Question 1

A safe driver who drives faster as a result of purchased collision car insurance would be an example of the ___________ problem.

Accepted Answer

A)   moral hazard
B)   adverse selection
C)   Texas hedge
D)   actuarial errorE) None of the above
F) A) and B)

Question 2

No taxes are paid on withdrawals made during retirement from a _________.

Accepted Answer

A)   traditional IRA
B)   Roth IRA
C)   401k
D)   403b planE) None of the above
F) A) and B)

Question 3

An insurance company plans to sell annuities to investors.Based on actuarial calculations,an investor has a 15 year life span and they want a $30,000 per year annuity,payable at the end of each year.If the insurance company uses a 4% assumed investment rate,how much should the annuity cost?

Accepted Answer

A)   $296,928
B)   $312,236
C)   $333,552
D)   $353.982E) All of the above
F) None of the above

Question 4

An investor can earn a 6% nominal rate of return but inflation is expected to be 3%.If the individual invests $2,000 per year for 20 years the real future value of their investment is ________.(All investments occur at year end) .

Accepted Answer

A)   $73,571
B)   $66,334
C)   $53,251
D)   $48,732E) A) and B)
F) All of the above

Question 5

Currently,the maximum combined taxable income of a retired household that avoids having to pay any taxes on a portion of their Social Security benefit is ______.

Accepted Answer

A)   $15,000
B)   $32,000
C)   $45,000
D)   $75,000E) B) and D)
F) A) and B)

Question 6

If you wish to tilt your savings toward later years you might be well advised to purchase which of the following types of readily available insurance?

Accepted Answer

A)   Career failure insurance
B)   Disability insurance
C)   Unemployment insurance
D)   Moral hazard insuranceE) B) and C)
F) None of the above

Question 7

You can tax shelter only one-half of your retirement savings.You want to invest one-half of your savings in bonds and one-half in stocks.How much of the bonds and how much of the stocks should you allocate to the tax sheltered investment?

Accepted Answer

A)   Stock and bond investments should be equally invested in both tax sheltered and non-sheltered accounts.
B)   You should place all the stocks in tax sheltered accounts and all the bonds in non-sheltered accounts.
C)   You should place all the bonds in tax sheltered accounts, and all the stocks in non-sheltered accounts.
D)   It makes no difference how you allocate your stock and bond investments among tax sheltered and non-sheltered accounts.E) B) and D)
F) B) and C)

Question 8

In planning for retirement,an investor decides she will save $2,000 every year for 25 years.At a 7% return on her investment,how much money will she have at the end of 25 years?

Accepted Answer

A)   $119,015
B)   $125,316
C)   $126,498
D)   $128,420E) None of the above
F) A) and B)

Question 9

Sharon decides to put $5,000 into her IRA at age of 25. She will continue to invest the same amount for the next 6 years and then stop contributing. Assume 10% annual return.
-How much money will Sharon have in her IRA after 6 years?

Accepted Answer

A)   $30,000
B)   $35,575
C)   $38,578
D)   $41,451E) None of the above
F) C) and D)

Question 10

Which one of the following is not likely to be subject to adverse selection?

Accepted Answer

A)   Health insurance providers
B)   Lifetime annuity providers
C)   Life insurance providers
D)   Social SecurityE) B) and C)
F) None of the above

Question 11

Suppose you have maxed out your allowable contributions to your tax sheltered retirement plans and you still want to shelter income.The best choice of investment for you to minimize the tax bill is to invest in _________.

Accepted Answer

A)   a bond portfolio
B)   stocks with high dividend yields
C)   a blended stock and bond portfolio containing zero coupon bonds
D)   stocks with low or zero dividend yieldsE) B) and D)
F) B) and C)

Question 12

In 2009,the income cap on social security taxes was set at _____ with an exemption of _____.

Accepted Answer

A)   $200,000; $10,000
B)   $153,600; $7,600
C)   $106,800; $0
D)   $96,000; $10,000E) A) and B)
F) A) and C)

Question 13

An employee uses his firm's 401(k) plan.If he decides to contribute $11,000 per year and pays an effective tax rate for all items at 28%,what is the reduction in her take home pay each year?

Accepted Answer

A)   $3,080
B)   $4,210
C)   $7,920
D)   $11,000E) B) and C)
F) All of the above

Question 14

The Social Security Primary Insurance Amount formula favors ______.

Accepted Answer

A)   older workers
B)   high income workers
C)   younger workers
D)   low income workersE) A) and B)
F) A) and C)

Question 15

Contributions to a _____________ are not tax deductible.

