Chap 011

Chapter 011 Health, Disability, and Long-Term Care Insurance
True / False Questions
1. (p. 339) The United States has the lowest per capita medical expenditures of any industrialized
country in the world.
FALSE
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 11-1
2. (p. 339) Affordable health care has become one of the most important issues of our time.
TRUE
Bloom's: Knowledge
Difficulty: Easy
3. (p. 341) One reason for the high cost of health care is the use of sophisticated and expensive
technologies.
TRUE
Bloom's: Comprehension
Difficulty: Easy
4. (p. 342) Hospitals, doctors, and patients have enough incentive to make the most economical
use of health care services.
FALSE
Difficulty: Medium
11-1
5. (p. 342) The best way to avoid the high cost of illness is to stay well.
TRUE
Bloom's: Knowledge
Difficulty: Easy
6. (p. 342) To stay healthy, you must get sufficient rest, relaxation, and exercise.
TRUE
Bloom's: Knowledge
Difficulty: Easy
7. (p. 343) The number of Americans without basic health insurance has been decreasing since
the 1980s.
FALSE
Bloom's: Knowledge
Difficulty: Medium
8. (p. 343) Health insurance includes both medical expense insurance and disability income
insurance.
TRUE
Bloom's: Knowledge
Difficulty: Medium
11-2
9. (p. 344) Group health insurance plans comprise about 90 percent of all health insurance issued
by health and life insurance companies.
TRUE
Bloom's: Knowledge
Difficulty: Easy
11-3
10. (p. 344) Group health insurance will cover you but not your immediate family.
FALSE
Bloom's: Knowledge
Difficulty: Medium
11. (p. 344) Group health insurance covers all of your health insurance needs.
FALSE
Bloom's: Knowledge
Difficulty: Medium
12. (p. 344) Individual health insurance covers either one person or family.
TRUE
Bloom's: Knowledge
Difficulty: Easy
13. (p. 344) Make sure you have enough insurance, but don't over insure.
TRUE
Bloom's: Knowledge
Difficulty: Medium
14. (p. 345) Very few group health policy contracts have a coordination of benefits provision.
FALSE
Bloom's: Knowledge
Difficulty: Medium
11-4
15. (p. 345) Employees of the federal government and churches are covered by the Consolidated
Omnibus Budget Reconciliation Act of 1986.
FALSE
Bloom's: Knowledge
Difficulty: Medium
16. (p. 345) A good health insurance plan should offer basic coverage for hospital and doctor
bills.
TRUE
Difficulty: Easy
17. (p. 345) A good health insurance plan should impose no unreasonable exclusions.
TRUE
Difficulty: Easy
18. (p. 346) More people have hospital insurance than any other kind of health insurance.
TRUE
Bloom's: Knowledge
Difficulty: Easy
11-5
19. (p. 346) People often buy surgical expense insurance in combination with hospital expense
insurance.
TRUE
Bloom's: Knowledge
Difficulty: Easy
11-6
20. (p. 346) Physician expense insurance coverage never includes visits to the doctor's office, x-
rays, and lab tests.
FALSE
Bloom's: Knowledge
Difficulty: Medium
21. (p. 346) Basic health insurance coverage includes hospital expense insurance, surgical
expense insurance, and physician expense insurance.
TRUE
Bloom's: Knowledge
Difficulty: Medium
22. (p. 346) A deductible provision requires the policyholder to pay a basic amount before the
policy benefits begin.
TRUE
Bloom's: Knowledge
Difficulty: Easy
23. (p. 346) Hospital expense insurance pays part or all of hospital bills for room, board, and
other charges.
TRUE
Bloom's: Knowledge
Difficulty: Medium
11-7
24. (p. 346) Surgical expense insurance pays part or all of the surgeon's fees for an operation.
TRUE
Bloom's: Knowledge
Difficulty: Easy
25. (p. 346) Physician expense insurance helps pay for physician's care that does not involve
surgery.
TRUE
Bloom's: Knowledge
Difficulty: Medium
26. (p. 346) Physician expense insurance is expensive, therefore, it should be avoided.
FALSE
Bloom's: Knowledge
Difficulty: Medium
27. (p. 356) A coinsurance provision requires the policyholder to share the expenses beyond the
deductible amount.
TRUE
Difficulty: Easy
11-8
28. (p. 346) A stop-loss provision requires the policyholder to pay up to a certain amount, after
which the insurance company pays 100 percent of all remaining covered expenses.
TRUE
Difficulty: Medium
11-9
29. (p. 357) Comprehensive major medical insurance is a type of major medical insurance that
has a very high deductible amount.
FALSE
Bloom's: Knowledge
Difficulty: Medium
30. (p. 347) A hospital indemnity policy pays benefits only when you are hospitalized and only
to the hospital where the care was provided.
FALSE
Bloom's: Knowledge
Difficulty: Medium
31. (p. 347) The hospital indemnity policy is a good substitute for basic or major medical
protection.
FALSE
Difficulty: Medium
32. (p. 347) Dread disease and cancer policies are usually very good values.
FALSE
Difficulty: Medium
11-10
33. (p. 347) Long-term care insurance was virtually unknown 25 years ago, but now it is
growing faster than any other form of insurance.
TRUE
Bloom's: Knowledge
Difficulty: Easy
34. (p. 354) Blue Cross plans provide for surgical and medical services performed by
physicians.
FALSE
Bloom's: Knowledge
Difficulty: Medium
35. (p. 354) Blue Shield plans provide hospital care benefits on essentially a "service type"
basis.
FALSE
Bloom's: Knowledge
Difficulty: Medium
36. (p. 356) Preferred Provider Organizations combine the best elements of the fee-for-service
and HMO systems.
TRUE
Difficulty: Easy
11-11
37. (p. 358) Public opinion polls consistently show that Americans are happy with the nation's
health care system.
FALSE
Bloom's: Knowledge
Difficulty: Medium
38. (p. 358) Part A of Medicare pays for all covered services for inpatient hospital care after you
pay a single annual deductible.
TRUE
Bloom's: Knowledge
Difficulty: Medium
39. (p. 372) Medigap insurance, intended to supplement Medicare, is sold and serviced by the
federal government.
FALSE
Bloom's: Knowledge
Difficulty: Easy
40. (p. 361) Medicaid is administered by each state within certain broad federal requirements and
guidelines.
TRUE
Bloom's: Knowledge
Difficulty: Medium
11-12
41. (p. 361) Medicare does not cover the expenses of private-duty nursing care.
TRUE
Bloom's: Knowledge
Difficulty: Medium
42. (p. 358) Two sources of government health insurance are Medicare and Medicaid.
TRUE
Bloom's: Knowledge
Difficulty: Medium
43. (p. 358) Medicare has two parts: hospital insurance (Part A) and medical insurance (Part B).
TRUE
Bloom's: Knowledge
Difficulty: Medium
44. (p. 358) Medicare hospital insurance (Part A) is financed from a portion of the Social
Security tax.
TRUE
Bloom's: Knowledge
Difficulty: Easy
45. (p. 359) To get Medicare medical insurance (Part B) you must sign for it and pay a monthly
premium.
TRUE
Bloom's: Knowledge
Difficulty: Medium
11-13
11-14
46. (p. 361) Skilled nursing care beyond 100 days per benefit period is approved and covered by
Medicare.
FALSE
Bloom's: Knowledge
Difficulty: Medium
47. (p. 361) Medicare covers routine checkups, dental care, most immunizations, cosmetic
surgery, routine foot care, eyeglasses, and hearing aids.
FALSE
Bloom's: Knowledge
Difficulty: Hard
48. (p. 361) Medicare covers the cost of care received outside the United States, Canada, and
Mexico.
FALSE
Bloom's: Knowledge
Difficulty: Easy
49. (p. 361) Medicare was never intended to pay all medical costs.
TRUE
Difficulty: Medium
11-15
50. (p. 362) Medicare Supplement insurance is a government-sponsored program.

FALSE
Bloom's: Knowledge
Difficulty: Medium
11-16
51. (p. 362) Title XIX of the Social Security Act provides for a program of medical assistance to
certain low-income individuals and families.
TRUE
Bloom's: Knowledge
Difficulty: Medium
52. (p. 363) Medicaid is financed by both state and federal funds.
TRUE
Bloom's: Knowledge
Difficulty: Easy
53. (p. 363) Very few members of the Medicaid population are also covered by Medicare.
FALSE
Bloom's: Knowledge
Difficulty: Medium
54. (p. 363) Medicaid differs from Medicare because eligibility for Medicaid depends on having
very low income and assets.
TRUE
Difficulty: Hard
11-17
55. (p. 363) Because Medicaid coverage is very limited, people using it need to purchase
supplemental insurance.
FALSE
Difficulty: Hard
11-18
56. (p. 364) The Department of Health and Human Services maintains one of the richest and
most reliable sources of information on the Internet.
TRUE
Bloom's: Knowledge
Difficulty: Easy
57. (p. 365) Disability income insurance benefits provide regular cash income lost by employees
as the result of an accident, illness, or pregnancy.
TRUE
Difficulty: Medium
58. (p. 372) Once a person is eligible, Medicaid provides more benefits than does Medicare.
TRUE
Bloom's: Knowledge
Difficulty: Hard
59. (p. 365) Just about every worker is covered by disability income insurance.
FALSE
Bloom's: Knowledge
Difficulty: Medium
60. (p. 366) Basically, the word disability has only one definition.
FALSE
Bloom's: Knowledge
Difficulty: Medium
11-19
11-20
61. (p. 365) Most people are more likely to lose their income due to death than due to disability.
FALSE
Bloom's: Knowledge
Difficulty: Medium
62. (p. 366) Good disability plans pay when you are unable to work at your regular job; poor
disability plans pay only when you are unable to work at any job.
TRUE
Difficulty: Easy
63. (p. 366) Disability benefits begin on the first day you are disabled.
FALSE
Bloom's: Knowledge
Difficulty: Medium
64. (p. 366) Generally, disability income policies with shorter waiting periods have lower
premiums.
FALSE
Difficulty: Medium
65. (p. 366) You should seek a disability policy that pays benefits for life.
TRUE
Bloom's: Knowledge
Difficulty: Medium
11-21
11-22
66. (p. 367) Look for a disability income policy that waives premiums while you are disabled.
TRUE
Bloom's: Knowledge
Difficulty: Medium
67. (p. 367) The premium for noncancelable and guaranteed renewable coverage is higher, but
the coverage is well worth the extra cost.
TRUE
Difficulty: Medium
68. (p. 367) Very few employers provide disability income protection for their employees
through the group insurance plans.
FALSE
Bloom's: Knowledge
Difficulty: Easy
69. (p. 367) Unfortunately, most salaried workers in the United States do not participate in the
Social Security programs.
FALSE
Bloom's: Knowledge
Difficulty: Easy
11-23
Multiple Choice Questions
70. (p. 339) What has become one of the most important issues of our time?
A. Affordable health care
B. Affordable housing
C. Affordable automobiles
D. Affordable vacations
Bloom's: Knowledge
Difficulty: Easy
71. (p. 339) Which country has the highest per capita medical expenditures of any industrialized
country in the world?
A. Australia
B. Britain
C. Canada
D. Denmark
E. U.S.A.
Bloom's: Knowledge
Difficulty: Medium
72. (p. 342) Which one(s) of the following groups has (have) undertaken innovative activities to
contain the costs of health care?
A. Employers
B. labor unions
C. health insurers
D. Consumers
E. All of the choices have undertaken activities.
Bloom's: Knowledge
Difficulty: Medium
11-24
73. (p. 342) Which of the following is an innovative way concerned groups are containing health
care costs?
A. Incentives to encourage preventive care
B. Encouragement of prepaid group practices
C. Establishment of community education programs so people can learn to take better care of
themselves
D. Encouragement by doctors to pay cash for routine medical costs
E. All of the choices are innovative ways concerned groups are containing health care costs
Difficulty: Medium
74. (p. 341) What are some possible reasons for high and rising costs of health?
A. the use of sophisticated and high-priced equipment
B. medical personnel who command high earnings
C. innovative but costly treatment for some illnesses
D. the increasing number and longevity of elderly people
E. All are possible reasons for high health care costs
Bloom's: Analysis
Difficulty: Easy
75. (p. 342) What can you do to reduce your health care costs?
A. Stay well.
B. Gain a little extra weight.
C. Smoke and drink.
D. Live dangerously.
E. Don't seek medical care.
Bloom's: Knowledge
Difficulty: Easy
11-25
76. (p. 343) Why have a growing number of students been without health insurance?
A. Because insurance companies refuse to insure them
B. Because students are young and healthy
C. Because students don't need health insurance
D. Because students don't care if they get sick
E. Because an older student population is not covered by family policies
Difficulty: Medium
77. (p. 343) Health insurance includes:

