Test Bank for PFIN 6th Edition by Billingsley – Test Bank  

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Test Bank for PFIN 6th Edition by Billingsley – Test Bank

 

Sample  Questions

 

 

  1. Russ and Lois got married on December 30. Even though they were single for most part of the year, they can legally file as married filing jointly taxpayers in the year of the wedding.

 

*a. True

  1. False

 

 

  1. Dwayne and Gayle were divorced on September 29. They have not remarried since and have no dependents. Their filing status for the year will be married filing separately since they were married for more than half of the year.

 

  1. True

*b. False

 

 

  1. If you are married, you can legally file as a single taxpayer.

 

  1. True

*b. False

 

 

  1. Gross income minus tax-exempt income equals adjusted gross income.

 

  1. True

*b. False

 

 

  1. Adjustments to gross income will decrease your taxable income.

 

*a. True

  1. False

 

 

  1. Qualified dividends are taxed at the highest capital gain rates.

 

  1. True

*b. False

 

 

  1. The alternative minimum tax (AMT) is applicable to taxpayers with moderate levels of income only.

 

  1. True

*b. False

 

 

  1. Tax credits are dollar for dollar reductions in taxable income.

 

  1. True

*b. False

 

 

  1. All taxpayers have an equal probability of having their tax returns audited.

 

  1. True

*b. False

 

 

  1. A tax audit is an examination by enrolled agents to validate the accuracy of a filed tax return.

 

  1. True

*b. False

 

 

  1. A married couple filing a joint return has Ms. Cindy Cook, a CPA, complete their return. The IRS will hold only Ms. Cook responsible for any errors in the filed return.

 

  1. True

*b. False

 

 

  1. Tax preparers must be licensed by either the state or the federal government.

 

  1. True

*b. False

 

 

  1. Tax avoidance is legal, whereas tax evasion is illegal.

 

*a. True

  1. False

 

 

  1. Tax evasion is a legal means to avoid tax liabilities.

 

  1. True

*b. False

 

 

  1. Income shifting refers to the process of transferring income from the taxpayer to the IRS.

 

  1. True

*b. False

 

 

  1. Personal income taxes are:

 

  1. optional.
  2. regressive.

*c. progressive.

  1. deductible.
  2. unconditional.

 

 

  1. A progressive tax system is one in which:

 

  1. tax rates are directly proportional to inflation rates.

*b. people at higher-income levels pay tax at a higher rate than people at lower-income levels.

  1. tax rates are inversely related to inflation rates.
  2. people at higher-income levels pay tax at a lower rate than people at lower-income levels.
  3. there are no exemptions or deductions available from taxable income.

 

 

  1. Henry is married to Lillian, and they have two dependent children. Both of them want to file their own tax returns, reporting only his or her own income, deductions, and exemptions. The filing status of Henry and Lillian in their tax returns is:

 

  1. single taxpayer.
  2. married filing jointly.
  3. head of household.
  4. qualifying widow.

*e. married filing separately.

 

 

  1. Mandi and Thomas were married and had a child aged 7 in 2014. Mandi died in 2014, leaving Thomas a single parent. The most favorable filing status for Thomas in 2015 will be:

 

  1. single.
  2. married filing separately.
  3. head of household.

*d. qualifying widower.

  1. married filing jointly.

 

 

  1. Molly and Jason were married. Their only dependent was Spot, their black standard poodle. Jason died in 2014. Assuming Molly does not remarry, the only legal filing status for Molly in 2015 will be:

 

*a. single.

  1. married filing separately.
  2. head of household.
  3. qualifying widow.
  4. married filing jointly.

 

 

  1. Your take-home pay is what you are left with after subtracting withholdings from your:

 

*a. gross earnings.

  1. net earnings.
  2. taxable income.
  3. adjusted gross income.
  4. tax-exempt income.

 

 

  1. The _____ income is gross income less the tax deductions and payments for insurance and retirement savings.

 

*a. take-home

  1. EBIT
  2. adjusted gross
  3. taxable
  4. tax-exempt

 

 

  1. Your income tax withholding is dependent on:

 

  1. your age and educational qualification.
  2. the number of deductions claimed by your spouse.

*c. your income level and the number of withholding allowances you have claimed.

  1. the number of standard deductions you have claimed.
  2. the number of withholding allowances allowed by your employer.

 

 

  1. In 2015, the total Social Security tax rate was:

 

  1. 6.0 percent.
  2. 6.75 percent.
  3. 7.25 percent.
  4. 13.4 percent.

*e. 15.3 percent.

