Download Financial Literacy Certification Test Questions and Answers and more Exams Finance in PDF only on Docsity!
WISE FINANCIAL LITERACY CERTIFICATION
TEST QUESTIONS AND ANSWERS
"Money orders - high rate of counterfeits - Correct Answer A certificate that allows the stated payee to
receive cash on-demand, usually issued by governments and banking institutions. A money order functions much like a check, in that the person who purchased the money order may stop payment."
“Earned Income - Correct Answer Income derived from active participation
in a trade or business, including wages, salary, tips, commissions and bonuses."
"Unearned Income - Correct Answer Any income that comes from investments and other sources
unrelated to employment services. Examples: interest from a savings account, bond interest, alimony, and dividends from stock"
"Exemptions (aka allowance) and how they work - Correct Answer If you are not claimed as a
dependent on another taxpayer's return, then you can claim one personal tax exemption. The exemption reduces your taxable income just like a deduction does, but has fewer restrictions to claiming it. If you are married and file a joint tax return, both you and your spouse each get an exemption."
"Exemptions (aka allowance) and how they work PART 2 - Correct Answer The IRS allows you to take
additional exemptions for each dependent you claim. Frequently, the source of these exemptions are the children who live with you for more than half the year, are under 19 years old (or under 24 if a full- time student) and who don't provide more than half of their own financial support during the tax year."
"Institutions that give loans- Payday lenders - Correct Answer A payday lender allows you to borrow
against your future income. You give them a postdated check, which is deposited if you do not pay back the loan. The APR (interest expressed as an annual percent rate) is usually over 200 percent and can go much higher if you refinance the loan instead of paying it off as soon as it comes due."
"Liquidity - what does it mean? - Correct Answer The ability to convert an asset to cash quickly and
with minimal impact to the price."
"Liquidity - what financial products are liquid? - Correct Answer Examples: Cash, Most stocks, money
market instruments and government bonds."
"Roles of SEC, Federal Reserve (the Fed), FDIC, CFPB worth - Correct Answer FDIC (Federal Deposit
Insurance Corporation): The U.S. Corporation insuring deposits in the U.S. against bank failure. The FDIC was created in 1933 to maintain public confidence and encourage stability in the financial system through the promotion of sound banking practices. The FDIC will insure deposits of up to US$250,000 per institution as long as the bank is a member firm."
"Roles of SEC, Federal Reserve (the Fed), FDIC, CFPB worth - Correct Answer CFPB (Consumer Fraud
Protection Bureau): A regulatory agency charged with overseeing financial products and services that are offered to consumers. Role is to protect and educate consumers about the various types of financial products and services that are available."
"Gift cards - how do they work? - Correct Answer A gift card is a restricted monetary equivalent is
issued by retailers or banks to be used as an alternative to a non-monetary gift."
"Gift cards - how do they work - fees? - Correct Answer Prepaid cards, gift cards, and gift certificates
cannot expire within five years of activation or unless the terms of the expiration are clearly disclosed. The law bans dormancy fees, inactivity fees or service fees on gift cards unless there has been no activity in a 12-month period and the issuer clearly discloses all fees before the gift card is purchased."
"Gift cards - how do they work - fees? (Exclusions) - Correct Answer Prepaid phone cards , re-loadable
cards, loyalty or rewards cards, cards issued for admission to special events or venues and certificates issued in paper form only are exempt."
"Discretionary income and budget surplus - Correct Answer The amount of an individual's income that
is left for spending, investing or saving after taxes and personal necessities (such as food, shelter, and clothing) have been paid. Discretionary income includes money spent on luxury items, vacations and non-essential goods and services."
"Why does the US currency have value? - Correct Answer Its value is only based on what we can get in
exchange for it. Or put it another way, money has value as long as other people believe the money you give them can be exchanged for the goods and services they desire in the future."
"Opportunity cost - Correct Answer The second-best alternative (or the value of that
alternative) that must be given up when scarce resources are used for one purpose instead of another"
"Who is hurt the most and least with inflation - Correct Answer Inflation is a general increase in prices
and a corresponding decrease in money's purchasing power."
"Zero-coupon CD - Correct Answer does not pay out annual interest, and instead re-invests the
payments so you earn interest on a higher total deposit. The interest rate offered is slightly higher than others, but you'll owe taxes on the re-invested interest."
"Institutions that give loans- Pawnshops - Correct Answer You are given a short-term loan in exchange
for leaving a personal item, such as jewelry or an electronic device, as collateral. If you pay back the loan, including interest, on time, you get the item back. You may be able to renew the loan by paying the interest. However, if you fail to repay or renew the loan, your item can be sold. The APRs for pawn shop loans are typically around 120-300 percent, much higher than the rate charged on credit cards. Many pawn shops also charge additional fees for insurance and storage."
"Institutions that give loans- Banks vs. credit unions - Correct Answer Credit unions generally charge
lower interest rates."
"Institutions that give loans- Tax preparers - Correct Answer short-term consumer loans, usually 24 to
48 hours, secured by a taxpayer's expected tax refund, and designed to offer customers quicker access to funds."