A. life insurance.
B. Disability insurance.
C. personal liability insurance.
D. An annuity.
E. An endowment.
Bloom's: Knowledge
Difficulty: Medium
78. (p. 344) Most health insurance policies in the United States are sold to:
A. victims of communicable diseases.
B. individuals with families.
C. single individuals with no dependents.
D. Employees and their dependents.
E. Employers, who in turn offer the benefits to employees.
Bloom's: Knowledge
Difficulty: Medium
11-26
79. (p. 344) Which health insurance coverage requires careful shopping because coverage and
cost vary from company to company?
A. group health
B. individual health
C. hospital expense
D. surgical expense
E. physician's expense
Difficulty: Medium
80. (p. 344) Which type of health insurance policy may not cover all of your health insurance
needs or may deny benefits if you lose your job?
A. group health
B. individual health
C. Basic health
D. Comprehensive medical
E. Disability income
Difficulty: Medium
81. (p. 346) Which type of health insurance pays part or all of hospital bills for room, board, and
other charges?
A. surgical expense
B. hospital expense
C. physician's expense
D. Basic health
E. major medical
Difficulty: Medium
11-27
82. (p. 346) Harry Mayhue gets a bad case of the flu and ends up in the hospital for three days.
Which part of his basic insurance coverage should help pay for this stay?
A. Hospital Expense Insurance
B. Surgical Expense Insurance
C. Physician Expense Insurance
D. Major Medical Expense Insurance
E. None of the choices
Bloom's: Analysis
Difficulty: Medium
83. (p. 346) Joe Johnson needs surgery for appendicitis. Which part of his basic insurance
coverage should help pay for this surgery?
Bloom's: Analysis
Difficulty: Medium
84. (p. 346) Julie Cumbie is playing softball and gets hurt sliding into second base. She gets an
x-ray at her doctor's office to make sure her ankle isn't broken. Which part of her basic
insurance coverage should help pay for this x-ray?
Bloom's: Analysis
Difficulty: Medium
11-28
85. (p. 346) Jamal Walker gets infected with the West Nile Virus and ends up in the hospital for 6
weeks. What part of his insurance policy would be the most useful for helping to pay for this?
Bloom's: Analysis
Difficulty: Medium
86. (p. 345) Nathanial Drummond has three different insurance policies. He has been injured in
an accident and has incurred $30,000 in medical bills. There is a clause in all of his insurance
contracts the makes sure that he receives no more than $30,000 in payments from his
insurance companies. This clause is called:
A. Coordination of benefits
B. Deductible
C. Coinsurance
D. Stop-Loss provisions
E. Major medical expense insurance
Difficulty: Medium
87. (p. 346) Sophie Bennett must pay $500 in doctor's visits before her insurance company will
make any payments for doctors visits. This is called:
B. Deductible
C. Coinsurance
D. Stop-Loss provision
Difficulty: Medium
11-29
88. (p. 346) Sophie Bennett has met the deductible for her doctor's visits. However, her insurance
company requires her to pay 20% of all expenses above this deductible amount. This clause is
called:
B. Add on expenses
C. Coinsurance
Difficulty: Medium
89. (p. 346) Sophie Bennett has met the deductible for her doctor's visits. She has also paid out
20% of all expenses above this deductible amount. She has paid a total of $5000 in doctor's
visits. At this point there is a clause in her insurance contract that make her insurance
company pay for 100% of all expenses. What clause is this likely to be?
B. Add on expenses
C. Coinsurance
Difficulty: Medium
90. (p. 346) Raymond Carter has a type of medical insurance that has a very low deductible and
pays for hospital, surgical, medical and other bills under one plan. What is this called?
A. Comprehensive Major Medical Insurance
B. Hospital Indemnity Policy
C. Long Term Care Insurance
D. Cancer Insurance Policy
Difficulty: Medium
11-30
91. (p. 347) Chris Jones has an insurance policy that pays benefits in cash when he is
hospitalized. What type of insurance would this be?
Difficulty: Medium
92. (p. 347) Karen Blumenthall was seriously injured in a car accident and is paralyzed from the
waist down. Luckily she has an insurance policy that will pay for someone to come in and
help with her day to day activities such as bathing, dressing and household chores. What type
of insurance policy is this likely to be?
Difficulty: Medium
93. (p. 347) Joan Wilder receives a phone call from a salesman who tries to sell her an insurance
policy by scaring her about her high risk of death from this disease. She knows that this type
of insurance policy has a notoriously poor value so she politely declines. What type of
insurance policy did this salesman likely try to sell her?
Difficulty: Medium
11-31
94. (p. 350) Which of the following should you ask about in a long term care insurance policy?
A. The Daily Benefit
B. The Benefit Period
C. The Policy Limit
D. The Elimination Period
E. All of the choices are things you should ask about
Difficulty: Easy
95. (p. 350) Marcia Fuller has an insurance policy that lists that she and her three daughters, ages
6 10 and 12, are covered under this policy. Which provision in her insurance policy defines
this?
A. Eligibility
B. Assigned Benefits
C. Benefit Limits
D. Guaranteed Renewable
E. Exclusions and Limitations
Difficulty: Medium
96. (p. 351) Dean Thomas has an insurance policy that cannot be cancelled unless he fails to pay
his premium. What provision in his insurance policy would specify this?
A. Eligibility
C. Benefit Limits
Difficulty: Medium
11-32
97. (p. 350) Darren Chase has an insurance policy that tells him he can only stay in the hospital
for 60 days during the year. What provision in his insurance policy would specify this?
A. Eligibility
C. Benefit Limits
Difficulty: Medium
98. (p. 350) Benjamin Northcutt has an insurance policy that does not cover cosmetic surgery
like the nose job he would like to have. What provision in his insurance policy would specify
this?
A. Eligibility
C. Benefit Limits
Difficulty: Medium
99. (p. 346) Which type of health insurance pays part or all of the surgeon's fee for an
operation?
A. surgical expense
B. hospital expense
D. Basic expense
E. major medical expense
Bloom's: Knowledge
Difficulty: Easy
11-33
100. (p. 346) Which type of health insurance pays for physician's care that does not involve
surgery?
A. surgical expense
B. hospital expense
D. Basic expense
Bloom's: Knowledge
Difficulty: Medium
101. (p. 345) A good health insurance plan should:

A. provide at least one year's hospital room and board in full.
B. provide at least $2 million lifetime maximum for each family member.
C. pay 100 percent for out-of-hospital expenses.
D. offer basic coverage for hospital and doctor bills.
Difficulty: Hard
102. (p. 346) Which type of insurance is usually bought in combination with hospital and
surgical insurance?
A. Disability income
B. Comprehensive major medical
C. major medical expense
D. hospital indemnity
E. physician's expense
Bloom's: Knowledge
Difficulty: Medium
11-34
103. (p. 346) Which type of insurance protects against the large expenses of a serious injury or a
long illness?
A. Disability income
B. major medical expense
C. hospital indemnity
D. physician's expense
E. interim medical
Bloom's: Knowledge
Difficulty: Medium
104. (p. 345) A good health insurance plan should:

A. offer basic coverage for hospital and doctor bills.
B. provide at least 120 days' total room and board in full.
C. provide at least $1 million lifetime maximum for each family member.
D. impose no unreasonable exclusions.
E. offer all of these.
Difficulty: Medium
105. (p. 346) Which one of the following provisions requires that the policyholder pay a basic
amount before the policy benefits begin?
A. Coinsurance
B. stop loss
C. Deductible
D. self insurance
E. incontestable
Bloom's: Knowledge
Difficulty: Medium
11-35
106. (p. 346) ____________ is a type of major medical insurance that has a very low deductible
amount and is offered without any separate basic plan.
A. Comprehensive major medical insurance
B. Major Medical expense insurance
C. Physician's expense insurance
D. Hospital expense insurance
E. Surgical expense insurance
Bloom's: Knowledge
Difficulty: Hard
107. (p. 347) Which health insurance policy pays benefits only when you are hospitalized, but
pays these benefits in cash which you can use as you like?
A. hospital indemnity
B. interim or short-term
C. Disability income
D. Comprehensive major medical
Bloom's: Knowledge
Difficulty: Hard
108. (p. 347) Which type of health policy is like buying a lottery ticket?
A. major medical expense insurance
B. Comprehensive expense insurance
C. interim expense insurance
D. hospital indemnity insurance
E. physician's expense insurance
Difficulty: Medium
11-36
109. (p. 347) Dental expense insurance provides reimbursement for:

A. oral examinations.
B. fillings.
C. Extractions.
D. inlays.
E. All of the choices provide reimbursement.
Bloom's: Knowledge
Difficulty: Medium
110. (p. 347) According to your textbook, supplemental hospital indemnity plans:
A. are almost always excellent buys.
B. should never be purchased.
C. do not justify the premium cost.
D. should be purchased only by older people.
E. are meant for couples with two or three children.
Bloom's: Knowledge
Difficulty: Medium
111. (p. 347) Which type of health insurance is simply a bad buy?
A. Individual health insurance
B. Group health insurance
C. Dread disease and cancer policy
D. Dental insurance
E. Vision insurance
Difficulty: Medium
11-37
112. (p. 346) Which of the following is true?