 

 

  1. Ben and Jack both earned $60,000 this year. Ben (age 30) is married with two children, and Jack (age 68) is single with no dependents. Which of the following is true regarding the amount of Social Security taxes they will have to pay?

 

*a. They will pay the same amount of Social Security taxes.

  1. Ben will pay lesser Social Security taxes because he is married.
  2. Ben will pay lesser Social Security taxes because he has children.
  3. Jack will pay lesser Social Security taxes because he is single.
  4. Jack will pay lesser Social Security taxes because he is over the age of 65.

 

 

  1. Mark is not married and has dependent parents. He pays more than half of the cost of keeping up a home for himself and his parents. His tax filing status is _____.

 

  1. single taxpayer
  2. married filing jointly
  3. married filing separately

*d. head of household

  1. qualifying widow

 

 

  1. Which of the following statements is true of the tax levied under the Federal Insurance Contributions Act (FICA)?

 

  1. It is also known as property tax.

*b. It is paid equally by employer and employee.

  1. It is not applicable to self-employed persons.
  2. It is applicable to all federal employees.
  3. It is used to provide insurance against theft.

 

 

  1. Taxable income is calculated by:

 

  1. adding adjustments to and subtracting the larger of itemized or standard deductions and exemptions from gross income.

*b. subtracting adjustments, the larger of itemized or standard deductions, and exemptions from gross income.

  1. adding adjustments, the larger of itemized or standard deductions, and exemptions to gross income.
  2. subtracting adjustments from and adding the larger of itemized or standard deductions and exemptions to gross income.
  3. adding adjustments and the larger of itemized or standard deductions to and subtracting exemptions from gross income.

 

 

  1. Which of the following is subject to federal income tax?

 

  1. The tax credit earnings on a Roth IRA
  2. Municipal bond interest
  3. Child-support payments

*d. Alimony received

  1. Personal exemptions

 

 

  1. _____ would be considered a part of your taxable income.

 

  1. Your (Individual retirement account) IRA contributions
  2. A gift from your aunt
  3. Your child-support payments

*d. A gain from the sale of your assets

  1. Your tuition scholarship

 

 

  1. A capital gain is the result of:

 

  1. selling an asset for less than its purchase price.
  2. holding an asset that has depreciated.
  3. selling an asset at its purchase price.

*d. selling an asset for more than its purchase price.

  1. buying a new asset at a rate lower than the market rate of the asset.

 

 

  1. Tom sold mutual fund shares, which he had owned for 3 years, so that he could use the proceeds to return to college. Tom is in the 15% marginal tax bracket, and his capital gain from the sale was $11,000. How much tax does Tom owe on the gain?

 

  1. $11,000
  2. $3,080
  3. $1,650
  4. $1,100

*e. $0

 

 

  1. Diana sold mutual fund shares, which she had owned for 4 years, so that she could use the proceeds to travel across Europe with her son. Diana is in the 35 percent marginal tax bracket, and her capital gains from the sale were $30,000. Diana’s tax liability on the gain is _____.

 

  1. $10,500
  2. $8,400
  3. $6,000

*d. $4,500

  1. $1,500

 

 

  1. Sarah is a homeowner and a single taxpayer. She has owned and occupied the house as a principal residence for the last 8 years. In the current taxable year, she receives a promotion. She sells her home and moves to another area. The capital gain on the sale of the principal residence will:

 

  1. be taxable as ordinary income.
  2. be taxable at a rate of 25%.
  3. be taxable at the appropriate short-term capital gains rate.

*d. be taxable excluding the first $250,000 of the gain.

  1. not be taxable because the relocation is a job-related move.

 

 

  1. Murray (age 68, single) sold his home owned for 35 years so that he could relocate to a place that is closer to where his grandchildren live. He realized a $400,000 capital gain on the home. Murray’s tax liability on capital gain is computed on _____.

 

  1. $400,000
  2. $300,000
  3. $250,000

*d. $150,000

  1. $0

 

 

  1. Molly and Justin are considering contributing $5,000 to a tax-deductible charity. This contribution will bring their total itemized deductions to $20,000. Assuming they are in the 28% marginal tax bracket, how much will they save in taxes by contributing the $5,000 to charity?

 

  1. $0
  2. $840

*c. $1,400

  1. $5,600
  2. $5,000

 

 

  1. John and Charlotte are considering contributing $1,000 to their church. This contribution will bring their total itemized deductions to $2,000. Assuming they are in the 15% marginal tax bracket, how much will they save in taxes by contributing the $1,000 to their church?