Accepted Answer

A)   traditional IRA
B)   Roth IRA
C)   401k plan
D)   403b planE) A) and B)
F) A) and C)

Question 16

Sharon decides to put $5,000 into her IRA at age of 25. She will continue to invest the same amount for the next 6 years and then stop contributing. Assume 10% annual return.
-How much money will Sharon have in her IRA when she is ready to retire at age of 62?

Accepted Answer

A)   $554,856
B)   $623,245
C)   $738,578
D)   $814,527E) A) and B)
F) C) and D)

Question 17

Withdrawals from a traditional IRA prior to age ___ are taxable and must pay a ___ tax penalty.

Accepted Answer

A)   59 ½; 10%
B)   62; 5%
C)   65; 7 ½ %
D)   63 ½; 5%E) None of the above
F) A) and B)

Question 18

The U.S.income tax code is generally _____.

Accepted Answer

A)   regressive
B)   progressive
C)   flat
D)   peakedE) C) and D)
F) None of the above

Question 19

Contributions to a traditional IRA are __________ and contributions to a Roth IRA are ____________.

Accepted Answer

A)   not tax deductible; not tax deducible
B)   tax deductible; tax deductible
C)   tax deductible; not tax deductible
D)   not tax deductible; tax deductibleE) A) and B)
F) B) and D)

Question 20

Social Security is ____________.

Accepted Answer

A)   a pension plan only
B)   an insurance plan only
C)   a combination of a pension and insurance plan
D)   an involuntary intergenerational transferE) B) and C)
F) A) and B)

Exam 21: Taxes,inflation,and Investment Strategy

Social Security is ____________.

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In planning for retirement,an investor decides she will save $2,000 every year for 25 years.At a 7% return on her investment,how much money will she have at the end of 25 years?

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The U.S.income tax code is generally _____.

Correct AnswerverifiedShow Answer

An insurance company plans to sell annuities to investors.Based on actuarial calculations,an investor has a 15 year life span and they want a $30,000 per year annuity,payable at the end of each year.If the insurance company uses a 4% assumed investment rate,how much should the annuity cost?

Correct AnswerverifiedShow Answer

In 2009,the income cap on social security taxes was set at _____ with an exemption of _____.

Correct AnswerverifiedShow Answer

Suppose you have maxed out your allowable contributions to your tax sheltered retirement plans and you still want to shelter income.The best choice of investment for you to minimize the tax bill is to invest in _________.

Correct AnswerverifiedShow Answer

A safe driver who drives faster as a result of purchased collision car insurance would be an example of the ___________ problem.

Correct AnswerverifiedShow Answer

An investor can earn a 6% nominal rate of return but inflation is expected to be 3%.If the individual invests $2,000 per year for 20 years the real future value of their investment is ________.(All investments occur at year end) .

Correct AnswerverifiedShow Answer

If you wish to tilt your savings toward later years you might be well advised to purchase which of the following types of readily available insurance?

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No taxes are paid on withdrawals made during retirement from a _________.

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Contributions to a traditional IRA are __________ and contributions to a Roth IRA are ____________.

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You can tax shelter only one-half of your retirement savings.You want to invest one-half of your savings in bonds and one-half in stocks.How much of the bonds and how much of the stocks should you allocate to the tax sheltered investment?

Correct AnswerverifiedShow Answer

Which one of the following is not likely to be subject to adverse selection?

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The Social Security Primary Insurance Amount formula favors ______.

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Withdrawals from a traditional IRA prior to age ___ are taxable and must pay a ___ tax penalty.

Correct AnswerverifiedShow Answer

Currently,the maximum combined taxable income of a retired household that avoids having to pay any taxes on a portion of their Social Security benefit is ______.

Correct AnswerverifiedShow Answer

An employee uses his firm's 401(k) plan.If he decides to contribute $11,000 per year and pays an effective tax rate for all items at 28%,what is the reduction in her take home pay each year?

Correct AnswerverifiedShow Answer

Sharon decides to put $5,000 into her IRA at age of 25. She will continue to invest the same amount for the next 6 years and then stop contributing. Assume 10% annual return. -How much money will Sharon have in her IRA after 6 years?

Correct AnswerverifiedShow Answer

Sharon decides to put $5,000 into her IRA at age of 25. She will continue to invest the same amount for the next 6 years and then stop contributing. Assume 10% annual return. -How much money will Sharon have in her IRA when she is ready to retire at age of 62?

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Contributions to a _____________ are not tax deductible.

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In 2009,the income cap on social security taxes was set at _ with an exemption of _.

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Contributions to a traditional IRA are and contributions to a Roth IRA are __.

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Withdrawals from a traditional IRA prior to age _ are taxable and must pay a _ tax penalty.

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