A. Physician expense insurance coverage normally includes visits to the doctor's office, x-
rays, and lab tests.
B. Basic health insurance coverage includes hospital expense insurance, surgical expense
insurance, and physician expense insurance.
C. A deductible provision requires the policyholder to pay a basic amount before the policy
benefits begin.
D. All of the choices are true.
Bloom's: Knowledge
Difficulty: Medium
113. (p. 346) Which of the following is false?

A. A coinsurance provision requires the policyholder to share the expenses beyond the
deductible amount.
B. A stop-loss provision requires the policyholder to pay up to a certain amount, after which
the insurance company pays 100 percent of all remaining covered expenses.
C. Comprehensive major medical insurance is a type of major medical insurance that has a
very high deductible amount.
D. All of the choices are true.
Bloom's: Knowledge
Difficulty: Medium
114. (p. 351) In choosing health insurance, ideally, you should:

A. get a basic plan and a major supplementary plan.
B. get dental and vision plans.
C. buy dread disease and cancer insurance plans.
D. purchase nursing home insurance.
E. purchase accident insurance.
Difficulty: Hard
11-38
115. (p. 351) Which type of insurance is probably the most neglected form of available insurance
protection?
A. life
B. liability
C. Disability
D. Car
E. home and property
Difficulty: Medium
116. (p. 354) Which plan provides benefits for surgical and medical services performed by
physicians?
A. Blue Cross
B. Blue Shield
C. Medicare
D. Medicaid
E. HMO
Bloom's: Knowledge
Difficulty: Medium
117. (p. 353) Health insurance is available from:

A. private insurance companies.
B. Blue Cross and Blue Shield.
C. HMOs.
D. PPOs.
E. All of the choices offer health insurance.
Bloom's: Knowledge
Difficulty: Medium
11-39
118. (p. 353) Which one of the following is not a source of health insurance?
A. fraternal organizations
B. trade unions
C. government programs such as Medicare
D. Health Insurance Industry Association
Bloom's: Knowledge
Difficulty: Medium
119. (p. 354) Most private insurance companies sell health insurance policies to:
A. individuals.
B. families.
C. Employers.
D. Employees.
Difficulty: Hard
120. (p. 354) Which plan provides hospital care benefits on essentially a "service type" basis?
A. Blue Cross
B. Blue Shield
C. managed care
D. Medicare
E. Medicaid
Bloom's: Knowledge
Difficulty: Hard
11-40
121. (p. 354) Which health care institution directly employs or contracts with selected medical
care specialists to give you health care services in exchange for a fixed, prepaid monthly
premium?
A. Blue Cross
B. Blue Shield
C. Medicare
D. Medicaid
E. HMO
Bloom's: Knowledge
Difficulty: Medium
122. (p. 358) Hospital insurance Part A. and medical insurance Part B. are characteristics of:
A. Blue Cross.
B. Blue Shield.
C. Medicare.
D. Medicaid.
E. HMO.
Difficulty: Medium
123. (p. 361) What is covered by Medicare?

A. intermediate and custodial nursing care
B. out-of-hospital prescription drugs
C. private-duty nursing
D. physician charges above Medicare's approved amount
E. None of the choices are covered
Bloom's: Knowledge
Difficulty: Hard
11-41
124. (p. 363) Which health care plan is administered by each state within certain broad federal
requirements and guidelines?
A. Blue Cross
B. Blue Shield
C. Medicare
D. Medicaid
E. HMO
Bloom's: Knowledge
Difficulty: Medium
125. (p. 358) Hospital insurance (Part A) of Medicare is financed from part of the ____________
taxes.
A. state income
B. federal excise
C. individual income
D. Corporate income
E. Social Security
Bloom's: Knowledge
Difficulty: Hard
126. (p. 361) Medigap is sold or serviced by:

A. Medicare.
B. Medicaid.
C. private insurance companies.
D. Health Care Financing Administration.
E. National Institutes of Health.
Bloom's: Knowledge
Difficulty: Hard
11-42
127. (p. 358) Which one of the following is a correct statement about the nation's health care
system?
A. Most Americans are very satisfied with the nation's health care system.
B. Most Americans are somewhat satisfied.
C. Most Americans don't care one way or the other.
D. Americans are unhappy with our health care system.
E. All Americans enjoy the best health care available anywhere in the world.
Difficulty: Medium
128. (p. 362) Which one of the following is a source of government health insurance?
A. Blue Cross
B. Blue Shield
C. Medicare
D. HMO
E. PPO
Bloom's: Knowledge
Difficulty: Easy
129. (p. 362) Which one of the following is a source of government health insurance?
A. Blue Cross
B. Blue Shield
C. National Institutes of Health
D. HMO
E. Medicaid
Bloom's: Knowledge
Difficulty: Easy
11-43
130. (p. 358) Medicare, a federal health insurance program was established in 1965 for:
A. people 65 or older.
B. people of any age with permanent kidney failure.
C. people with certain disabilities.
D. all of the choices.
Bloom's: Knowledge
Difficulty: Medium
131. (p. 358) Jose Gonzales just turned 65 this year. He should apply for Medicare benefits at a
local:
A. office of the National Institutes of Health.
B. IRS office.
C. Social Security office.
D. county medical hospital.
E. None of the choices.
Difficulty: Easy
132. (p. 358) Hospital insurance is which part of Medicare?

A. Part A
B. Part B
C. Part C
D. Part D
Bloom's: Knowledge
Difficulty: Easy
11-44
133. (p. 358) Medical insurance is which part of Medicare?

A. Part A
B. Part B
C. Part C
D. Part D
Bloom's: Knowledge
Difficulty: Easy
134. (p. 358) Hospital insurance (Part A) of Medicare helps pay for:
A. inpatient hospital care.
B. inpatient care in a skilled nursing facility.
C. home health care.
D. hospice care.
E. all of the choices.
Bloom's: Knowledge
Difficulty: Hard
135. (p. 358) Medicare medical insurance (Part B) helps pay for:
A. inpatient hospital care.
B. doctors' services and other medical services and supplies not covered by hospital
insurance.
C. home health care.
D. hospice care.
E. none of the choices.
Bloom's: Knowledge
Difficulty: Medium
11-45
136. (p. 358) Medicare medical insurance (Part B) for people 65 or over is:
A. mandatory.
B. financed by corporations.
C. voluntary, and you must sign up for coverage.
D. state supported and partially funded by the National Institutes of Health.
Difficulty: Hard
137. (p. 361) Which of the following is correct about Medigap or MedSup insurance?
A. It is sold and serviced by the federal government.
B. It is sold and serviced by the state government.
C. It is sold and serviced by both the federal and state governments.
D. Private insurance companies sell Medicap Insurance policies.
Difficulty: Hard
138. (p. 362 -366) Which of the following statement is correct about Medicaid:
A. The Social Security Act created Medicaid in 1965.
B. Medicaid is a program of medical assistance to certain low-income individuals and
families.
C. Medicaid is administered by each state within certain federal guidelines.
D. Medicaid if financed by both state and federal funds.
E. All of the statements are correct.
Difficulty: Hard
11-46
139. (p. 365) Which type of insurance provides for the partial replacement of income lost by
employees as a result of an accident, illness, etc.?
A. Comprehensive major medical
B. major medical expense
D. Disability income
E. surgical expense
Difficulty: Easy
140. (p. 368) Which health care program is administered by the Centers for Medicare and
Medicaid, Services, a federal agency?
A. Blue Cross
B. Blue Shield
C. Medicare
D. Medicaid
E. HMO
Bloom's: Knowledge
Difficulty: Medium
141. (p. 365) Because you are young and healthy now, you may overlook the very real need for:
A. Disability income insurance.
B. health insurance.
C. Dental insurance.
D. vision care insurance.
E. liability insurance.
Difficulty: Easy
11-47
142. (p. 366) The definition of disability:

A. is universally accepted.
B. varies.
C. is standardized by American Council of Life Insurance.
D. is provided by the Insurance Information Institute.
Bloom's: Knowledge
Difficulty: Medium
143. (p. 366) Good disability plans pay when you are:
A. unable to work at your regular job.
B. unable to work at any job.
C. on an extended vacation.
D. ill even for a short period.
E. fired from your regular job.
Difficulty: Medium
144. (p. 366) With disability income insurance, benefits usually begin:
A. on the first day of disability.
B. Between 30 and 90 days after the disability occurs.
C. on the 10th day of disability.
D. one year after the start of the disability.
Bloom's: Knowledge
Difficulty: Easy
11-48
145. (p. 366) The waiting period in disability income insurance is called ____________ period.
A. Exclusion
B. no benefit
C. Coverage
D. trade-off
E. Elimination
Bloom's: Knowledge
Difficulty: Medium
146. (p. 366) Generally, disability income policies with longer waiting periods:
A. have higher premiums.
B. have lower premiums.
C. have about the same premium.
D. Are issued by smaller insurance companies.
E. Are issued by larger insurance companies.
Bloom's: Knowledge
Difficulty: Easy
147. (p. 367) The premium for noncancelable and guaranteed renewable disability income
insurance is higher:
A. therefore, younger people should skip these coverages.
B. hence, the insurance companies enjoy better profit margins.
C. therefore, very few older workers should carry these coverages.
D. but the coverages are well worth the extra cost.
Difficulty: Hard
11-49
148. (p. 367) In most employer-sponsored disability income insurance plans:

A. your employer pays part or all of the cost.
B. you pay all the cost.
C. your union pays all the cost.
D. the Social Security Administration pays most of the premium.
E. the Veterans Administration foots the bill.
Bloom's: Knowledge
Difficulty: Medium
149. (p. 368) The availability and extent of disability income insurance:
A. is better on the West Coast than on the East Coast.
B. does not vary much in the United States.
C. varies widely in different parts of the country, depending on employers.
D. is mandated by federal laws.
E. is mandated by state laws.
Bloom's: Knowledge
Difficulty: Hard
150. (p. 368) Most insurers limit benefits from all sources of insurance to no more than
____________ percent of your take-home pay.
A. 30-40
B. 40-50
C. 50-60
D. 60-70
E. 70-80
Bloom's: Knowledge
Difficulty: Medium
11-50
151. (p. 367) John Gleason is permanently disabled while on the job. Which of the following is
the most likely source of disability income for John?
A. His employer
B. Social security
C. Worker's compensation
D. An individual insurance policy
Difficulty: Medium
152. (p. 344) Which of the following is true?

