money than he has in his checking account. In order for the check to be paid by the bank, he needs to have A. overdraft protection. B. credit insurance. C. a joint account. D. a credit history. 44. Many companies offer a service to electronically deposit an employee s net pay into his designated bank account. This service is known as A. barter. A. amortization. B. automatic savings. C. direct deposit. 45. When a person cashes a $300 check and only receives $285, she most likely went to a/an A. investment bank. B. check cashing store. C. savings bank. D. credit union.
7 SAMPLE FINANCIAL LITERACY EXAM A debit card allows a person to A. pay for purchases directly from a checking or savings account. B. build wealth. C. borrow money for a short term. D. spend more money than deposited in a checking or savings account. 47. The highest interest rate on a loan is charged by a A. savings bank. B. credit-card company. C. pawnshop. D. investment bank. 48. Electronic banking allows customers to A. access accounts only during business hours six days a week. B. perform transactions with the help of a teller during business hours. C. stop the need to reconcile checking accounts. D. perform transactions 24 hours a day. 49. When a person asks her bank not to honor a specific check, it is called A. an overdraft. B. a stop-payment order. C. a cancellation. D. a limit order. 50. What can a person expect as a customer of a credit union? A. Higher account fees and lower interest rates on loans than a commercial bank offers. B. Higher account fees and higher interest rates on loans than a commercial bank offers. C. Lower account fees and higher interest rates on loans than a commercial bank offers. D. Lower account fees and lower interest rates on loans than a commercial bank offers. 51. What type of information is not found on a consumer s credit report? A. Personal medical information. B. Criminal records. C. Employment history. D. Current and past addresses. 52. Hillary and Stephanie have both borrowed $15,000 from the same bank to buy the same model of a new car. Hillary's credit score is 732 and Stephanie's credit score is 588. Who is likely to pay a lower finance charge? A. They will pay the same because they used the same bank. B. Hillary. C. Stephanie. D. They will pay the same because they bought the same car. 53. Choose the best suggestion for building and maintaining a good credit score. A. Have money in savings and protect against identity theft. B. Keep debt low and pay bills on time. C. Make safe investments and set clear financial goals. D. Comparison shop and follow a budget. 54. What is true about loans? A. The lower the APR, the more interest is paid. B. The larger the down payment, the lower the principal. C. The shorter the length of the loan, the smaller the payments. D. The higher the APR, the less interest is paid.
8 SAMPLE FINANCIAL LITERACY EXAM An example of identity theft is when an individual A. uses a parent s charge account to buy lunch for friends. B. uses another person s information to open an account. C. notifies a credit reporting agency of an unpaid debt. D. has the same name as another person in the same state. 56. It is generally a good idea to borrow money and repay the amount borrowed with future income when A. a person needs to buy a car to get a much better paying job. B. a person really needs a week s vacation. C. clothing a person likes goes on sale. D. the interest on the loan is greater than interest being earned on savings. 57. If a person is behind on his debt payments and goes to a responsible credit counseling service, what help is likely to be offered? A. They can cancel and cut up his credit cards without his permission. B. They can get the federal government to apply his income taxes to pay off his debts. C. They can work with those who loaned him money to set up a realistic payment schedule. D. They can force those who loaned him money to forgive his debts. 58. Scott and Eric are young men with good credit reports. They work at the same company and make approximately the same salary. Scott has borrowed $6,000 to take an overseas vacation. Eric has borrowed $6,000 to buy a truck. Who is likely to pay the lowest finance charge? A. Eric will pay less because the truck is collateral for the loan. B. Scott will pay less because people who travel overseas are less risky to lenders. C. They will both pay the same because the rate of interest on the loan is set by law. D. They will both pay the same because they are borrowing the same amount of money. 59. An arrangement to receive cash, goods or services now and pay for them in the future is called A. credit. B. liquidity. C. collateral. D. net income. 60. The rate imposed by the lender for the borrower to pay on a loan is known as A. money market rate (MMR). B. effective annual rate (EAR). C. annual percentage rate (APR). D. debit card rate (DCR). 61. The possibility that a borrower fails to repay a loan on time and will never be able to repay the loan is known as A. interest rate risk. B. credit risk. C. liquidity risk. D. investment risk. 62. When applying for a loan, borrowers will probably need to provide information regarding their A. work experience. B. assets. C. health record. D. financial plan.