 

*a. $0

  1. $150
  2. $300
  3. $500
  4. $1,000

 

 

  1. For those under the age of 65, medical and dental expenses may be included as itemized deductions:

 

  1. when they exceed 4% of the adjusted gross income.
  2. up to a maximum of $7,500 per individual per tax year.
  3. only if they do not exceed 7.5% of the gross income.

*d. only for amounts in excess of 10% of the adjusted gross income.

  1. when they exceed 2% of the taxable income.

 

 

  1. Mr. and Mrs. Davenport, aged 40 and 38, respectively, have three children aged 3, 6, and 13. Their financial details for 2015 are as follows: Adjusted gross income (AGI) – $65,000

Unreimbursed medical expenses – $6,750

The Davenports’ claim for itemized deductions for medical expenses is _____.

 

  1. $0

*b. $250

  1. 3,500
  2. $2,750
  3. $4,500

 

 

  1. Connie is a 20-year-old college student who earned $8,000 and spent it all supporting herself during the year. Her parents may claim her as a tax dependent as long as:

 

*a. they provide more than half of the amount she needs to support herself during the year.

  1. she is under 21.
  2. she makes under $10,000.
  3. she lives at home.
  4. she does not get her Social Security number.

 

 

  1. Peter’s tax computed as per the tax rate schedule amounts to $2,000, and his tax credits amount to $500. His total tax liability is _____.

 

  1. $2,500

*b. $1,500

  1. $3,000
  2. $2,200
  3. $4,000

 

 

  1. Based on the given information, Max’s portfolio income is:
Interest from savings account $1,000
Capital gains realized $5,000
Salary $8,000

 

 

  1. $13,000.

*b. $6,000.

  1. $8,000.
  2. $6,000.
  3. $18,000.

 

 

  1. _____ are the deductions from adjusted gross income (AGI) that are based on the number of persons supported by the taxpayer’s income.

 

  1. Taxable assets
  2. Tax credits
  3. Liabilities
  4. Extensions

*e. Exemptions

 

 

  1. The total amount of income tax you owe in one year is your tax:

 

  1. withholding.
  2. credit.
  3. rate.
  4. refund.

*e. liability.

 

 

  1. Which of the following statements is true about tax credits?

 

  1. They are deductions that depend on the taxpayer’s filing status, age, and vision and that can be claimed by a taxpayer whose total itemized deductions are small.
  2. They are deductions from the adjusted gross income based on the number of persons supported by the taxpayer’s income.
  3. They represent the income remaining after subtracting all allowable adjustments to income from the gross income.
  4. They are personal expenditures that can be deducted from adjusted gross income when determining taxable income.

*e. They are deductions from a taxpayer’s tax liability that directly reduce the person’s taxes due.

 

 

  1. What is the maximum amount of adoption tax credit available for an individual?

 

  1. $10,000

*b. $13,400

  1. 10 percent of the adjusted gross income
  2. 15 percent of the adjusted gross income
  3. $25,000

 

 

  1. Tax credits reduce your:

 

*a. tax liability.

  1. adjusted gross income.
  2. tax refund.
  3. tax withholding.
  4. taxable income.

 

 

  1. Mr. and Mrs. McMurray have three children, aged 6, 12, and 18, for whom they paid childcare expenses of $6,000 in 2015. The McMurrays’ tax liability calculated as per the tax schedule is $10,000. The McMurrays’ tax liability is _____.

 

*a. $8,000

  1. $8,500
  2. $8,800
  3. $13,190
  4. $10,000

 

 

  1. Jamil and Vicki have one child, aged 3, for whom they paid childcare expenses of $2,500 this year. If they are eligible for a 20% dependent care credit plus child tax credit, by how much will these credits reduce their tax liability?

 

  1. $500

*b. $1,500

  1. $2,000
  2. $2,500
  3. $3,000

 

 

  1. A simplified version of Form 1040 for individual income tax if you have a taxable income of less than $100,000 from wages only and you do not claim any itemized deductions or any tax credit is:

 

  1. Schedule A.
  2. Schedule B.
  3. Form 1040S.
  4. Form 1040A.

*e. Form 1040EZ.

 

 

  1. Itemized deductions are listed on:

 

*a. Schedule A of Form 1040.

  1. Schedule B of Form 1040.
  2. Schedule C of Form 1040.
  3. Schedule D of Form 1040.
  4. Schedule F of Form 1040.

 

 

  1. If you are a professional who is likely to receive income that is not subject to withholding, then you are required to _____.

 

*a. pay an estimated tax

  1. file an amended return
  2. file an extension
  3. deduct tax credit
  4. calculate itemized deductions

 

 

  1. A _____ would most likely have to pay estimated taxes.

 

  1. school teacher
  2. manager for an industrial firm

*c. self-employed plumber

  1. union worker
  2. corporate attorney

 

 

  1. A declaration of estimated taxes is made in:

 

  1. Schedule B.
  2. Form 1040EZ.
  3. Schedule Z.

*d. Form 1040-ES.