A. Group health insurance will cover you but not your immediate family.
B. Group health insurance covers all of your health insurance needs.
C. Group health insurance is the most common health coverage in the U.S.
D. Group health insurance typically covers all an individuals medical costs.
Difficulty: Medium
153. (p. 365) For which of the following causes does Disability Income Insurance not provide
regular cash for income lost by employees?
A. Accident
B. Drug abuse
C. Illness
D. Pregnancy
Bloom's: Knowledge
Difficulty: Medium
11-51
154. (p. 366) Which of the following is false?

A. Good disability plans pay when you are unable to work at your regular job.
B. Poor disability plans pay only when you are unable to work at any job.
C. Disability benefits begin on the first day you are disabled.
D. Generally, disability income policies with shorter waiting periods have lower premiums.
Difficulty: Medium
Essay Questions
155. (p. 341) Why are the costs of health insurance and health care increasing?
Among the reasons for high and rising health care costs are the use of high-priced equipment
and personnel, increases in the variety and frequency of treatments, innovative but costly
treatment of some illnesses, third-party payments, too many hospital beds and too much
duplication of facilities, and the lack of incentives to make the most economical use of health
care services.
Difficulty: Medium
156. (p. 343) What is the importance of health insurance and disability insurance in personal
financial planning?
Both protections should be a part of your overall insurance program to safeguard your
family's economic security.
Difficulty: Medium
11-52
157. (p. 346) What are the five basic types of health insurance? What are their benefits and
limitations?
Five basic types of health insurance are available under group and individual policies: hospital
expense insurance, surgical expense insurance, physician's expense insurance, major medical
expense insurance, and comprehensive medical insurance. The benefits and limitations of
each policy differ. Ideally, you should get a basic plan and a major medical policy that
combines the values of both of these plans in a single policy.
Difficulty: Medium
158. (p. 353 357) What are private sources of health care insurance?
Health insurance and health care are available from private insurance companies, hospital and
medical service plans such as Blue Cross/Blue Shield, health maintenance organizations
(HMOs), preferred provider organizations (PPOs), health associations, home health agencies,
and employer self-funded health plans.
Bloom's: Knowledge
Difficulty: Medium
159. (p. 358 365) What are government sources of health care insurance?
The federal government and state governments offer health coverage in accordance with laws
that define the premiums and benefits. Two well-known government health programs are
Medicare and Medicaid.
Bloom's: Knowledge
Difficulty: Easy
11-53
160. (p. 365) What is disability income insurance? What are the major sources of disability
income insurance?
Disability income insurance benefits provide regular cash income lost by employees as the
result of an accident, illness, or pregnancy. Sources of disability income insurance include
your employer, social security, workers' compensation, the Veterans Administration, the
federal government, state governments, unions, and private insurance.
Bloom's: Knowledge
Difficulty: Medium
1. (p. 377) Life insurance is still more often sold than bought.
TRUE
Bloom's: Knowledge
Difficulty: Easy
2. (p. 378) Most people buy life insurance to protect someone who depends on them from
financial losses caused by their death.
TRUE
Difficulty: Easy
11-54
3. (p. 377) Most American families face substantial loss when one spouse dies unexpectedly.
TRUE
Bloom's: Knowledge
Difficulty: Easy
4. (p. 377) Many widows and widowers say their spouse had been adequately insured.
FALSE
Bloom's: Knowledge
Difficulty: Easy
5. (p. 377) Life insurance is one of the most important purchases you may ever make.
TRUE
Bloom's: Knowledge
Difficulty: Medium
11-55
6. (p. 377) Consumer awareness of life insurance has changed little over the years.
TRUE
Bloom's: Knowledge
Difficulty: Medium
7. (p. 378) Life insurance proceeds may be used to provide an education or income for children.
TRUE
Bloom's: Knowledge
Difficulty: Medium
8. (p. 378) Life insurance proceeds may provide a retirement income.

TRUE
Bloom's: Knowledge
Difficulty: Medium
9. (p. 378) Most insurance companies can determine how long a particular person will live.
FALSE
Bloom's: Knowledge
Difficulty: Hard
10. (p. 381) Single persons living alone have little or no need for life insurance.
TRUE
Difficulty: Medium
11-56
11. (p. 381) Households with small children most often have the greatest need for life insurance.
TRUE
Difficulty: Easy
12. (p. 381) The first step in buying insurance is to determine whether you really need life
insurance.
TRUE
Bloom's: Knowledge
Difficulty: Medium
13. (p. 381) If your death would cause financial stress for your dependents, you should consider
purchasing life insurance.
TRUE
Difficulty: Medium
14. (p. 381) Two-earner couples may have a moderate need for life insurance, especially if they
have a mortgage or other large debts.
TRUE
Difficulty: Hard
11-57
15. (p. 382) How much insurance one should carry is an important question for anyone who
owns or intends to buy life insurance.
TRUE
Difficulty: Medium
16. (p. 382) Although it is impossible to put a price on the life of an insured person, most adults
probably are covered by some life insurance.
TRUE
Bloom's: Knowledge
Difficulty: Medium
17. (p. 382) The easy method of determining life insurance is based on the rule of thumb that a
"typical family" will need about 70 percent of wage-earner's salary for seven years.
TRUE
Bloom's: Knowledge
Difficulty: Hard
18. (p. 382) The DINK (Duel Income No Kids) method of determining life insurance needs
assumes that the spouse will continue to work after husband's/wife's death.
TRUE
Bloom's: Knowledge
Difficulty: Hard
11-58
19. (p. 382) If you have no dependents and your wife earns as much as you do, you have very
simple insurance needs.
TRUE
Difficulty: Medium
20. (p. 383) The "family need" method of determining life insurance need provides a thorough
estimation of life insurance needs.
TRUE
Bloom's: Knowledge
Difficulty: Easy
21. (p. 384) Nearly all mutual companies issue only nonparticipating policies.
FALSE
Bloom's: Knowledge
Difficulty: Medium
22. (p. 385) A term insurance policy pays a benefit only if you die during the period that the
policy covers.
TRUE
Bloom's: Knowledge
Difficulty: Easy
11-59
23. (p. 386) The premium for the whole life policy increases with your age.
FALSE
Bloom's: Knowledge
Difficulty: Easy
11-60
24. (p. 385) Universal life, variable life, and adjustable life are types of term life insurance.
FALSE
Bloom's: Knowledge
Difficulty: Medium
25. (p. 384) You can purchase life insurance from two types of insurance companies.
TRUE
Bloom's: Knowledge
Difficulty: Easy
26. (p. 384) Stock life insurance companies are owned by their policyholders.
FALSE
Bloom's: Knowledge
Difficulty: Easy
27. (p. 384) Most life insurance companies are mutuals.