9 SAMPLE FINANCIAL LITERACY EXAM A person purchases $2,500 of furniture from XYZ Department Store. She decides to use the store s plan where a person makes 12 equal payments over the next year to pay for the purchase. She signs a contract which specifies what her payments are and when they are due. This is an example of A. an installment plan. B. a predatory loan. C. a cash purchase. D. a line of credit. 64. A loan can be denied by a lender because of a person s A. education. B. health. C. credit history. D. gender. 65. Which of the following individuals has financial problems? A. A person who is borrowing money to buy a house. B. A person who has a loan for college. C. A person who uses a credit card to make most purchases. D. A person who is unable to pay his rent. 66. A low credit score can negatively affect a person s ability to A. rent an apartment. B. get approved for a debit card. C. open a savings account. D. qualify for a driver s license. 67. One difference between a debit card and a credit card is that A. debit cards can only be used when the person makes a large transaction. B. debit cards provide better consumer protection than credit cards. C. debit card payments are immediately deducted from the person s bank account. D. debit cards generate unsecured debt. 68. An advantage of having a credit card is that it helps a person to A. limit the amount of cash she has to carry. B. buy without thinking about her budget. C. spend more than she earns. D. owe an unlimited amount of money. 69. Which of the following helps to build a strong credit history? A. Having a steady employment record. B. Reporting a lost credit card within 24 hours. C. Using an ATM several times a month. D. Being a responsible driver. 70. The grace period refers to the time A. taken to process a credit card application by the credit card company. B. permitted for paying a credit card bill to avoid a late fee. C. allowed to notify a creditor of an error in billing. D. used for calculating interest. 71. The Truth-in-Lending Act requires that borrowers be given A. information on the cost of the loan. B. 45 day notice if interest is being increased. C. the features of the extended warranty. D. the reasons credit has been denied.
10 SAMPLE FINANCIAL LITERACY EXAM Which of the following credit cards makes the most sense for a person that pays his balance every month? A. A credit card with a 5% fixed interest rate. B. A credit card with a 0% interest rate for the first six months. C. A credit card that offers 1% cash back rewards on all purchases. D. A credit card with a high APR. 73. A company that keeps files and records on people who apply for and use credit is called a A. credit union. B. commercial bank. C. finance company. D. credit reporting agency. 74. What type of financial aid needs to be repaid? A. Loan. B. Grant. C. Scholarship. D. Work-study. 75. A computer scam that uses spam or pop-up messages to deceive consumers into disclosing their card numbers, bank account information, Social Security numbers, passwords, or other personal information is called A. soliciting. B. phishing. C. scamming. D. consuming. 76. The maximum amount of money a person can borrow is called a credit A. history. B. rating. C. report. D. line. 77. Which of the following can help a person lower her personal risk of loss? A. Insurance. B. A will. C. Mutual funds. D. Home ownership. 78. If a car was damaged in a flood, which type of car insurance would typically cover the damage to the car? A. Universal. B. Term. C. Disability. D. Comprehensive. 79. How should a person decide how much coverage she needs when selecting renters insurance? A. Do online research to find out the minimum coverage requirement. B. Ask salespeople from several different insurance companies. C. Determine the dollar value of personal property to be covered by insurance. D. The amount of insurance is the same for everyone. 80. Car insurance is more expensive for teenage males than teenage females because studies have shown that A. male teenagers have a greater number of accidents than female teenagers. B. more male teenagers take driver education classes than female teenagers. C. female teenagers do not drive often. D. female teenagers frequently own their cars.
