Question 1

One way to hedge labor income is to ____________________.

Accepted Answer

A)  diversify your investment portfolio away from the industry in which you work 
B)  save for retirement only from investment income 
C)  change careers every 7 years 
D)  invest heavily in the stock options provided by your firm 
A)  diversify your investment portfolio away from the industry in which you work 
B)  save for retirement only from investment income 
C)  change careers every 7 years 
D)  invest heavily in the stock options provided by your firm

Question 2

In planning for retirement,an investor decides she will save $11,000 every year for 40 years.At an 11% return on her investment,how much money will she have at the end of 40 years (to the nearest hundred thousand dollars)?

Accepted Answer

A)  $1,400,000 
B)  $2,800,000 
C)  $4,900,000 
D)  $6,400,000 
A)  $1,400,000 
B)  $2,800,000 
C)  $4,900,000 
D)  $6,400,000

Question 3

Which one of the following is an example of "global" consumption smoothing?

Accepted Answer

A)  Borrowing to buy a car 
B)  Borrowing to buy a home 
C)  Saving to send children to college 
D)  Saving during your working years for retirement 
A)  Borrowing to buy a car 
B)  Borrowing to buy a home 
C)  Saving to send children to college 
D)  Saving during your working years for retirement

Question 4

Annuity income is positively correlated with ___________.
I.longevity
II.durability of marriage
III.expected length of your base (Social Security)annuity

Accepted Answer

A)  I only 
B)  I and II only 
C)  II and III only 
D)  I, II and III 
A)  I only 
B)  I and II only 
C)  II and III only 
D)  I, II and III

Question 5

Suppose you are a high tax bracket individual and you want to shelter your investment 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 municipal bond portfolio 
D)  stocks with low or zero dividend yields 
A)  a bond portfolio 
B)  stocks with high dividend yields 
C)  a municipal bond portfolio 
D)  stocks with low or zero dividend yields

Question 6

Employers commonly match at least some portion of employee contributions to ___________.
I.401k plans
II.403b plans
III.Self directed IRAs

Accepted Answer

A)  I only 
B)  I and II only 
C)  II only 
D)  I, II and III 
A)  I only 
B)  I and II only 
C)  II only 
D)  I, II and III

Question 7

Which one of the following represents local consumption smoothing?
I.Saving during your working years for retirement
II.Borrowing money to buy a car
III.Putting off a vacation for a year until you can afford it

Accepted Answer

A)  I only 
B)  II and III only 
C)  I and II only 
D)  I, II and III 
A)  I only 
B)  II and III only 
C)  I and II only 
D)  I, II and III

Question 8

You earn 6% on your corporate bond portfolio this year and you are in a 25% federal tax bracket and an 8% state tax bracket.Your after tax return is _____.(Assume that federal taxes are not deductible against state taxes and vice versa).

Accepted Answer

A)  4.50% 
B)  4.14% 
C)  4.02% 
D)  3.12% 
A)  4.50% 
B)  4.14% 
C)  4.02% 
D)  3.12%

Question 9

A non-profit organization offers a 5% salary contribution to John's 403b plan and matching 5% when John contributes 5% of his/her salary. John makes $56,000 a year.
-What is the amount of total contribution to his 403b if John contributes 5% of his own money?

Accepted Answer

A)  $5,600 
B)  $8,400 
C)  $11,200 
D)  $12,500 
A)  $5,600 
B)  $8,400 
C)  $11,200 
D)  $12,500

Question 10

If you start saving for retirement only in your later years and your income growth from that point is rapid then ________________________.

Accepted Answer

A)  a traditional IRA is probably a better choice than a Roth IRA 
B)  a Roth IRA is probably a better choice than a traditional IRA 
C)  a SEP is probably a better choice than Medicare 
D)  a 401(k) is probably a better choice than a 403(b) 
A)  a traditional IRA is probably a better choice than a Roth IRA 
B)  a Roth IRA is probably a better choice than a traditional IRA 
C)  a SEP is probably a better choice than Medicare 
D)  a 401(k) is probably a better choice than a 403(b)

Question 11

A worker plans to retire in 20 years.He needs $20,000 per year in retirement income in today's dollars.If inflation is forecast at 3.5% per year,what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $20,000?

Accepted Answer

A)  $30,353 
B)  $34,159 
C)  $37,398 
D)  $39,796 
A)  $30,353 
B)  $34,159 
C)  $37,398 
D)  $39,796

Question 12

A study by Spivak and Kotlikoff (1981)showed that a marriage contract increases the dollar value of lifetime savings by as much as _____.

Accepted Answer

A)  5% 
B)  10% 
C)  25% 
D)  50% 
A)  5% 
B)  10% 
C)  25% 
D)  50%

Question 13

In a private defined benefit pension plan the ___________ bears the investment risk and in a private defined contribution plan the ____________ bears the investment risk.

Accepted Answer

A)  plan sponsor; employee 
B)  employee; plan sponsor 
C)  U.S. government; plan sponsor 
D)  plan sponsor; U.S. government 
A)  plan sponsor; employee 
B)  employee; plan sponsor 
C)  U.S. government; plan sponsor 
D)  plan sponsor; U.S. government

Question 14

The employees of a firm complain that they can not afford to contribute $8,000 per year to a 401k,because of the loss of $8,000 of take home pay.In fact,how much will the take home pay be reduced if all taxes combined total 33%?