  1. Form 1040 A.

 

 

  1. Which of the following individuals should pay estimated taxes?

 

*a. An entrepreneur

  1. A teacher
  2. A corporate manager
  3. A State worker
  4. A State police officer

 

 

  1. A taxpayer can file for an automatic extension of _____ months.

 

  1. 2
  2. 4

*c. 6

  1. 9
  2. 12

 

 

  1. Which of the following private tax preparers are required to pass an exam administered by the Internal Revenue Service (IRS)?

 

  1. National and local tax services
  2. Certified public accountants (CPAs)

*c. Enrolled agents (EAs)

  1. Tax attorneys
  2. Corporate managers

 

 

  1. You are preparing your own tax return. The least costly source for getting your questions answered would be:

 

*a. the IRS office toll-free number.

  1. an enrolled agent.
  2. a tax accountant.
  3. a tax lawyer.
  4. the local post office.

 

 

  1. Tax practitioners who are federally licensed are called:

 

  1. certified public accountants.
  2. certified financial planners.
  3. tax attorneys.

*d. enrolled agents.

  1. chartered financial analysts.

 

 

  1. The Robertsons, a couple with an adjusted gross income of $28,500, decides to contribute the maximum amount possible toward their individual retirement accounts (IRAs) even though Mr. Robertson is covered by a pension plan where he works. He names his wife the beneficiary of the IRA. What is such a tax strategy called?

 

*a. Tax deferral strategy

  1. Tax avoidance strategy
  2. Tax evasion strategy
  3. Tax ignorance strategy
  4. Income shifting strategy

 

 

  1. Which of the following is an illegal method of reducing your current tax liability?

 

*a. Not reporting the taxable income you receive

  1. Investing in a tax deferred annuity
  2. Shifting income to your children
  3. Investing money in municipal bonds
  4. Putting money in a Roth IRA

 

 

  1. The highest marginal tax rate is currently ____________. ​

 

  1. 35.6 percent
  2. 35 percent

*c. 39.6 percent

  1. 41 percent

 

 

  1. Christy lives by herself with her dog, Tex. Her filing status should be ____________. ​

 

  1. head of household
  2. qualifying widow

*c. single

  1. married filing separately

 

 

  1. Payments under the provisions of the Federal Insurance Contributions Act (FICA) are also known as ____________. ​

 

  1. income tax

*b. Social Security tax

  1. property tax
  2. capital gains tax

 

 

  1. A tax credit could result from ____________. ​

 

  1. owning a home

*b. adopting a child

  1. charitable contributions
  2. investing in municipal bonds

 

 

  1. If your income is high, then there is ____________ probability of your income being audited. ​

 

  1. zero
  2. an equal

*c. a low

  1. a high

 

 

  1. Tax ____________ is an illegal practice. ​

 

  1. avoidance
  2. planning

*c. evasion

  1. deferring

 

 

  1. When an individual gives his or her child an income-producing asset, he or she is ____________. ​

 

*a. shifting his or her income

  1. maximizing his or her deductions
  2. deferring his or her tax
  3. executing his or her will

 

 

  1. Shawn earns $65,000. If the total Social Security tax rate is 15.3%, then how much is his Social Security tax? How much does his employer pay toward Social Security taxes for Shawn? (Show all work.)

 

 

  1. From the information given below, determine Marcie’s gross income for tax purposes.
Salary $ 40,000
Interest (checking account) $ 50
Cash received as birthday gift $ 900
Dividends (mutual funds) $ 500
Inheritance received on father’s death $ 22,000
Cash received from insurance for accident claim settlement $ 3,200
Cash dividend from stock $ 750

 

 

 

  1. From the information given below, determine Steve’s gross income for tax purposes.
Salary $ 32,000
Interest (checking account) $ 25
Cash received as birthday gift $ 1,000
Dividends (mutual funds) $ 5,500
Child-support payments received from ex-wife $ 24,000
Life insurance benefits received after aunt’s death $ 50,000

 

 

 

  1. Sue and Tim are married taxpayers in the 33% marginal tax bracket. In 2015, they sold common stock shares, which they held for more than 40 months, for a capital gain of $3,800. They also sold some technology stock for a long-term capital loss of $9,000. In addition, they sold the home they had lived in for the past 10 years and experienced a $75,000 gain on the house. How much will their net capital gains (or losses) be for 2015? How much will they pay (or save) in taxes as a result of these transactions?