11 SAMPLE FINANCIAL LITERACY EXAM A person had an Apple computer that was destroyed in a fire. She was able to buy a new Apple computer because her insurance policy had the following benefit A. actual cash value. B. replacement value. C. limited risk. D. unlimited claim. 82. If a driver receives several traffic tickets, the cost of the car insurance will probably A. increase. B. decrease. C. stay the same. D. be billed monthly. 83. Money that a person pays to an insurance company for a policy is called a A. debt. B. premium. C. deductible. D. liability. 84. Before a person can receive money to cover the damage from a car accident, he must A. file a claim with his insurance company. B. increase his insurance coverage. C. have a witness who will testify for him. D. notify the lender who gave him a car loan. 85. What is the key word for insurance companies when establishing the cost for a policy? A. Diversify. B. Deductible. C. Risk. D. Credit. 86. Two types of life insurance policies are A. general and fixed-rate. B. valuable and indemnified. C. term and whole life (permanent). D. annual and tax exempt. 87. When shopping for life insurance, the best strategy is to A. do what the insurance salesperson recommends, since he is an expert. B. buy coverage at work if possible. C. figure out how much is needed, then get prices from different companies. D. buy insurance coverage after age 40 so the risk will be lower. 88. The purpose of life insurance is to A. pay a person s outstanding credit card bills. B. provide investment income to pay expenses during retirement. C. help meet the financial needs of dependents upon a person s death. D. protect against financial loss during a person s lifetime. 89. Which of the following financial products has the highest risk? A. Checking accounts. B. Certificates of deposit (CDs). C. Stocks. D. Savings accounts.
12 90. One reason investors purchase stock is to A. increase wealth. B. borrow money. C. earn interest. D. balance a budget. SAMPLE FINANCIAL LITERACY EXAM Before a person begins investing, he should have A. taken more than one business course. B. a meeting with a licensed financial planner/advisor. C. a minimum of $5,000 to invest. D. strong self confidence in his ability to make money. 92. The New York Stock Exchange (NYSE) can be described as a A. marketplace where stocks are bought and sold. B. market for trading bonds. C. place to barter goods and services. D. location where government officials meet. 93. A person wants to invest in a low-risk investment product. Which of the following would be the best investment for her? A. US Treasury bond. B. Mutual fund. C. Common stock. D. Speculative stock. 94. The stock price of a corporation is most likely to increase when the corporation announces a A. decrease in the expected profit for this year. B. budget deficit. C. new product being released for sale. D. serious problem with its product. 95. A method of reducing investment risk is known as A. speculation. B. diversification. C. consolidation. D. negotiation. 96. Profit from the sale of stocks, bonds, or real estate is called A. equity capital. B. gift income. C. capital gains. D. tax-free income. 97. A company that sells shares of ownership through a stock exchange to investors is a A. sole proprietorship. B. public corporation. C. securities exchange. D. private corporation. 98. One of the main reasons for buying a stock mutual fund is that it is A. safe. B. managed by a professional. C. guaranteed to provide income. D. backed by the government.
13 SAMPLE FINANCIAL LITERACY EXAM Investments with greater potential returns generally have higher A. risk. B. fees. C. liquidity. D. deductibles When a person buys a company s bond, he A. owns a part of the company. B. has lent money to the company. C. is liable for the company s debts. D. can vote as a shareholder.