FALSE
Bloom's: Knowledge
Difficulty: Medium
28. (p. 384) In participating policy, a part of the premium is refunded to the policyholder
annually.
TRUE
Bloom's: Knowledge
Difficulty: Hard
11-61
29. (p. 384) The premium that is refunded to policy holders of a participating policy is called the
policy dividend.
TRUE
Bloom's: Knowledge
Difficulty: Medium
30. (p. 384) The price should be your only consideration in choosing a life insurance policy.
FALSE
Bloom's: Knowledge
Difficulty: Medium
31. (p. 384) Two basic types of life insurance are temporary and permanent insurance.
TRUE
Bloom's: Knowledge
Difficulty: Easy
32. (p. 385) Permanent insurance can be limited payment, variable, adjustable, or universal life
insurance.
TRUE
Bloom's: Knowledge
Difficulty: Hard
33. (p. 385) The group life and credit life insurance are generally permanent forms of insurance.
FALSE
Bloom's: Knowledge
Difficulty: Hard
11-62
11-63
34. (p. 385) Term insurance is protection for a specified period of time, usually 1, 5, 10, or 20
years.
TRUE
Bloom's: Knowledge
Difficulty: Medium
35. (p. 385) Term insurance continues for the entire term even if you stop paying the premiums.
FALSE
Bloom's: Knowledge
Difficulty: Medium
36. (p. 385) Term insurance is basic, "no frills" form of life insurance and is the best value for
most customers.
TRUE
Difficulty: Easy
37. (p. 385) Term life insurance premiums decrease as you get older.
FALSE
Bloom's: Knowledge
Difficulty: Medium
11-64
38. (p. 385) The coverage of term insurance ends at the conclusion of the term, but you can
continue it if you have a renewability option.
TRUE
Bloom's: Knowledge
Difficulty: Medium
11-65
39. (p. 385) If you have convertible term insurance, you can exchange it for a whole life policy
without a medical examination and at a higher premium.
TRUE
Difficulty: Hard
40. (p. 387) The premium for the whole life policy stays the same for the rest of your life.
TRUE
Bloom's: Knowledge
Difficulty: Medium
41. (p. 386) Decreasing term life insurance is generally not available.
FALSE
Bloom's: Knowledge
Difficulty: Easy
42. (p. 387) The most common type of permanent life insurance is the whole life policy.
TRUE
Bloom's: Knowledge
Difficulty: Easy
43. (p. 387) The amount of your life insurance premium depends primarily on the age at which
you purchase the insurance.
TRUE
Bloom's: Knowledge
Difficulty: Medium
11-66
11-67
44. (p. 387) One important feature of term life policy is its cash value.
FALSE
Bloom's: Knowledge
Difficulty: Medium
45. (p. 387) Cash value policies may make sense for people who intend to keep the policies for
the short term.
FALSE
Difficulty: Hard
46. (p. 387) Because the premium payment period for a limited payment policy is shorter than
that of a whole life policy, the annual premium is higher.
TRUE
Difficulty: Hard
47. (p. 387) A special form of the limited payment plan is the single-premium policy. In this type
of contract, you make only one very large premium payment.
TRUE
Bloom's: Knowledge
Difficulty: Hard
11-68
48. (p. 387) The cash values of a variable life insurance policy do not fluctuate.
FALSE
Bloom's: Knowledge
Difficulty: Hard
11-69
49. (p. 389) When you purchase a variable life policy, the insurance company assumes the risk of
poor investment performance.
FALSE
Bloom's: Knowledge
Difficulty: Medium
50. (p. 389) Universal life is a whole life policy that combines term insurance and investment
elements.
TRUE
Bloom's: Knowledge
Difficulty: Medium
51. (p. 390) In recent decades, group life insurance has become quite popular.
TRUE
Bloom's: Knowledge
Difficulty: Easy
52. (p. 391) Credit life insurance is used to repay a personal debt should the borrower die before
doing so.
TRUE
Bloom's: Knowledge
Difficulty: Easy
11-70
53. (p. 392) Credit life insurance policies for auto loans and home mortgages are usually the best
buys for the protection they offer.
FALSE
Bloom's: Knowledge
Difficulty: Medium
54. (p. 392) Industrial life insurance is the most popular form of insurance today.
FALSE
Bloom's: Knowledge
Difficulty: Medium
55. (p. 393) An important provision in every life insurance policy is the right to name your
beneficiary.
TRUE
Bloom's: Knowledge
Difficulty: Easy
56. (p. 394) A rider is any document attached to the policy that modifies its coverage by adding
or excluding specified conditions or altering its benefits.
TRUE
Bloom's: Knowledge
Difficulty: Medium
11-71
57. (p. 393) The incontestability clause stipulates that the insurance company can dispute the
validity of the policy during the insured's lifetime.
FALSE
Bloom's: Knowledge
Difficulty: Medium
58. (p. 394) The policy loan provision permits you to borrow any amount up to the cash value of
the policy.
TRUE
Bloom's: Knowledge
Difficulty: Easy
59. (p. 394) Even though it is expensive, you should consider the accidental death benefit in a
life insurance policy.
FALSE
Bloom's: Knowledge
Difficulty: Medium
60. (p. 384) When your life insurance objectives change, it may be necessary to give up the
insurance policy.
TRUE
Difficulty: Medium
11-72
61. (p. 393) A beneficiary is a person designated to receive something such as life insurance
proceeds, from the insured.
TRUE
Bloom's: Knowledge
Difficulty: Medium
62. (p. 393) Usually, there is no time limit on reinstatement of a lapsed life insurance policy.
FALSE
Bloom's: Knowledge
Difficulty: Hard
63. (p. 393) One important feature of the whole life policy is the nonforfeiture clause.
TRUE
Bloom's: Knowledge
Difficulty: Medium
64. (p. 393) The nonforfeiture clause prevents the forfeiture of accrued benefits if you choose to
drop the policy.
TRUE
Bloom's: Knowledge
Difficulty: Medium
65. (p. 394) Under the waiver of premium disability benefit provision, the company waives any
premiums that are due after the onset of total and permanent disability.
TRUE
Difficulty: Hard
11-73
11-74
66. (p. 394) The guaranteed insurability option is desirable if you anticipate the need for
additional life insurance in the future.
TRUE
Difficulty: Medium
67. (p. 395) The cost of living protection rider is designed to help prevent inflation from eroding
the purchasing power of the protection your policy provides.
TRUE
Difficulty: Medium
68. (p. 395) Accelerated benefits are life insurance policy proceeds paid to the policyholder who
is terminally ill before he or she dies.
TRUE
Bloom's: Knowledge
Difficulty: Hard
69. (p. 395) The second-to-die option is paid when the first spouse dies.
FALSE
Bloom's: Knowledge
Difficulty: Hard
11-75
70. (p. 399) An interest-adjusted index is a method of evaluating the cost of life insurance by
taking into account the time value of money.
TRUE
Bloom's: Knowledge
Difficulty: Medium
71. (p. 396) Life insurance is available from a wide range of private and public sources.
TRUE
Bloom's: Knowledge
Difficulty: Easy
72. (p. 396) The financial strength of an insurance company may be a major factor in holding
down premium costs for consumers.
TRUE
Bloom's: Knowledge
Difficulty: Medium
73. (p. 397) When buying life insurance, as a rule, you should deal with companies rated
superior or excellent by the big rating agencies.
TRUE
Bloom's: Knowledge
Difficulty: Medium
11-76
74. (p. 398) A chartered life underwriter (CLU) is a life insurance agent who has passed a series
of college-level examinations on insurance and related subjects.
TRUE
Bloom's: Knowledge
Difficulty: Medium
75. (p. 401) Selecting an appropriate settlement option is not a very important part of designing a
life insurance program.
FALSE
Difficulty: Medium
76. (p. 401) The lump-sum payment settlement option is the least used option.
FALSE
Bloom's: Knowledge
Difficulty: Hard
77. (p. 401) Under the life income option, payments are made to the beneficiary for as long as he
or she lives.
TRUE
Bloom's: Knowledge
Difficulty: Medium
11-77
78. (p. 401) If life insurance proceeds are left with the company, the company acts as trustee and
pays the interest to the beneficiary.
TRUE
Bloom's: Knowledge
Difficulty: Hard
79. (p. 401) The insurance industry is regulated by federal government insurance
commissioners.
FALSE
Bloom's: Knowledge
Difficulty: Medium
80. (p. 403) An annuity is a financial contract written by an insurance company to provide you
with a regular income.
TRUE
Bloom's: Knowledge
Difficulty: Medium
81. (p. 403) A fixed annuity is a plan under which the monthly payments vary.
FALSE
Bloom's: Knowledge
Difficulty: Easy
11-78
82. (p. 403) When you buy an annuity, the interest on the principal, as well as the interest
compounded on that interest, builds up free of current income tax.
TRUE
Bloom's: Knowledge
Difficulty: Medium
83. (p. 403) A primary reason for buying an annuity is to give you retirement income for the rest
of your life.
TRUE
Difficulty: Easy
84. (p. 378) Typical examples of uses of life insurance proceeds are:
A. paying off a home mortgage.
B. endowment to children.
C. making charitable bequests.
D. paying estate taxes.
E. All of the choices are typical examples.
Difficulty: Easy
11-79
85. (p. 377) Which is a correct statement about life insurance?

A. Life insurance is still more often sold than bought.
B. Consumer awareness of life insurance has changed considerably over the years.
C. Life insurance is mysterious.
D. Life insurance is difficult to understand.
Bloom's: Knowledge
Difficulty: Medium
11-80
86. (p. 378) Individuals and families purchase life insurance to:
A. get rich quick
B. fill financial needs created by the loss of the breadwinner
C. defraud the insurance companies
D. keep up with people with a similar financial situation
Difficulty: Medium
87. (p. 378) Probability as used in life insurance relates to the:

A. number of people who will die this year
B. age at which people will die
C. number of people who will buy insurance this year
D. number of agents who sell life insurance
Difficulty: Medium
88. (p. 378) Life insurance premiums are determined basically by the:
A. forces of supply
B. forces of demand
C. forces of competition
D. use of mortality tables.
E. guesswork of insurance executives
Difficulty: Medium
11-81
89. (p. 378) The Commissioners 1958 Standard Ordinary (CSO) mortality table was based on
combined mortality experiences of:
A. women and children
B. males and females
C. men and children
D. blacks and whites
E. workers and non-workers
Bloom's: Knowledge
Difficulty: Medium
90. (p. 378) The 1980 CSO Table separates the mortality experience by:
A. age
B. income level
C. occupation
D. domicile
E. sex
Bloom's: Knowledge
Difficulty: Medium
91. (p. 378) The life expectancy of a female at the age of 30 is 47.65 years. It means that:
A. a 30-year-old female has the highest probability of dying.
B. a 30-year-old female has the highest probability of living.
C. Females alive at 30 years of age have an average number of 47.65 years still left to live.
D. 47.65 is the average age at which all females, age 30, will die.
Bloom's: Knowledge
Difficulty: Hard
11-82
92. (p. 378) If an insured person dies while the policy is in force, the insurance company pays
out the proceeds of the policy. Which of the following are common uses of life insurance
proceeds?
A. Education of children.
B. Make charitable bequests after death.
C. Pay off the mortgage on a home.
D. Uncovered medical expenses and funeral costs.
E. All of the choices.
Difficulty: Medium
93. (p. 381) What factors should you consider before you buy insurance?
A. your present and future sources of income
B. your savings
C. group life insurance
D. pension benefits
E. All of the factors should be considered.
Difficulty: Medium
94. (p. 381) You probably have little or no need for life insurance if you are:
A. a single person living alone or with parents
B. divorced and have two children
C. married and your spouse works
D. gainfully employed
E. a household with several children
Bloom's: Knowledge
Difficulty: Easy
11-83
95. (p. 381) A two-earner couple may have:

A. the greatest need for life insurance
B. no need for life insurance
C. a moderate need for life insurance, especially if they have a mortgage
D. the greatest need for an annuity
Bloom's: Knowledge
Difficulty: Medium
96. (p. 381) Who has the greatest need for life insurance?
A. households with small children
B. singles living alone
C. singles living with parents
D. dual income couple
E. children
Bloom's: Knowledge
Difficulty: Easy
97. (p. 381) Your first step in determining a life insurance program should be to:
A. consult a local insurance company agent
B. buy as much life insurance as you can afford
C. estimate your life insurance requirements
D. determine your life insurance objectives
E. evaluate the ratings of the insurance company
Bloom's: Knowledge
Difficulty: Medium
11-84
98. (p. 382) The easy method of determining your life insurance requirements is:
A. overly simplistic
B. simple, but remarkably useful
C. simple, but useless
D. for a "typical" family
E. valid if there are only one or two children in the family
Bloom's: Knowledge
Difficulty: Hard
99. (p. 382) The easy method of determining life insurance requirements assumes that your
family is:
A. rich
B. poor
C. typical
D. young
E. old
Bloom's: Knowledge
Difficulty: Medium
100. (p. 382) Suppose that yours is a typical family. Your annual income is $50,000. Use the easy
method to determine your need for life insurance. Your insurance should be in the amount of:
A. $245,000
B. $300,000
C. $345,000
D. $400,000
E. $450,000
Bloom's: Application
Difficulty: Medium
11-85
101. (p. 382) Which method of determining life insurance requirements is best suited for a
working couple with no dependents?
A. hard method
B. easy method
C. "nonworking" spouse method
D. thorough method
E. DINK method
Difficulty: Medium
102. (p. 382) The DINK method assumes that:

A. you have only two children
B. your spouse does not work
C. your insurance needs are complex
D. your spouse will continue to work after your death
E. your spouse is in an occupation with an uncertain future
Bloom's: Knowledge
Difficulty: Hard
103. (p. 383) Insurance experts have estimated that extra costs of up to $____________ a year
may be required to replace the services of a homemaker in a family with small children.
A. 3,000
B. 6,000
C. 10,000
D. 12,000
E. 15,000
Bloom's: Knowledge
Difficulty: Medium
11-86
104. (p. 383) The method of determining life insurance requirements that does not ignore such
important factors as social security and your liquid assets is called the:
A. easy method
B. hard method
C. DINK method
D. "nonworking" spouse method
E. "family need" method
Bloom's: Knowledge
Difficulty: Hard
105. (p. 382) Suppose that yours is a typical family. Your annual income is $35,000. Using the
easy method, what should be your need for life insurance?
A. $35,000
B. $110,500
C. $171,500
D. $191,500
E. over $200,000
Difficulty: Hard
106. (p. 382) The DINK method of determining life insurance need is best suited for:
A. singles
B. newly-marrieds
C. non-working spouses
D. working spouses with no dependents
E. senior citizens
Difficulty: Medium
11-87
107. (p. 382) You are a dual income, no kids family. You and your spouse have the following
debts (total): mortgage, $180,000; auto loan, $10,000; credit card balance, $2,000; and other
debts of $6,000. Further, you estimate that your funeral will cost $4,000. Your spouse expects
to continue to work after your death. Using the DINK method, what should be your need for
life insurance?
A. $103,000
B. $206,000
C. $226,000
D. $233,000
E. over $233,000
Difficulty: Hard
108. (p. 383) Using the "nonworking" spouse method, what should be the life insurance needs
for a family whose youngest child is 7 years old?
A. $50,000
B. $70,000
C. $90,000
D. $110,000
E. $140,000
Difficulty: Hard
109. (p. 383) Using the "nonworking" spouse method, what should be the life insurance needs
for a family whose youngest child is 10 years old?
A. $30,000
B. $50,000
C. $80,000
D. $100,000
E. $180,000
Difficulty: Hard
11-88
110. (p. 387) Kathy and Bob Terrell have no kids and both work as CPA's. They want to
determine their life insurance needs. What method would probably be the best method for
them to use to calculate their insurance needs?
A. The easy method
B. The DINK method
C. The nonworking spouse method
D. The family need' method
Bloom's: Evaluation
Difficulty: Medium
111. (p. 387) Catherine Carey has made the choice to stay home and raise her three kids while
her husband works. She wants to determine her insurance needs. What method would
probably be the best method for her to use to calculate her insurance needs?
A. The easy method
B. The DINK method
Bloom's: Evaluation
Difficulty: Medium
112. (p. 383) Using the "non-working" spouse method, how much life insurance is needed to
cover the loss of a non-working spouse whose younger of two children is 3 years old?
A. $50,000
B. $150,000
C. $300,000
D. None of the choices
Difficulty: Hard
11-89
113. (p. 382) Your annual income is $100,000. You have a spouse, two kids, a dog and a
mortgage a typical family. Using the easy method to determine your need for life insurance,
your insurance should be in the amount of:
A. $310,000
B. $490,000
C. $700,000
D. $1,00,000
Difficulty: Medium
114. (p. 381) Who is likely to have the least need for life insurance?
A. A married couple, only one spouse working, with three small children.
B. A single person living with parents.
C. A married couple with solid jobs and no dependents.
D. A married working couple with one child.
Difficulty: Medium
115. (p. 387) Jeff Willis does not think he has an average family. He has five kids and probably
has a little more debt than average. He wants to determine his insurance needs. What method
would probably be the best method for him to calculate his insurance needs?
A. The easy method
B. The DINK method
Bloom's: Evaluation
Difficulty: Medium
11-90
116. (p. 382) The insurance industry rule of thumb that a typical family will need approximately
70% of salary for seven years in order to adjust for the financial consequences of a salary
earner's death is know as which of the following estimation methods?
A. The "nonworking" spouse method.
B. The easy method.
C. The DINK method.
D. The "Family Need" method.
Bloom's: Knowledge
Difficulty: Medium
117. (p. 384) Which of the following is not true?

A. Stock companies generally sell nonparticipating policies.
B. A participating policy usually has a somewhat higher premium than a nonparticipating
policy.
C. Mutual companies generally sell participating policies.
D. You can expect a policy dividend from a stock company.
E. All of the choices are true.
Bloom's: Knowledge
Difficulty: Medium
118. (p. 384) A participating life insurance policy has

A. lower premiums than a nonparticipating policy
B. about the same premium as the nonparticipating policy
C. been declared illegal in many states
D. somewhat higher premiums than nonparticipating policy
Bloom's: Knowledge
Difficulty: Medium
11-91
119. (p. 384) Most participating policies are sold by

A. federal government agencies
B. state insurance commissioners
C. mutual life insurance companies
D. stock life insurance companies
E. individual life insurance agents
Bloom's: Knowledge
Difficulty: Medium
120. (p. 384) Which statement is correct regarding mutual insurance companies?
A. Mutual insurance companies have stockholders.
B. Nearly all mutual companies issue only nonparticipating policies.
C. Premiums are lower than those offered by stock companies.
D. Mutual companies do not declare policy dividends.
E. A mutual company refunds part of the premium to the policyholders.
Difficulty: Medium
121. (p. 384) Mutual insurance companies specialize in the sale of ____________ policies.
A. nonparticipating
B. participating
C. preferred
D. nonpreferred
E. noncumulative
Bloom's: Knowledge
Difficulty: Medium
11-92
122. (p. 384) Which statement is correct regarding stock life insurance companies?
A. A stock company sells participating policies.
B. A stock company always charges higher premiums than mutual companies.
C. A policyholder participates in the profit or loss of the company.
D. A stock company generally sells nonparticipating (non par) policies.
E. A stock company is owned by policyholders.
Difficulty: Medium
123. (p. 384) If you wish to pay exactly the same life insurance premium each year, you would
choose a:
A. nonparticipating policy
B. participating policy
C. term insurance policy
D. variable life policy
Difficulty: Hard
124. (p. 384) Which type of insurance is sometimes called temporary insurance?
A. whole life insurance
B. term insurance
C. straight life
D. ordinary life
E. modified life
Bloom's: Knowledge
Difficulty: Easy
11-93
125. (p. 384) Which of the following statements is correct for term insurance?
A. Premiums for term insurance remain constant.
B. Term insurance has cash value.
C. Term insurance is protection for a specified period of time.
D. Term insurance is usually more expensive than whole life insurance.
Bloom's: Knowledge
Difficulty: Medium
126. (p. 387) The most common type of permanent life insurance is called:
A. whole life policy
B. term life policy
C. universal life
D. modified life
Bloom's: Knowledge
Difficulty: Medium
127. (p. 385) Which statement is correct about whole life insurance?
A. Whole life insurance is cheaper than term life.
B. Whole life insurance builds up cash value.
C. Whole life premiums increase with your age.
D. Whole life insurance is the best choice for most people.
Bloom's: Knowledge
Difficulty: Medium
11-94
128. (p. 387) Which type of life insurance plan requires you to pay premiums for a stipulated
period, usually 20 or 30 years, or until you reach a specified age?
A. modified life policy
B. variable life policy
C. adjustable life policy
D. limited payment policy
E. endowment policy
Bloom's: Knowledge
Difficulty: Hard
129. (p. 387) A special form of the limited payment plan is the ____________ premium policy.
A. double
B. simple
C. single
D. compound
E. equitable
Bloom's: Knowledge
Difficulty: Medium
130. (p. 387) The cash values of a ____________ life insurance policy fluctuate according to the
yields earned by a separate fund, which can be a stock fund, a money market fund, or a long-
term fund.
A. modified
B. variable
C. adjustable
D. ordinary
E. temporary
Bloom's: Knowledge
Difficulty: Medium
11-95
131. (p. 389) Subject to certain minimums, which life insurance is designed to let you pay
premiums at any time in virtually any amount?
A. whole life
B. ordinary life
C. universal life
D. adjustable life
E. variable life
Bloom's: Knowledge
Difficulty: Hard
132. (p. 389) Which type of life insurance policy combines term insurance and investment
elements?
A. whole life
B. ordinary life
C. universal life
D. adjustable life
E. variable life
Bloom's: Knowledge
Difficulty: Medium
133. (p. 391) Some experts claim that credit life insurance policies are:
A. the nation's biggest rip off
B. the best buys
C. useful for creditors and debtors alike
D. less expensive than term life insurance
E. an excellent investment
Bloom's: Knowledge
Difficulty: Medium
11-96
134. (p. 390) A plan that insures a large number of persons under the terms of a single policy
without a medical examination is called a(n) ____________ life insurance policy plan.
A. individual
B. whole
C. large number
D. permanent
E. group
Bloom's: Knowledge
Difficulty: Medium
135. (p. 390) Fundamentally, group insurance is ____________ insurance.