"Compound interest - what is it and how does it work? - Correct Answer "interest on interest," It will
make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount. The rate at which compound interest accrues depends on the frequency of compounding; the higher the number of compounding periods, the greater the compound interest."
"Time value of money - Correct Answer The idea that money available at the present time is worth
more than the same amount in the future due to its potential earning capacity."
"Liquid assets - Correct Answer Those that can be converted to cash easily,
with little effect on value. Examples: most stocks, money market instruments and government bonds."
"Less liquid (Illiquid) - Correct Answer The state of a security or other asset
that cannot easily be sold or exchanged for cash without a substantial loss in value. Illiquid assets also cannot be sold quickly because of a lack of ready and willing investors or speculators to purchase the asset. Examples: Housing, stocks that have no buyers."
"Rule of 72 - Correct Answer is a simplified way to determine how long an investment will take to
double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself."
"Reconciling a Checking account - Correct Answer A record, usually sent to the account holder once
per
month, summarizing all transactions in an account during the time from the previous statement to the current statement. The opening balance from the prior month combined with the net of all transactions during the period should result in the closing balance for the current statement."
"Reconciling a Checking account - why and when - Correct Answer Consumers should carefully review
their bank statements and retain them for their own records. In reconciling their own record of transactions with the bank's records, account holders should be on the lookout for incorrect or transposed numbers as well as unauthorized transactions. Discrepancies should be reported as soon as possible, in writing if possible."
"Repayment of student loans - Correct Answer You must repay a student loan even if your financial
circumstances become difficult. Your student loans cannot be canceled because you didn't get the education or job you expected, or because you didn't complete your education (unless you couldn't complete your education because your school closed)."
"Tax anticipation loans - Correct Answer A Refund Anticipation Loan (RAL) is a loan that is offered by
many tax preparation companies to people against their income tax return. These loans are based on the full amount of the tax refund. Loans can be had for the entire amount or a partial amount of the anticipated refund. When the check arrives at the tax preparer's office, the loan is paid in full, with interest, and any remaining balance is issued to the recipient. Many people use this program for its quick access to money without considering the high interest rates attached."
"Credit card cash advances - Correct Answer A service provided by many credit card issuers allowing
cardholders to withdraw a certain amount of cash, either through an ATM or directly from a bank or other financial agency. Cash advances typically carry a high interest rate - even higher than credit card itself - and the interest begins to accrue immediately. On the plus side, cash advances are quick and easy to obtain in a pinch."
"Truth in Lending Act - Correct Answer A federal law enacted in 1968 with the intention of
protecting consumers in their dealings with lenders and creditors. The Truth in Lending Act was implemented by the Federal Reserve through a series of regulations."
"Consequences of paying the minimum payment due on a credit card bill or paying a bill late - Correct
Answer *Your credit score will fall
*Your monthly bills start to balloon *Your credit card costs skyrocket"
"How does the degree of risk influence the interest rate charged for credit - Correct Answer * Higher
risk = higher interest rate *Lower risk = lower interest rate"
"Debt to credit ratio - Correct Answer *Amount of available credit you are using
"The length of debt repayment and impacts on cost - Correct Answer Longer you take to pay, the more
you pay in total (accumulating interest)"
"What to do if a person thinks he/she is the victim of identity theft - Correct Answer * Report to
creditors and credit reporting agencies *Watch credit report carefully for several months"
"Characteristics of predatory loans - Correct Answer *Giving unfair and abusive loan terms to
borrowers *Showing lower interest than actually paying, making it seem they can afford more than they can, using collateral against default, high fees, etc."
"Collateral (secured vs. unsecured) - Correct Answer Secured = has collateral tied to it in case of
default (home mortgage, car financing)"
"Collateral (secured vs. unsecured) - Correct Answer Unsecured = no collateral (credit cards)"
"Pawnshops - Correct Answer *Offer collateralized loans
*Bring in item of value, get loan of percentage of value *Pay back with interest
- If unpaid, item is forfeited to the pawnshop and considered paid in full
- Does NOT affect credit score, doesn't require a credit check or bank account"
"How insurance works - concept of sharing risk - Correct Answer Insurance is a form of risk
management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium"
"Insurance deductible - what happens to the premium when the deductible is raised or lowered -
Correct Answer *Deductible=The amount you have to pay out-of-pocket for expenses before the
insurance company will cover the remaining costs. *A lower deductible creates higher premiums (cost for insurance coverage), higher deductible creates lower premiums."
"Collision coverage -when do consumers normally terminate this coverage - Correct Answer *Collision
Insurance will reimburse the insured for any damage sustained to their personal automobile that is due to the fault of the insured driver.
*People typically drop this coverage when their car's value is low enough that the cost of the insurance deductible and premiums aren't worth paying"
"Term life insurance - Correct Answer *A policy with a set duration limit on the coverage period. Once
the policy is expired, it is up to the policy owner to decide whether to renew the term life insurance policy or to let the coverage end. *The policy pays out upon death only - no savings or investment component."