Accepted Answer

A)  $5,360 
B)  $6,340 
C)  $7,637 
D)  $8,000 
A)  $5,360 
B)  $6,340 
C)  $7,637 
D)  $8,000

Question 15

Which one of the following statements about 401(k)plans is not correct?

Accepted Answer

A)  The employer will typically match some portion of an employee's contributions to a 401(k). 
B)  A 401(k) plan is a defined contribution plan. 
C)  Allowable contributions to 401(k) plans are limited. 
D)  Withdrawals from 401(k) plans are not taxed upon retirement. 
A)  The employer will typically match some portion of an employee's contributions to a 401(k). 
B)  A 401(k) plan is a defined contribution plan. 
C)  Allowable contributions to 401(k) plans are limited. 
D)  Withdrawals from 401(k) plans are not taxed upon retirement.

Question 16

You have the broadest choice of investment alternatives for your _____________.

Accepted Answer

A)  traditional IRA 
B)  Roth IRA 
C)  401k plan 
D)  taxable savings account 
A)  traditional IRA 
B)  Roth IRA 
C)  401k plan 
D)  taxable savings account

Question 17

Withdrawals after retirement from a traditional IRA are __________ and withdrawals after retirement from a Roth IRA are ____________.

Accepted Answer

A)  taxable; not taxable 
B)  not taxable; taxable 
C)  tax deductible; not tax deductible 
D)  not tax deductible; tax deductible 
A)  taxable; not taxable 
B)  not taxable; taxable 
C)  tax deductible; not tax deductible 
D)  not tax deductible; tax deductible

Question 18

An individual wants to have $95,000 per year to live on when they retire in 30 years.The individual is planning on living for 20 years after retirement.If the investor can earn 6% during her retirement years and 10% during her working years,how much should she be saving during her working life? (Hint: Treat all calculations as annuities.)

Accepted Answer

A)  $9,872 
B)  $8,234 
C)  $7,908 
D)  $6,624 
A)  $9,872 
B)  $8,234 
C)  $7,908 
D)  $6,624

Question 19

It would be costly to provide wage insurance because of the ___________ problem.

Accepted Answer

A)  moral hazard 
B)  adverse selection 
C)  Texas hedge 
D)  actuarial error 
A)  moral hazard 
B)  adverse selection 
C)  Texas hedge 
D)  actuarial error

Question 20

Tilting your retirement savings plan toward your later years should only be done by investors _____________.

Accepted Answer

A)  who are sufficiently risk averse 
B)  who are more tolerant of risk 
C)  who are unsure if their income growth will keep up with inflation 
D)  who wish to retire early 
A)  who are sufficiently risk averse 
B)  who are more tolerant of risk 
C)  who are unsure if their income growth will keep up with inflation 
D)  who wish to retire early

Exam 21: Taxes,inflation,and Investment Strategy

One way to hedge labor income is to ____________________.

In planning for retirement,an investor decides she will save $11,000 every year for 40 years.At an 11% return on her investment,how much money will she have at the end of 40 years (to the nearest hundred thousand dollars)?

Which one of the following is an example of "global" consumption smoothing?

Annuity income is positively correlated with ___________. I.longevity II.durability of marriage III.expected length of your base (Social Security)annuity

Suppose you are a high tax bracket individual and you want to shelter your investment income.The best choice of investment for you to minimize the tax bill is to invest in _________.

Employers commonly match at least some portion of employee contributions to ___________. I.401k plans II.403b plans III.Self directed IRAs

Which one of the following represents local consumption smoothing? I.Saving during your working years for retirement II.Borrowing money to buy a car III.Putting off a vacation for a year until you can afford it

You earn 6% on your corporate bond portfolio this year and you are in a 25% federal tax bracket and an 8% state tax bracket.Your after tax return is _____.(Assume that federal taxes are not deductible against state taxes and vice versa).

A non-profit organization offers a 5% salary contribution to John's 403b plan and matching 5% when John contributes 5% of his/her salary. John makes $56,000 a year. -What is the amount of total contribution to his 403b if John contributes 5% of his own money?

If you start saving for retirement only in your later years and your income growth from that point is rapid then ________________________.

A worker plans to retire in 20 years.He needs $20,000 per year in retirement income in today's dollars.If inflation is forecast at 3.5% per year,what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $20,000?

A study by Spivak and Kotlikoff (1981)showed that a marriage contract increases the dollar value of lifetime savings by as much as _____.

In a private defined benefit pension plan the ___________ bears the investment risk and in a private defined contribution plan the ____________ bears the investment risk.

The employees of a firm complain that they can not afford to contribute $8,000 per year to a 401k,because of the loss of $8,000 of take home pay.In fact,how much will the take home pay be reduced if all taxes combined total 33%?

Which one of the following statements about 401(k)plans is not correct?

You have the broadest choice of investment alternatives for your _____________.

Withdrawals after retirement from a traditional IRA are __________ and withdrawals after retirement from a Roth IRA are ____________.

It would be costly to provide wage insurance because of the ___________ problem.

Tilting your retirement savings plan toward your later years should only be done by investors _____________.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Portfolio Performance Evaluation

Globalization and International Investing

Hedge Funds

Investors and the Investment Process

Filters

In a private defined benefit pension plan the _ bears the investment risk and in a private defined contribution plan the __ bears the investment risk.

Withdrawals after retirement from a traditional IRA are and withdrawals after retirement from a Roth IRA are __.