14 SAMPLE FINANCIAL LITERACY EXAM 13 Exam Key 1. C Create a budget of current income and expenses Money- Purpose of a budget Rationale: When a person creates and follows a budget, it helps to control spending. The budget indicates how money is to be spent and/or saved. When expenses are reviewed, they can be adjusted if needed to make sure that spending and saving does not exceed income on a monthly basis. 2. C The price for the car can vary a great deal Money- Purchasing strategies (comparison shopping) Rationale: As with any large purchase, a person should comparison shop for the best price. In the case of buying an automobile, it is extremely important to get price quotes from different dealers and from online sources to ensure a good and fair deal on the purchase. The actual price may be different than the manufacturer s suggested retail price on the sticker of the car window. 3. B Of the power of compounding and appreciation Money- Compounding interest Rationale: It is important to save and invest early because of the power of compounding and appreciation. When money compounds, interest is earned on interest, which greatly increases the value of the money. 4. A Has a specific time frame Rationale: A person s financial goals should be S.M.A.R.T. Specific, Measurable, Attainable, Realistic, and Timely. Timely means that a goal should be anchored to a timeframe. By establishing a specific timetable to achieve the goal, it is more likely to be accomplished. A person s goals are defined as shortterm, intermediate, and long-term. 5. B Inflation Money- Inflation Rationale: During times of inflation purchasing power is decreased as the value of money declines and prices rise. For example, if the cost of buying groceries for seven days increases from $100 last year to $105 this year, it is because of inflation. Thus, with the same level of income this year the person is unable to purchase as many groceries as they did last year. 6. C Following a budget that allows for savings Money- Budget with savings Rationale: Creating a budget that includes savings is the best way to achieve a financial goal such as setting aside enough money for a down payment (usually 10%-20% is required) to purchase a house. If necessary, a person may need to reduce spending in order to save. A larger down payment in cash may eliminate the requirement for mortgage insurance. 7. C Is the new cell phone a need or want? Money Needs vs. Wants Rationale: Because the student is on a tight budget, he has to be very careful about spending his money. He already has a cell phone that meets his needs for communication, so before making a decision to exchange it for the newest product, he should ask himself whether he actually needs a new one or whether he simply wants it because it has the newest features and applications.
15 SAMPLE FINANCIAL LITERACY EXAM B A penny saved is a penny earned. Money-Savings Rationale: The phrase a penny saved is a penny earned means that it is a good idea to save money because it can earn interest. We should not spend or waste money, but try to save it. This represents the time value of money. It is a quote from the 18th century. 9. D Rent Money- Budgeting - fixed expenses Rationale: Fixed expenses are those expenses that are the same amount each month such as rent, a mortgage payment, or car insurance. Variable expenses are those expenses that vary from month-tomonth such as food, vacation or entertainment costs. 10. A Federal withholding tax and FICA Money- Payroll deductions Rationale: Each pay period, federal income taxes are withheld from an employee s paycheck. Other withholding taxes may include state taxes, local taxes, Medicare and Social Security (FICA). Voluntary deductions may include a personal retirement savings plan (IRA, 401k) or flexible spending plans for medical expenses. 11. B As young as possible Money- Saving for retirement Rationale: The sooner one starts contributing to a retirement plan, the more money will be available when the time for retirement comes. If a 23 year-old person is 40 years away from retirement and he starts contributing $300 a month ($3,600 a year) and his employer contributes $5,000 a year, at 5% interest he will have $724,782 saved when he retires. This is much more than if he were to wait another ten years before contributing to the plan. 12. B Wages/salary Money- Source of income Rationale: For most people aged 20-35, the major source of income is their earnings or wages from a job. Rent and mortgage payments are expenditures, not sources of income for the person who has to pay them. Dividends are monies earned through investments. While dividends provide income, it is not usually a major source of income early in life. 13. C U.S. Internal Revenue Service (IRS) Money- Power to assess taxes Rationale: The IRS is responsible for the collection of federal taxes and the enforcement of tax laws. The Fed regulates banks and the money supply, the SEC regulates the sale of stocks and bonds, and the CFPB educates consumers and enforces laws and regulations about credit. 14. D Total expenses + savings = total income Money- Balanced budget Rationale: In creating a balanced budget a person should include a portion of income as savings for future goals such as education, a car or a home. To have a balanced budget, the income has to cover both savings and expenses.