"Whole life insurance - Correct Answer A life insurance contract with level premiums that has
both insurance and an investment component. The insurance component pays a stated amount upon death of the insured. The investment component accumulates a cash value that the policyholder can withdraw or borrow against."
"Health insurance - HMO insurance and co-pays - Correct Answer *An HMO is a type of health
insurance plan that gives you access to certain doctors and hospitals, often called network or contracting doctors and hospitals (sometimes called "providers"). *Co-pays: paid by the insured person each time a medical service is accessed."
"Renters insurance - Correct Answer Covers possessions within the home and isolated events not
covered in the property insurance held by the owner."
"Disability insurance - Correct Answer Disability insurance offers income protection to individuals who
become disabled for a long period of time, and as a result can no longer work during that time period. Employees, who have paid the Federal Insurance Contributions Act (FICA) tax for a certain amount of time, are eligible to receive the Social Security disability income insurance."
"How to reduce the cost of auto insurance - Correct Answer Increase deductible, purchase a low
profile car, drop unneeded coverage, drive less, safety discounts, student discounts, combine policies"
"Securities and equities - Correct Answer *When you sell a capital asset, the difference between the
amounts you sell it for and your basis - which is usually what you paid for it - is a capital gain or a capital loss.
- Historical performance of stocks: Up and down but average 9-10%"
"Securities and equities - Correct Answer *Primary market: The primary market is where securities
are created. It's in this market that firms sell new stocks and bonds to the public for the first time (IPO - Initial Public Offering) *Secondary market: The secondary market is what people are talking about when they refer to the "stock market". This includes the New York Stock Exchange (NYSE),
"Treasury bills - Correct Answer *A short-term debt obligation backed by the U.S.
government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks)."
"Determine Net Worth and definition and examples of assets, liabilities and net worth - Correct
Answer *Net worth = value of assets - amount of liabilities
- Assets: real estate, stock investments, bank accounts, cash *Liabilities: debts, loans (mortgage, car, student, etc.)
- Assets = Liabilities + Owner's Equity"
"Retirement - Correct Answer *how different plans and accounts work and when
taxes are paid on funds (Pensions, 401K, Traditional IRA [Individual Retirement Account], Roth IRA) worth *A pension is a retirement account that an employer maintains to give you a fixed payout when you retire. It's a kind of defined benefit plan. *Your payout typically depends on how long you worked for your employer and on your salary. When you retire, you can choose between a lump-sum payout or a monthly "annuity" payment"
"Retirement - Correct Answer *Traditional IRA: An individual retirement account (IRA)
that allows individuals to direct pretax income, up to specific annual limits, toward investments that can grow tax-deferred (no capital gains or dividend income is taxed). Taxes are paid at the time of distribution/withdrawal. *Roth IRA: With a Roth IRA, you make contributions with money on which you've already paid taxes. Your money can then potentially grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met."
"Inflation - Correct Answer *Purchasing power of money. Government tries to keep it
to 2-3%. o Most hurt: lenders and those on fixed incomes (retired) o Least hurt: minimum wage earners, middle class home owners"
"Inflation - Correct Answer * Deflation: Reduction in the general level of prices, often caused by a
reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression." "Taxes - graduated income taxes worth (VCEE Scope and
Sequence - Unit 14) - Correct Answer A tax that takes a larger percentage from the income of
high-income earners than it does from low-income individuals. Taxpayers are broken down into categories based on taxable income; the more one earns, the more taxes they will have to pay once they cross the benchmark cut-off points between the different tax bracket levels."
"Roles of SEC, Federal Reserve (the Fed), FDIC, CFPB worth - Correct Answer SEC (Securities and
Exchange Commission): A government commission created by Congress to regulate the securities markets and protects investors. In addition to regulation and protection, it also monitors the corporate takeovers in the U.S. Role is to protect the investing public against fraudulent and manipulative practices in the securities markets."
"Roles of SEC, Federal Reserve (the Fed), FDIC, CFPB worth - Correct Answer The Fed: The central bank
of the United States and the most powerful financial institution in the world."
"Roles of SEC, Federal Reserve (the Fed), FDIC, CFPB worth - Correct Answer Roles: Conducting
national monetary policy by influencing monetary and credit conditions in the U.S. economy to ensure maximum employment, stable prices and moderate long-term interest rates.
- Supervising and regulating banking institutions to ensure safety of the U.S. banking and financial system and to protect consumers' credit rights. *Maintaining financial system stability and containing systemic risk. *Providing financial services - including a pivotal role in operating the national payments system - to depository institutions, the U.S. government and foreign official institutions."
"What is a credit union? - Correct Answer Member-owned financial co-operative. These institutions
are created and operated by its members and profits are shared among the owners."
"What are the advantages of using a credit union? - Correct Answer Advantages: Lower interest rates
for loans, higher interest rates for savings accounts and investments because they are a non-profit and pass savings to customer/owner."
"Overdraft protection - how does t work? - Correct Answer A line of credit that banks offer to their
customers to cover their overdrafts. Overdraft protection kicks in when a customer writes a check for more than the amount in their account. Banks usually charge interest on the amount used to cover the overdraft."