 

 

  1. George, aged 40, has the following expenses. He wants to include them under itemized deductions for the year. His adjusted gross income is $60,000. What is the total itemized deduction he can take? (Show all work.)
Medical expenses $4,500
Home mortgage interest 8,000
Credit card interest 450
Charitable contributions 1,500
State property taxes 2,400
Job-related expenses 1,900

 

 

 

  1. Jamie has taxable income of $45,000. She is single, and her tax rate is 10% on the first $9,225 of the taxable income, 15% on the amount over $9,225 up to $37,450 of the taxable income, and 25% on the remainder. What are Jamie’s tax liability, marginal tax rate, and average tax rate? (Show all work.)
  1. In a co-op, the buyer receives title to a unit and joint ownership of the common areas.

 

  1. True

*b. False

 

 

  1. The property listing in a local multiple listing service (MLS) cannot be accessed by all buyers and sellers.

 

*a. True

  1. False

 

 

  1. Prequalification provides a home buyer with information regarding the specific mortgage amounts he or she is eligible for subject to the expected changes in interest rates.

 

*a. True

  1. False

 

 

  1. The job of a mortgage banker is to locate conventional loans for clients.

 

  1. True

*b. False

 

 

  1. Variable auto ownership costs are dependent on:

 

  1. the driver’s behavior.

*b. the miles covered by the automobile.

  1. the instalment payments on car loan.
  2. the down payment.
  3. the periodic renewals of vehicle registration.

 

 

  1. Which of the following is a fixed auto ownership cost?

 

  1. The cost of fuel
  2. The cost of oil

*c. The cost of automobile insurance

  1. The maintenance and repair costs
  2. The cost of tires

 

 

  1. The loss in the value of an automobile over time is called:

 

  1. reinsurance.
  2. the acquisition payment.
  3. the market price.
  4. the repurchase commission.

*e. depreciation.

 

 

  1. The first step in the auto-buying process should be:

 

  1. to test-drive several automobiles.
  2. to begin negotiations on various automobiles.
  3. to decide whether to trade in your used car or to sell it yourself.
  4. to consider alternative buying strategies.

*e. to analyze how much you can afford to spend on the car.

 

 

  1. Henry has $2,500 for a down payment and thinks he can afford monthly payments of $400. If he can finance a vehicle with an 8 percent, 3-year loan from a local bank, what is the maximum amount Henry can spend on the car? (Round the answer to the nearest units place.)

 

  1. $12,765
  2. $14,400
  3. $14,079

*d. $15,265

  1. $16,879

 

 

  1. Kurt has $4,500 for a down payment and thinks he can afford monthly payments of $300. If Kurt can finance a vehicle with a 7 percent, 4-year loan from the automobile dealer, what is the maximum amount he can afford to spend on the car? (Round off the answer to nearest units place.)

 

  1. $12,528
  2. $14,400
  3. $16,028

*d. $17,028

  1. $18,028

 

 

  1. Jana has $1,500 for a down payment and thinks she can afford monthly payments of $300. If she can finance a vehicle with a 7 percent, 4-year loan from a credit society, what is the maximum loan amount Jana can afford? (Round off the answer to nearest units place.)

 

*a. $12,528

  1. $14,208
  2. $16,028
  3. $17,900
  4. $18,028

 

 

  1. Which of the following is true of buying a used car as compared with a new car?

 

  1. A used car will be in a better mechanical condition compared with a new car.
  2. A used car will have a higher residual value than a new car.
  3. The accessories in a new car will be better updated compared with those fitted in a new car.

*d. Purchasing a used car will be less expensive as compared with purchasing a new car.

  1. The fuel efficiency in a used car is always higher compared with that of a new car.

 

 

  1. A behavioral bias in which an individual tends to allow an initial estimate (of value or price) to dominate the subsequent assessment (of value or price) regardless of new information to the contrary is called _____.

 

  1. foreclosing

*b. anchoring

  1. depreciating
  2. leasing
  3. cooperating

 

 

  1. Jacob has taken an SUV on lease from Free Cruisers Inc. for a period of four years. Jacob does not need to pay any extra amount, based on the residual value of the car, at the end of the fourth year. He has a _____.

 

  1. residual lease

*b. closed-end lease

  1. purchase option lease
  2. right to early termination lease
  3. reassignment option lease

 

 

  1. The price of the car you are leasing is called the:

 

  1. money factor.

*b. capitalized cost.

  1. residual value.
  2. purchase option.
  3. capital cost reduction.

 

 

  1. At the end of your car lease period, you intend to turn in the car, and you will not pay extra at that time based on the residual value of the car. You have _____ lease.