16 SAMPLE FINANCIAL LITERACY EXAM B To build wealth Money- importance of saving Rationale: The advantage to saving 10% of one s paycheck is to build wealth for the future. Even if a person s take-home pay is $200 a week, if they put 10% or $20(each week) in a savings account it will accumulate to $1,040 in one year. This amount will also increase with interest over the course of one year. 16. B Money received today is worth more than the same amount of money received in the future Money- Time value of money Rationale: A dollar received today is worth more than a dollar received tomorrow because it can be saved, earn interest above the rate of inflation and be invested. This is the concept of the time value of money. The Rule of 72 is a convenient way to calculate the increased value of money from interest. 17. B Buy a book from that store Money- store gift cards Basic Rationale: A store gift card is only good for use in the store, on the store s website, or at stores owned by that specific store company. In this case the card can only be used for purchases in that particular book store company. It is important to read the information on the card regarding an expiration date, signature, and how to activate the card. A gift card from a credit card company may be used for cash or to make a purchase in different stores. 18. A A will Money Will Rationale: A will legally protects a person and distributes his/her property based on his/her wishes and the needs of his/her family or survivors. It makes clear how a person wants his/her property to be distributed after death. If there are children under 18 years of age, the will indicates who will take care of the children. A will also identifies an Executor to ensure that the will is properly followed. 19. B $10,000 Money- Net worth Rationale: Net worth is the value of everything a person owns (assets) minus everything a person owes (liabilities). In this case, the net worth is: $15,000 $5,000 = $10, C Bill will likely make more money because he is more valuable to his company Money- Factors influencing income Rationale: Among the factors that determine an individual s earning power is his level of skills. The more skilled and educated a person is, generally the higher the income he will earn. In this case, Bill will have more skills and will most likely earn more than Don. 21. A A student loan Money- Liabilities Rationale: Long term debts (liabilities) are loans that will take more than one year to repay, such as a student loan or mortgage. Debit card purchases, life insurance policies and a person s stock portfolio are not debts.
17 SAMPLE FINANCIAL LITERACY EXAM D $73,000 Money- Determining total income Rationale: Total (gross) income is the amount of money one earns in a year before taxes are deducted. Income can be one s salary as well as interest on savings, capital gains and dividends from investments, gifts and inheritances. In this case, the person s total (gross) income is $70,000 + $1,000 + $2,000 = $73, C Buying concert tickets instead of buying a textbook for a course Money- Opportunity cost Rationale: Opportunity cost can be described as the cost of making one decision vs. another. In other words, what a person gives up to do something else such as purchasing concert tickets instead of buying a textbook for a course. 24. A Values on decisions Money- Effect of values on financial planning Rationale: Values affect financial decisions in that people are products of their beliefs. If people believe that a penny saved is a penny earned they are likely to save. In this instance if one was to believe that debt is wrong she will most likely make financial decisions to avoid overspending her budget. 25. C Unemployment is extremely high Money Depression - impact on employment Rationale: During a depression people have less money available to spend on goods and services therefore businesses fail, people are laid off, and it is difficult to get a job, causing unemployment to be extremely high. Depressions are often related to the business cycle and when the recovery begins, businesses will hire workers reducing the high unemployment rate. 26. A Surplus Money- Determining budget surplus or deficit Rationale: There needs to be sufficient income to cover monthly expenses and savings. When a person has income of $500 and expenses and savings totaling $450, the person has a $50 surplus of discretionary income for the month. When a person has a surplus for a number of months, he might want to increase the amount of money he has budgeted for savings or investing. 27. A Simple interest Money- Simple vs. compound interest Rationale: Simple interest is the interest earned or paid on the principal only. Compound interest is the interest earned on the principal plus interest earned on the interest. The advantage of interest accumulating on a daily basis as compared to monthly, quarterly, or annually is that savings will increase more than with simple interest. With simple interest, if $100 is deposited in a bank account at 10% interest, at the end of the year the account balance would only be $ D Yes, because the money in the emergency account can be used if he loses his job Money-Emergency Savings Rationale: Professional financial planners recommend that individuals create an emergency fund of 3-6 months of living expenses to cover unanticipated expenses and loss of a job. Please know that today, some advisors are recommending 6-9 months of savings. The emergency account needs to be easily accessible and should be exempt from fees and expenses.
