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Study Guide

Field 059: Financial Literacy
Sample Multiple-Choice Questions

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Domain I–Financial Literacy

Objective 0001
Understand fundamental concepts of financial responsibility, decision making, and planning.

1. A person is trying to decide which of several asset categories to add to an investment portfolio. The person would be best advised to begin by:

  1. determining the amount of financial resources they are willing to put at risk.
  2. asking knowledgeable acquaintances about which option they would choose.
  3. comparing the potential returns from each of the options.
  4. estimating how much money they hope to make from the investment.
Answer
Correct Response: A. Every saver or investor has different priorities based on many factors including their short-term and long-term goals, their stage in life, and the alternatives open to them. However, much of the choice of asset categories within an investment portfolio reduces to a determination of risk tolerance. People with relatively longer time horizons and higher cash balances can afford to choose riskier investments that offer the possibility of higher rates of return.

2. At one time, U.S. tax law allowed taxpayers with children to deduct 4,050 dollars per child on their federal income tax return. Then the tax law changed with the deduction being replaced by a tax credit of 2,000 dollars per child. The likely combined effect of these changes for most taxpayers with children was to:

  1. increase their tax liability because the small tax credit provides less benefit in most situations.
  2. reduce their tax liability because a tax credit subtracts directly from the amount of taxes owed.
  3. complicate the process of filing taxes because a tax credit of that size requires taxpayers to complete a Form W-4.
  4. simplify the process of filing taxes because a tax credit of that size is automatically included in the Form W-2 received from employers.
Answer
Correct Response: B. A tax deduction subtracts the deducted amount from a taxpayer's income. The reduction in tax liability is found by multiplying the reduction in taxable income by the marginal tax rate, which for most taxpayers is under 25 percent and often around half that rate. By contrast, a tax credit is subtracted directly from the tax liability, delivering 100 percent of the credited amount to tax reduction. For most taxpayers with children, the $2,000 credit was more valuable than the previously allowed tax deduction even though the deducted amount was higher than the credited amount.

Objective 0002
Understand methods of informing and protecting consumers.

3. Which of the following expenses that affect a consumer's budget is most likely to vary from county to county within Ohio based purely on differences in geographic jurisdiction?

  1. shipping and handling charges for purchases
  2. federal income taxes
  3. premiums for life and health insurance policies
  4. sales and use tax on purchases
Answer
Correct Response: D. Sales and use taxes in Ohio are imposed by the state, at a rate of 5.75 percent, on the retail sale, lease, and rental of many goods and some services. Ohio counties, municipalities, and local transit authorities may levy additional sales and use taxes within their jurisdictions. These local surcharges create a range of sales and use tax rates extending from 6.5 percent to 8.0 percent, and rates are subject to change in the future.

4. A person whose credit cards are lost or stolen should take which of the following steps first?

  1. purchasing insurance against identity theft from a commercial insurance company
  2. contacting the credit card issuers to have them lock or freeze all affected accounts
  3. writing to the three credit bureaus to prompt them to remove fraudulent information from credit reports
  4. filing an Identity Theft Victim's Complaint and Affidavit at the nearest office of the Federal Trade Commission
Answer
Correct Response: B. In the event of lost or stolen credit cards, the most important action to take first would be to access the credit card accounts, whether by phone, email, or the card issuers' app, to initiate the process of locking or freezing the credit accounts. Although some distinctions between locking and freezing can exist, the primary idea is to prevent a thief or finder of the lost cards from charging expenses to the cards. Closing or canceling the account would also prevent fraudulent charges, but a lock or freeze is reversible if the cards are later found.

Objective 0003
Understand principles of investing and the use of credit and debt.

5. An individual has 35,000 dollars in government student loans, 13,000 dollars in credit card debt, no savings, and a full-time job that pays 45,000 dollars per year. The individual is creating a long-term financial plan with the goal of buying a house in ten years. The first action this individual should take as part of this plan is to:

  1. pay off the student loans.
  2. create an emergency fund equal to six months' salary.
  3. pay off the credit card debt.
  4. get a different job with a higher salary.
Answer
Correct Response: C. A lifetime financial plan should have the ultimate goal of increasing net worth. Credit card debt often accrues interest at a rate near or over 20 percent annually, which far exceeds both the interest rate on student loans and the rate of return that can be expected from any type of investment asset. The individual will find it much easier to increase their net worth as soon as the credit card debt is eliminated.

6. A college student wants to establish a credit history in order to apply for a car loan or mortgage in the future. Which of the following strategies would be most effective in helping the student establish a credit history?

  1. opening a checking account at a bank and using a debit card to pay most bills
  2. applying for student loans to help pay for tuition at the school that the student is attending
  3. applying for a credit card with a small maximum and paying the balance in full each month
  4. obtaining a part-time job and having their paycheck deposited directly into a checking account
Answer
Correct Response: C. Beginning to use a credit card account and paying the balance in full each month will establish a person's credit history and raise their credit score in two distinct ways. First, having some debt that is a small percentage of the available credit card limit shows the consumer reporting agencies and future creditors that the debtor can exercise psychological control over their own borrowing. Second, avoiding debt delinquencies, late payments, foreclosures, and bankruptcies assures the consumer reporting agencies and future creditors that the debtor has the responsibility and earning power to go into debt and pay it back without putting the creditors at risk.