 

  1. a residual
  2. an open-end
  3. a purchase option

*d. a closed-end

  1. a money factor

 

 

  1. Which of the following is a type of down payment that lowers the potential depreciation and therefore your monthly lease payments on a leased car?

 

  1. Money factor
  2. Property depreciation cost
  3. Initial residual value
  4. Purchase option

*e. Capital cost reduction

 

 

  1. When shopping for a lease, you want:

 

  1. a high insurance cost.

*b. a low capitalized cost.

  1. a high money factor.
  2. a low residual value.
  3. high lease payments.

 

 

  1. The financing rate on a lease similar to the interest rate on a loan is called the _____.

 

  1. lease point
  2. residual rate

*c. money factor

  1. purchase option
  2. capitalized cost

 

 

  1. When you receive title to an individual unit and a joint ownership of any common areas and facilities, you have purchased a:

 

  1. single family home.
  2. cooperative.

*c. condominium.

  1. row house.
  2. mobile home.

 

 

  1. Phil and Christina are recently married and are unsure of where they will be relocated after Christina finishes her residency in 9 months. Based on this information, which of the following housing recommendations would be most appropriate for them?

 

*a. Renting a home

  1. Buying a condominium
  2. Sharing a single-family dwelling
  3. Leasing a cooperative apartment
  4. Purchasing a trailer

 

 

  1. A foreclosure happens when:

 

  1. the rates of interest prevalent in the housing market are extremely volatile, forcing the lender to demand additional collateral from the borrower.

*b. the lenders attempt to recover loan balances from the insolvent borrowers by forcing the sale of the home pledged as collateral.

  1. the borrowers repay their housing loan well before the estimated closing period of the loan.
  2. the value of a house is higher than the loan taken on the property.
  3. the borrower is planning to restructure the loan taken for making mortgage payments.

 

 

  1. _____ is a situation where homeowners owe more to the lenders than what their properties are worth.

 

*a. A negative equity

  1. A foreclosure
  2. A restructure
  3. Inflation
  4. An expanded mortgage

 

 

  1. When you lease your apartment from a nonprofit corporation that owns the building and you own a share of the nonprofit corporation, you own:

 

  1. a single family home.

*b. a cooperative apartment.

  1. a condominium.
  2. a row house.
  3. a mobile home.

 

 

  1. As home prices have fallen in recent years, the rent ratio:

 

  1. and rent attractiveness have increased.

*b. and rent attractiveness have decreased.

  1. has increased and rent attractiveness has decreased.
  2. has decreased and rent attractiveness has increased.
  3. has increased and rent attractiveness has stabilized.

 

 

  1. If you made a down payment of $11,000 on a house worth $110,000, the lenders will require _____ because of the size of the down payment.

 

  1. closing points
  2. a bond

*c. private mortgage insurance

  1. application fees
  2. homeowner’s insurance

 

 

  1. Fees charged by lenders as a condition of a mortgage loan that raises the effective rate of interest are called:

 

*a. mortgage points.

  1. down payments.
  2. add-on charges.
  3. commissions.
  4. loan discounts.

 

 

  1. If the maximum loan-to-value ratio that a lender will accept on a house costing $100,000 is 80 percent, then the borrower must make a down payment of at least _____

 

  1. $100,000.
  2. $80,000.
  3. $180,000.

*d. $20,000.

  1. $120,000.

 

 

  1. Barb and Bob want to purchase a new home but don’t know how much mortgage they can qualify for. The lender requires that the total installment of loan payments do not exceed 35 percent of the monthly income. Based on Barb and Bob’s financial data given below, what is the maximum monthly mortgage payment for which they can qualify?
Monthly Gross Income $4,000
Car payment $350
Student loan payment $200

 

 

  1. $1,400
  2. $1,208
  3. $1,502

*d. $850

  1. $500

 

 

  1. The majority of each monthly payment at the beginning of the loan goes to pay the:

 

  1. principal.

*b. interest.

  1. real estate taxes.
  2. homeowner’s insurance.
  3. private mortgage insurance.

 

 

  1. If you purchase a house worth $110,000 and make a 10 percent down payment, how much would 1 mortgage point cost at closing?

 

  1. $765

*b. $990

  1. $1,100
  2. $1,530
  3. $1,800

 

 

  1. Which of the following are tax deductible if one itemizes deductions?

 

  1. Principal, interest, real estate taxes, and insurance
  2. Principal, interest, and real estate taxes
  3. Principal and interest
  4. Interest, real estate taxes, and insurance

*e. Interest and real estate taxes

 

 

  1. If the maximum loan-to-value ratio that a lender will accept on a house costing $100,000 is 90 percent, then the borrower must make:

 

*a. a minimum down payment of $10,000 plus closing costs.