18 SAMPLE FINANCIAL LITERACY EXAM A Complete a Free Application for Federal Student Aid (FAFSA) form Money- How to apply for federal aid Rationale: A FAFSA form must be completed and submitted by students who apply for financial aid to help pay for their college education. The application includes information from tax returns, bank accounts, investments, current expenses, debts, and a person s Social Security number. 30. A The interest rate remains the same for the life of the mortgage Money- Fixed-rate mortgages Rationale: A fixed-rate mortgage is more desirable for most people because the interest rate remains the same during the life of the loan. Therefore monthly payments are constant whether interest rates rise or fall. It is possible that a person will pay more money in interest with a 30 year fixed-rate mortgage than one of 20 or 15 years. If the mortgage was a variable-rate loan, changes in the interest rate generally cause the monthly payments to change. 31. A The bank is able to use deposits to earn profits Money- Cost of Money- Interest Rationale: A bank is a business that is interested in making a profit. In order to make money, the bank has to have money. In order to encourage people to deposit money in the bank, the bank pays depositors interest. Once people deposit money, the bank can use most of this money to make loans. The bank makes money because the interest it charges on these loans is higher than the interest it pays on the deposits. 32. A Build equity Money- Housing Rationale: When a person buys a home, she is building equity because the home can be sold in the future and the owner will be able to keep the money after paying the balance due on the mortgage. Mortgage payments are made up of two parts: first, interest on the loan; second, paying off the principal amount of the loan. As the principal amount of the loan decreases, the homeowner is building equity (wealth) because the amount owed on the loan is getting smaller. 33. B Checking account Money- Assets vs. liabilities Rationale: An asset is anything that has monetary value. A checking account has monetary value as the money in the account can be used as cash. A student or car loan represents money owed and, therefore, is not an asset. A credit card account is also considered a loan and therefore not an asset. Other examples of assets are jewelry, investments, and property. 34. D Build savings Money- Pay yourself first Rationale: By paying yourself first a person could increase her savings. For instance, if a person takes home $1,000 each pay period and puts $100 (10%) in a savings account before paying expenses she could build substantial savings over the course of years. 35. C Interest Banking- Interest on savings Rationale: Interest income can be earned if a person has an account with an interest rate. The person will earn interest on the amount of money in the account at the set interest rate. This interest is then reportable as income for tax purposes.
19 SAMPLE FINANCIAL LITERACY EXAM D Certificate of deposit (CD), because it generally earns higher interest Banking- Accounts that earn interest Rationale: A Certificate of Deposit (CD) is the best option for Sally because she is looking to save the $200 for a specified period of time. A CD would give Sally the highest interest rate, so the money will grow the most in the three years due to compounding. Since Sally does not need the money for three years, she should, therefore, buy a three year CD 37. B Pay the bank a penalty for early withdrawal Banking- Cashing in a CD Rationale: When an individual cashes in a CD before maturity, banks have the right to charge that person a penalty since the CD is an agreement to keep the money in the account for a specified period of time. The penalty can be between 3-6 months of interest. 38. C Bounced Banking- Insufficient funds Rationale: A check will be bounced if there is not enough money in the bank account of the person who wrote the check to pay the amount on the check. When a check bounces, the bank charges the person who wrote the bad check a fee. Some banks also charge the person who deposited the bad check a fee. A person can reduce the risk of writing a bad check by asking the bank for overdraft protection on the account. 39. B Bank check Banking- Cashier/Bank checks Rationale: A bank or cashier s check is a form of payment guaranteed to be as good as cash because the check is drawn from the bank s own funds and signed by a bank officer. The bank, rather than the purchaser, is responsible for paying the amount on the check. Before writing the check, the bank, first takes the money from the purchaser s checking or savings account. 40. D $250,000 Banking- Safety in banking Rationale: The Federal Deposit Insurance Corporation (FDIC) is an agency of the U.S. government that protects the money in commercial banks and savings associations (also known as savings banks). The FDIC insures deposits in each account that an account holder has up to the current legal limit, $250,000, provided that the name on each account is different. For example, a married couple could have three accounts, one in each of their names and one in their joint name; all three accounts would be FDIC insured. 41. D A person must have a bank account to have an ATM card Banking- ATM Cards Rationale: An ATM card allows a person to get cash and information concerning his bank balance at an ATM machine. The person MUST have a bank account to have an ATM card. A person cannot get cash anywhere in the world with no fee. If a person goes to an ATM of the bank where he has an account he will be able to withdraw cash with no fee, but if he goes to an ATM of another bank, he will most likely have to pay a fee if he wants to withdraw money. 42. D Regular checking account Banking- Liquidity Rationale: A regular checking account is good to have for short-term needs because the money can easily be accessed and used with no penalties or fees. Life insurance, individual retirement accounts and bonds are not as easy when money is needed today because it may take a day or more and there are rules determining when the money can be accessed and used.