  1. a minimum down payment of $10,000 including closing costs .
  2. a maximum down payment of $10,000 including closing costs and mortgage points.
  3. a maximum down payment of $10,000.
  4. a minimum down payment of $90,000 including closing costs.

 

 

  1. A lender will usually require a loan-to-value ratio of _____ or less for a borrower to avoid having to pay private mortgage insurance (PMI).

 

  1. 75%

*b. 80%

  1. 85%
  2. 90%
  3. 95%

 

 

  1. A real estate sales contract will include:

 

*a. the amount you have paid as an earnest money deposit.

  1. the terms of a mortgage loan taken from a third party.
  2. the future value of similar properties in foreign countries.
  3. the movement in the value of the property over the last 20 years.
  4. the current value of the properties in the neighboring locations.

 

 

  1. The data in a multiple listing service (MLS):

 

  1. eliminates the need for a real estate agent.
  2. is accessible to the buyers and sellers directly.
  3. includes the entire ownership history of the listed properties.
  4. deals only with undervalued properties that are authorized by the government within a geographic location.

*e. consists of a comprehensive listing of properties for sale in a given community area.

 

 

  1. The _____ governs closings on owner-occupied houses, condominiums, and apartment buildings of four units or fewer.

 

  1. Equal Credit Opportunity Act
  2. Truth-in-Lending Act

*c. Real Estate Settlement Procedures Act

  1. Mortgage Lenders Act
  2. Real Estate Agents Act

 

 

  1. Fredrick purchased a property worth $150,000 on mortgage. He had paid $30,000 as a down payment on this property. However, because of a recent slump in the real estate prices, the property is worth only $110,000, forcing Fredrick to sell the property. Assuming that no mortgage payments have been made by Fredrick, this sale is termed a(an) _____.

 

  1. real estate declining equity

*b. real estate short sale

  1. fixed mortgage sale
  2. shrinking principal sale
  3. indexed equity

 

 

  1. Jane and Smith are considering the purchase of a home in downtown Minneapolis. They approached Larson’s Mortgagers Inc. to arrange for the financing needed for their home. This process of arranging with a mortgage lender in advance of buying a home is called _____.

 

  1. foreclosure
  2. contingency auction

*c. prequalification

  1. real estate short sale
  2. diversification

 

 

  1. Which of the following will help a buyer know ahead of time the specific mortgage amount that he or she will be eligible for subject to changes in rates and term?

 

*a. Prequalification

  1. The rent ratio
  2. Leasing
  3. Anchoring
  4. The interest rate

 

 

  1. If the interest rates and monthly mortgage payments do not change over the life of your mortgage, you have _____.

 

  1. a reverse-annuity mortgage

*b. a fixed-rate mortgage

  1. an adjustable-rate mortgage
  2. a rollover mortgage
  3. a graduated-payment mortgage

 

 

  1. The monthly interest on your adjustable-rate mortgage was $690. You paid $650 as your monthly payment on the loan leading to an increase in the principal balance. This is an example of:

 

  1. a growing equity.

*b. a negative amortization.

  1. a fixed interest expense.
  2. a shrinking principal.
  3. an indexed equity.

 

 

  1. A buydown refers to:

 

  1. a mortgage that starts with unusually low payments that rise over several years to a fixed payment.

*b. financing made available by a builder or seller to a potential new-home buyer at well below market interest rates, often only for a short period.

  1. a fixed-rate mortgage with payments that increase over a specific period.
  2. a mortgage that requires the borrower to pay only interest; typically used to finance the purchase of more expensive properties.
  3. a loan on which payments that equal half the regular annual interest amount are made every six months.

 

 

  1. The Federal Housing Administration _____ to high loan-to-value ratio mortgages.

 

  1. guarantee

*b. insurance

  1. subsidies
  2. grants
  3. tax shelters

 

 

  1. _____ are loans offering low payments for the first few years, gradually increasing until year three or five, and then remaining fixed.