20 SAMPLE FINANCIAL LITERACY EXAM A Overdraft protection Banking- Overdraft protection Rationale: Overdraft protection is a service banks offer that allow account holders to temporarily make purchases with a debit card or write checks even if the person does not have enough money in his account to cover the purchase or amount on the check. The bank is effectively making a short-term loan to the account holder so the debit card is not declined or the check bounced. However, the bank charges a fee whenever an overdraft is incurred. It is important for the account holder to replenish the money in his account as soon as possible. 44. D Direct deposit Banking- Direct deposit of paycheck Rationale: Direct deposit is when employers automatically deposit their employees net pay into a designated bank account via an electronic funds transfer (EFT) rather than issuing them a check for the employee to deposit. Direct deposit is recommended since funds are available immediately whereas checks can take 2-5 days to clear; direct deposit also avoids the risk that a check might be lost. Automatic savings is when a person designates a specific amount of money from their salary for savings for a vacation, holiday gifts, or future expenses. 45. B Check cashing store Banking Check cashing store Rationale: Check cashing stores (centers) charge a fee for their services, in this instance the charge was $15 and the person cashing the check only received $285. Critics feel these stores exploit the consumers they serve, while providing a facade of convenience. Checks cashed can incur an average of 3-5% of the check amount in fees. On average, the annual costs of using a financial service center for check cashing is greater than fees for using a checking account at a bank or credit union. For individuals who are unable to open a checking account, there are alternatives, such as second chance bank accounts, which provide users the convenience of a checking account without having to pass a credit check. There is also a danger for the people who leave a check cashing store with a significant amount of cash of being robbed-- especially if the store is located in an area where crime is prominent. 46. A Pay for purchases directly from a checking or savings account Banking- Debit cards Rationale: A debit card is a card issued by a bank, directly linked to a checking or savings account. With this card, a person can pay for purchases and the purchase amount is immediately withdrawn directly from the person s checking or savings account. Debit cards can also be used to make point of sale (POS) purchases from stores. In order to use a debit card, a person must have a Personal Identification Number (PIN). 47. C Pawnshop Banking- Where to get a loan Rationale: When borrowing from a pawnshop, a person will usually face the highest loan rates. When a person receives a loan from a pawnshop, the loan is secured by something of value, but the interest rate will still be very high. 48. D Perform transactions 24 hours a day Banking- Online banking Rationale: Electronic banking allows customers to review their account information online (computer, tablet or smart phone) and perform transactions (e.g. bill payments) via electronic funds transfers 24 hours a day, seven days a week. Customers are not limited to the hours of their local bank branch and can access their account any day at any time.
Account a service provided by a bank allowing a customer s money to be handled and tracks money coming in and going out of the account. Account fee the amount charged by a financial institution for the
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