 

  1. Reverse-annuity mortgages
  2. Fixed-rate mortgages
  3. Adjustable-rate mortgages

*d. Graduated-payment mortgages

  1. Rollover mortgages

 

 

  1. The biggest fixed cost of owning a car is likely to be the ____________. ​

 

*a. loan payments

  1. fuel costs
  2. cost of license and renewals
  3. maintenance charges

 

 

  1. Assume that you have taken a car on a closed-end lease for a period of 5 years. At the end of the fifth year, you would need to pay additional money only ____________. ​

 

  1. when the residual value is lower than expected
  2. when the residual value is more than expected

*c. when the mileage limits are exceeded

  1. when the mileage limits are not exceeded

 

 

  1. Janet is considering the purchase of a condo for $150,000 during a recession phase, partly financed by a mortgage. She is due to retire in a few years. If she cannot make her mortgage payments on time, she is bound to incur a ____________. ​

 

  1. neutral equity on her property
  2. reduced residual value of the property
  3. higher rent ratio

*d. foreclosure of her house

 

 

  1. The purchase price of the house you are buying is $140,000. A loan-to-value ratio of 80 percent will require a down payment of ____________. ​

 

  1. $34,000

*b. $28,000

  1. $108,000
  2. $112,000

 

 

  1. ____________ are ongoing costs of home ownership. ​

 

  1. Down payments
  2. Closing costs
  3. Taxes on capital gains

*d. Property taxes and insurance

 

 

  1. If your lender charges 1.5 mortgage points on a house selling for $100,000, on which there is a $90,000 loan, the points will cost you ____________. ​

 

*a. $1,350

  1. $1,500
  2. $2,850
  3. $150

 

 

  1. A(n) ____________ ratio specifies the maximum percentage of the value of a property that a lender is willing to loan. ​

 

  1. affordability

*b. loan-to-value

  1. rent
  2. mortgage points to closing costs

 

 

  1. Earnest money is the sum of money the home buyer pledges with the ____________. ​

 

  1. lender to guarantee the purchase

*b. seller to indicate the intent of purchase

  1. realtor for finding the desired home within a preset budget
  2. lender to originate the loan

 

 

  1. The ____________ Act governs closings on owner-occupied houses, condominiums, and apartment buildings of four units or fewer. ​

 

  1. Equal Credit Opportunity
  2. Truth-in-Lending

*c. Real Estate Settlement Procedures

  1. Mortgage Lenders

 

 

  1. The Real Estate Settlement Procedures Act governs ____________ on owner-occupied houses, condominiums, and apartment buildings of four units or fewer. ​

 

*a. mortgage closings

  1. mortgage rates
  2. the contingency clause
  3. the terms of prequalified loans

 

 

  1. Matt is considering the purchase of a condo on a mortgage. However, he is not sure of the amount of the mortgage he is eligible for. ____________ will help him identify and correct any problems such as credit report errors that may arise on his application. ​

 

*a. Prequalification

  1. A contingency clause
  2. A Multiple Listing Service
  3. Due diligence

 

 

  1. With prequalification, a buyer can ____________. ​

 

  1. always negotiate a price lower than the quoted price on the property

*b. set right in advance any problems on his credit report

  1. get a comprehensive list of all the suitable properties in a locality
  2. bargain for additional time in a property deal for the want of funds

 

 

  1. The real estate agent’s commission is generally paid by ____________. ​

 

*a. the seller

  1. the buyer
  2. the mortgage bank
  3. the local multiple listing service provider

 

 

  1. A financing made available by a builder or seller to a potential new-home buyer at interest rates well below market interest rates, often only for a short period is termed as a ____________. ​

 

  1. conventional mortgage
  2. convertible ARM

*c. buydown

  1. two-step ARM

 

 

  1. A veteran might be able to buy a home with no down payment with ____________. ​

 

  1. an FHA mortgage insurance

*b. a VA loan guarantee

  1. a buydown
  2. a conventional mortgage

 

 

  1. You made a $900 mortgage payment. The interest of $925 on the mortgage for this month leads to an increase in the principal balance. You have ____________. ​

 

*a. experienced a negative amortization

  1. signed up for a conventional mortgage
  2. refinanced your loan
  3. taken a fixed-rate mortgage

 

 

  1. Judy has $2,000 for a down payment on a vehicle and she can afford monthly payments of $400. If lenders are currently offering 6 percent interest on 5-year loans, what is the maximum price Judy can pay for a vehicle?

 

 

  1. Leslie has been offered the choice of either a $1,000 rebate or a 5.5 percent, 48-month loan for the new car she is purchasing. If Leslie will be financing $15,000 and can get a 7.5 percent, 48-month loan at her credit union, should she take the $1,000 rebate or the 5.5 percent loan? (Show all work.)

 

 

  1. Dick and Jane have just purchased a house and are calculating how much money they will need when the closing day rolls around. The purchase price is $200,000. They will make a 20 percent down payment, and they must pay 2 points on the loan. Closing costs should be 3 percent of the purchase price. What is the total dollar amount they will need at closing? (Show all work.)