A. term
B. whole life
C. ordinary life
D. permanent
E. universal life
Bloom's: Knowledge
Difficulty: Easy
136. (p. 390) Which of the following statements is true about group life insurance?
A. Group life has been losing its popularity recently.
B. The cost of insurance per $1,000 is the same for each employee.
C. Group insurance is not a good bargain for older employees regardless of age.
D. Principles that apply to other forms of insurance do not apply to group life insurance.
Bloom's: Knowledge
Difficulty: Hard
11-97
137. (p. 384) Lori Simpson is thinking about purchasing some life insurance. She goes to a
company where the policyholders are essentially the owners of the company. What type of life
insurance company has she gone to?
A. A stock life insurance company
B. A debt life insurance company
C. A mutual life insurance company
D. An exclusionary life insurance company
Difficulty: Medium
138. (p. 384) Jerry Lewis is thinking about purchasing some life insurance. He goes to a
company that is owned by shareholders. What type of life insurance company has he gone to?
A. A stock life insurance company
B. A debt life insurance company
C. A mutual life insurance company
D. An exclusionary life insurance company
Difficulty: Medium
139. (p. 385) Jeremy Osteryoung is buying life insurance for a period of 20 years. It will pay a
benefit to his beneficiaries only if he dies during this 20 year period. What type of life
insurance has Jeremy purchased?
A. Term insurance
B. Renewable term insurance
C. Convertible term insurance
D. Decreasing term insurance
Difficulty: Medium
11-98
140. (p. 391) Francesca Brown has a life insurance policy that provides her with protection for
the next 10 years. However, she can get five more years of protection at the end of this term
without having to have a medical examination until she reaches the age of 70. Her premiums
will rise during each five year period. What type of life insurance does Francesca likely
have?
A. Term insurance
Difficulty: Medium
141. (p. 385) Frank Keating has a life insurance policy that can be exchanged for a whole life
policy without a medical examination. Once it has been exchanged it will have higher
premiums on it. What type of life insurance does Frank likely have?
A. Term insurance
Difficulty: Medium
142. (p. 386) Renee Warning has a life insurance policy where the payments to beneficiaries get
smaller as time passes. What type of life insurance does Renee likely have?
A. Term insurance
Difficulty: Medium
11-99
143. (p. 387) Which of the following is another name for permanent insurance?
A. Whole life insurance
B. Straight life insurance
C. Ordinary life insurance
D. Cash value life insurance
E. All of the choices are names for permanent insurance
Bloom's: Knowledge
Difficulty: Easy
144. (p. 386) Taylor Jones has a life insurance policy that returns every cent she pays in
premiums that she pays if she outlives the term of the policy. She knows this policy costs 30
to 50 percent more than a traditional policy but thinks it is worth it. What type of life
insurance does Taylor have?
A. Term insurance
E. Return on premium insurance
Difficulty: Easy
145. (p. 387) Shelley Jackson has a life insurance policy where she makes payments of $185 per
year for the rest of her life. This policy has a cash value that increases while she continues to
make payments. If she gives up her insurance, the cash value is the amount she would receive
from this policy. What type of life insurance does Shelley likely have?
A. Ordinary whole life insurance
B. Limited payment life insurance
C. Variable life insurance
D. Adjustable life insurance
E. Universal life insurance
Difficulty: Medium
11-100
146. (p. 387) Tim Bridges has a life insurance policy where he makes payments of $265 per year
until he reaches the age of 65. His policy is then paid up' for life. His beneficiaries would
receive the face value of upon his death. What type of life insurance does Tim likely have?
Difficulty: Medium
147. (p. 387) John Camey has a life insurance policy that is tied to a separate stock fund. The
cash value of his insurance policy depends on the value of this stock fund. He is guaranteed a
minimum death benefit but it can rise above this amount depending on the value of the stock
fund. What type of life insurance does John likely have?
Difficulty: Medium
148. (p. 389) Jim Brown has a life insurance policy that allows him to change his policy to fit his
changing needs. He can change either the premium he pays or the period of coverage. What
type of insurance does Jim likely have?
Difficulty: Medium
11-101
149. (p. 389) Russell Lowe has a life insurance policy that within certain minimums allows him
to pay his premiums virtually at any time and virtually in any amount. What type of insurance
does Russell likely have?
Difficulty: Medium
150. (p. 384) Jane Curtain has a participating life insurance policy that returns part of her
premiums at the end of the year. The money that is returned to Jane at the end of the year is
called:
A. The Cash Value
B. The Policy Dividend
C. The Beneficiary
D. The Rider
E. Double Indemnity
Difficulty: Medium
151. (p. 394) Richard Beck has a life insurance in which he has altered the benefits to be
received by his son and daughter. This alteration has most likely been done by attaching:
A. A cash value
B. A policy dividend
C. A beneficiary
D. A rider
E. Double indemnity
Difficulty: Medium
11-102
152. (p. 399) Lisa Smith has her age listed on her driver's license as being three years younger
than it actually is. This is also how old she tells her insurance company she is. Her insurance
company has discovered she lied about her age. What provision of her life insurance contract
states that her benefits will be what her premium would have bought if she had been truthful
about her age?
A. Policy loan provision
B. Misstatement of age provision
C. Cost of living protection provision
D. Guaranteed insurability provision
E. Grace period provision
Difficulty: Medium
153. (p. 392) Your life insurance policy is valuable only if it:
A. meets your objectives
B. makes you rich
C. makes your beneficiaries rich
D. serves as a collateral on loans
E. pays you at least 7.5 percent interest
Bloom's: Knowledge
Difficulty: Medium
154. (p. 393) A beneficiary is a person who:

A. acts as a trustee of your insurance policy
B. is a guardian of your children
C. acts on your behalf
D. is designated to receive life insurance proceeds
E. takes your money and runs
Bloom's: Knowledge
Difficulty: Hard
11-103
155. (p. 393) The grace period allows ____________ days to elapse, during which time the
premium may be paid on an insurance policy.
A. 1 to 10
B. 10 to 20
C. 28 to 30
D. 30 to 60
E. 60 to 90
Bloom's: Knowledge
Difficulty: Medium
156. (p. 393) A suicide clause means that the insurance company:
A. can cancel the policy if age has been misstated
B. will pay the death benefit equal to the amount of the premium paid, if the insured dies
during the first two years that the policy is in force.
C. allows the insured to pay premiums in installments
D. automatically pays the premium out of the policy's cash value
Bloom's: Knowledge
Difficulty: Hard
157. (p. 394) A document attached to the policy that modifies its coverage by adding or deleting
a specified condition is called a(n):
A. rider
B. waiver of premium
C. automatic premium loan
D. beneficiary
E. incontestability clause
Bloom's: Knowledge
Difficulty: Medium
11-104
158. (p. 396) In planning your insurance program, you should:

A. seek advice from a competent financial adviser
B. determine what insurance is required
C. consider social security and other group insurance
D. decide what type of insurance best meets your needs
E. consider all of these factors
Bloom's: Knowledge
Difficulty: Medium
159. (p. 397) An authoritative rating guide to the financial stability of the nation's insurers is
published by all of the following except:
A. Dow Jones & Company
B. Standard & Poor's
C. Moody's Rating Service
D. A. M. Best Company
E. Duff & Phelps
Bloom's: Knowledge
Difficulty: Medium
160. (p. 396) Among the most important steps in the process of building your insurance program
is:
A. buying insurance
B. determining how much insurance to buy
C. choosing a good insurance agent
D. dealing with a local insurance company
Bloom's: Knowledge
Difficulty: Medium
11-105
161. (p. 399) The price that a company charges for a life insurance policy is affected by:
A. the seasons
B. the sunspots
C. the company's cost of doing business
D. state regulations
E. federal regulations
Bloom's: Knowledge
Difficulty: Medium
162. (p. 399) A factor that affects the cost of a life insurance policy is:
A. the seasons
B. the mortality rate
C. state laws
D. federal laws
E. local custom
Bloom's: Knowledge
Difficulty: Medium
163. (p. 399) A method of evaluating the cost of life insurance by taking into account the time
value of money is called:
A. double indemnity
B. guaranteed insurability
C. an interest-adjusted index
D. the consumer price index
E. a present value index
Bloom's: Knowledge
Difficulty: Hard
11-106
164. (p. 399) If your insurance agent does not give you an interest-adjusted index, your best bet
is to:
A. buy the policy anyway
B. not buy the policy and look for another agent
C. tell the agent that you are still thinking
D. tell the agent you will buy it later
E. complain to the Better Business Bureau
Difficulty: Medium
165. (p. 399) What percent of all applicants who apply for life insurance are found to be
insurable?
A. 58
B. 68
C. 78
D. 88
E. 98
Bloom's: Knowledge
Difficulty: Medium
166. (p. 399) The prices of life insurance policies:

A. vary considerably
B. are relatively the same
C. are higher for females
D. have remained constant
E. are higher in the Midwest than in the Northeast
Bloom's: Knowledge
Difficulty: Medium
11-107
167. (p. 400) After you buy new life insurance you have a "free look" period of ______ days.
A. 10
B. 20
C. 30
D. 40
E. 50
Bloom's: Knowledge
Difficulty: Medium
168. (p. 401) Perhaps the most common settlement option in a life insurance program is:
A. lump-sum payment
B. limited installment payment
C. life income option
D. proceeds left with the company
E. All are common options
Bloom's: Knowledge
Difficulty: Medium
169. (p. 403) A financial contract written by an insurance company to provide you with a regular
monthly income for as long as you live is called:
A. whole life insurance
B. term life insurance
C. modified life insurance
D. single-premium insurance
E. an annuity
Bloom's: Knowledge
Difficulty: Medium
11-108
170. (p. 403) The annuity is often described as being:

A. the same as a whole life insurance
B. term life insurance
C. limited life insurance
D. disability income insurance
E. the opposite of life insurance
Bloom's: Knowledge
Difficulty: Medium
171. (p. 403) A prime reason for buying an annuity is to:

A. save money for college education
B. start a new business
C. accumulate funds to invest in stocks
D. give you retirement income for the rest of your life
E. get rich quick
Difficulty: Hard
172. (p. 406) A contract stating that the annuitant will receive a fixed amount of income over a
certain period or for life is called a:
A. fixed-premium limited annuity
B. fixed annuity
C. variable annuity
D. ERISA annuity
E. participating annuity
Bloom's: Knowledge
Difficulty: Medium
11-109
173. (p. 382) Scott Cumbie believes he has a typical' family and wants to determine his life
insurance needs. What method would probably be the best method for him to use to calculate
his insurance needs?
A. The easy method
B. The DINK method
Bloom's: Evaluation
Difficulty: Medium
Essay Questions
174. (p. 377) What is life insurance? What is its purpose and principle?
Life insurance is a contract between an insurance company and a policyholder under which
the company agrees to pay a specified sum to a beneficiary upon the death of the insured.
Most people buy life insurance to protect someone who depends on them from financial
losses caused by their death. Fundamental to the life insurance principle is the predictable
mortality experience of a large group of individuals.
Bloom's: Knowledge
Difficulty: Medium
175. (p. 382) What are the four methods of determining your life insurance needs?
In determining your life insurance needs, you must first determine your insurance objectives
and then use the easy method, the DINK method, the "nonworking" spouse method, or the
thorough method. The thorough method is recommended.
Bloom's: Knowledge
Difficulty: Medium
11-110
176. (p. 384) What are the two types of life insurance companies? What are the various types of
insurance policies issued by them?
The two types of life insurance companies are stock companies, owned by stockholders, and
mutual companies, owned by policyholders. In general, stock companies sell nonparticipating
policies and mutual companies sell participating policies. The three basic types of life
insurance are term, whole life, and endowment policies. There are many variations and
combinations of these types.
Bloom's: Knowledge
Difficulty: Medium
177. (p. 386) What do the terms "term", "decreasing" or "declining term", and "whole life" mean
with respect to life insurance?
Term or level term provides a fixed amount of coverage for a specific period of time.
Declining term provides for the coverage to decrease over time and is also for a fixed period.
Whole life provides a fixed amount of coverage for the life of the insured. In essence it
combines declining term with a forced saving feature. Neither level term nor declining term
has a savings feature and are thus less expensive than whole life.
Difficulty: Hard
178. (p. 392) What are important provisions in most life insurance policies?
The naming of the beneficiary, the grace period, policy reinstatement, the incontestability and
suicide clauses, automatic premium loans, the misstatement of age provision, and the policy
loan provision are important provisions in most life insurance policies as are the waiver of
premium disability benefit, the accidental death benefit, and the guaranteed insurability
option.
Bloom's: Knowledge
Difficulty: Medium
11-111
179. (p. 398) What are the steps in creating a plan to buy your life insurance?
Before buying life insurance, consider your present and future sources of income, group life
insurance, group annuities (or other pension benefits), and social security. Then compare the
costs of life insurance policies. Examine your policy before and after the purchase, and
choose appropriate settlement options.
Bloom's: Knowledge
Difficulty: Medium
180. (p. 403) What is an annuity? What is the difference between life insurance and an annuity?
An annuity is the opposite of life insurance. It pays while you live; life insurance pays when
you die. An annuity provides you with a regular income during your retirement years.
Annuities are given favorable income tax treatment under the Tax Reform Act of 1986.
Bloom's: Knowledge
Difficulty: Medium
1. (p. 412) The decision to establish an investment plan is an important first step to
accomplishing your financial goals.
TRUE
Difficulty: Easy
11-112
2. (p. 413) Potential investors should not wait until they put their financial affairs in order before
starting to invest.
FALSE
Difficulty: Hard
3. (p. 413) An emergency fund is an amount of money that can be obtained quickly in case of
immediate need.
TRUE
Bloom's: Knowledge
Difficulty: Easy
4. (p. 413) A line of credit is a short-term loan that is approved before the money is actually
needed.
TRUE
Difficulty: Easy
11-113
5. (p. 413) A credit ceiling on a credit card is determined by the borrower and is the dollar
amount that they want to borrow using the cash advance provision on their credit card.
FALSE
Difficulty: Medium
6. (p. 415) Generally, it is not a good idea to participate in an employer-sponsored retirement

program.
FALSE
Difficulty: Easy
7. (p. 415) When starting an investment program, you should participate in an elective savings
program.
TRUE
Difficulty: Easy
8. (p. 415, 417) The rate of return on an investment has no affect on a long-term investment
program.
FALSE
Difficulty: Medium
11-114
9. (p. 417) There is no relationship between risk and safety.

FALSE
Difficulty: Medium
11-115
10. (p. 417-419) The potential return of any investment should be directly related to the risk that
the investor assumes.
TRUE
Difficulty: Medium
11. (p. 421) During inflationary times, there is a risk that the financial return on an investment
will not keep pace with the rate of inflation.
TRUE
Difficulty: Easy
12. (p. 421) The dollar value of an investment with a fixed-interest rate increases when overall
interest rates in the economy increase.
FALSE
Bloom's: Knowledge
Difficulty: Hard
13. (p. 422) One risk associated with a global investment is caused by the difficulty of obtaining
reliable accounting information needed to evaluate stocks issued by international companies.
TRUE
Difficulty: Medium
11-116
14. (p. 422) When investing in global investments, changes in the currency exchange rate may
affect the return on your investment.
TRUE
Bloom's: Knowledge
Difficulty: Easy
15. (p. 423) Investment growth means that investments will increase in value.
TRUE
Bloom's: Knowledge
Difficulty: Easy
16. (p. 423) Liquidity is the ease with which an asset can be converted to cash without a
substantial loss in dollar value.
TRUE
Bloom's: Knowledge
Difficulty: Easy
17. (p. 424) Over the past 50 years, stocks and U.S. government bonds have returned about the
same rate of return.
FALSE
Bloom's: Knowledge
Difficulty: Hard
11-117
18. (p. 424) Because of the growth potential, stocks or mutual funds that invest in stocks should
be the only type of securities included in the investment portfolio for most people.
FALSE
Difficulty: Medium
19. (p. 424) Asset allocation is the process of spreading your assets among several different types
of investments to lessen risk.
TRUE
Bloom's: Knowledge
Difficulty: Easy
20. (p. 426) The amount of time that your investments have to work for you is an important
factor when managing your investment portfolio.
TRUE
Bloom's: Knowledge
Difficulty: Easy
21. (p. 426) Because of the age factor, most young investors tend to invest a large percentage of
their nest egg in growth-oriented investments.
TRUE
Difficulty: Easy
11-118
22. (p. 428) Preferred stock represents the most basic form of corporate ownership.
FALSE
Difficulty: Medium
23. (p. 428) The most important priority for an investor in preferred stock is receiving cash
dividends before common stockholders are paid any cash dividends.
TRUE
Difficulty: Medium
24. (p. 428) Bondholders generally receive interest payments every six months.
TRUE
Bloom's: Knowledge
Difficulty: Medium
25. (p. 428-429) Mutual funds range from very conservative to extremely speculative
investments.
TRUE
Bloom's: Knowledge
Difficulty: Medium
11-119
26. (p. 429) The nationwide average increase is just over 7 percent a year for real estate
investments.
FALSE
Bloom's: Knowledge
Difficulty: Medium
11-120
27. (p. 417, 429) A speculative investment is an investment that is made in the hope of earning a
relatively large profit over a long period of time.
FALSE
Bloom's: Knowledge
Difficulty: Easy
28. (p. 429) Generally, options are conservative, long-term investment techniques.
FALSE
Bloom's: Knowledge
Difficulty: Medium
29. (p. 430-431) Once you have painstakingly developed a financial plan, it is not wise to change
it.
FALSE
Difficulty: Medium
30. (p. 430-431) Once you have made a decision to buy an investment, there is no need for
continued evaluation.
FALSE
Difficulty: Medium
11-121
31. (p. 432) Accurate recordkeeping can help you spot opportunities to maximize profits or
reduce dollar losses when you sell your investments.
TRUE
Bloom's: Knowledge
Difficulty: Easy
32. (p. 434) Although useful for many things, the Internet cannot be used to monitor the value of
stock, bond, and mutual fund investments.
FALSE
Bloom's: Knowledge
Difficulty: Medium
33. (p. 434) Today, federal, state, and local governments and most corporations have a home
page where you can obtain valuable information.
TRUE
Bloom's: Knowledge
Difficulty: Easy
34. (p. 435) The average investor cannot afford to purchase much of the investment information
available from the U.S. government.
FALSE
Bloom's: Knowledge
Difficulty: Medium
11-122
35. (p. 436) A corporation must give each potential investor an annual report.
FALSE
Bloom's: Knowledge
Difficulty: Medium
36. (p. 436) The fees for investor services and newsletters range between $30 to $1,000 a year.
TRUE
Bloom's: Knowledge
Difficulty: Easy
37. (p. 412) Which of the following is a true statement?

A. No one is going to make you save the money you need to start an program.
B. To be useful, investment objectives must be very general.
C. Investment goals are the same for each individual.
D. Because investment objectives deal with the future, it is useless to plan more than five
years in the future.
E. A long-term investment objective involves a time period of five years or less.
Difficulty: Medium
11-123
38. (p. 412) A short-term investment objective is defined as one that will be accomplished within
a period of?
A. Less than two years.
B. Two to five years.
C. More than five years.
D. None of the choices.
Bloom's: Knowledge
Difficulty: Medium
11-124
39. (p. 412) An intermediate-term investment objective is defined as one that will be
accomplished within a period of?
Bloom's: Knowledge
Difficulty: Medium
40. (p. 412) A long-term investment objective is defined as one that will be accomplished within
a period of?
Bloom's: Knowledge
Difficulty: Medium
41. (p. 412-413) All of the following statements are considered to be good advice for a potential
investor starting an investment program except:
A. Work to balance your budget.
B. Increase credit purchases and make installment payments in order to increase cash
available for investing.
C. Establish specific and measurable investment goals.
D. Start an emergency fund.
E. Establish a line of credit.
Difficulty: Easy
11-125
42. (p. 413) A good rule of thumb is to limit consumer credit payments to ____________ percent
of your net monthly income.
A. 20
B. 30
C. 40
D. 50
E. 60
Bloom's: Knowledge
Difficulty: Medium
43. (p. 413) An emergency fund should be deposited in a:

A. savings account at the highest available interest rate.
B. six month certificate of deposit.
C. checking account.
D. safe place at home.
E. safe deposit box in a bank vault.
Bloom's: Knowledge
Difficulty: Easy
44. (p. 413) Eric Peltz earns $80,000 a year. His monthly expenses total $4,300. What is the
minimum amount of money that Mr. Peltz should set aside in an emergency fund?
A. $2,150
B. $4,300
C. $8,600
D. $12,900
E. $43,000
Difficulty: Hard
11-126
45. (p. 413) Jack Masters earns $40,000 a year. His monthly expenses total $2,100. What is the
minimum amount of money that Mr. Masters should set aside in an emergency fund?
A. $2,100
B. $4,200
C. $6,300
D. $8,400
E. $10,000
Difficulty: Hard
46. (p. 413) Which of the following statements does not accurately describe a line of credit?
A. A line of credit is already approved before the money is actually needed.
B. A line of credit is available immediately when needed.
C. A line of credit can be obtained at a credit union, savings and loan association, or bank.
D. A line of credit provides an alternative source of funds if an emergency does develop.
E. A line of credit is a long-term loan.
Difficulty: Medium
47. (p. 415) All except which one of the following are good ways to acquire money for starting
an investment program?
A. Pay bills first, and then save a reasonable amount of money for investment.
B. Participate in an elective savings program offered by your employer.
C. Make a special savings effort one month per year.
D. Borrow money specifically for investment purposes.
E. Take advantage of gifts, inheritances, and windfalls.
Difficulty: Medium
11-127
48. (p. 415) Allen Arnold earns $3000 per month. He pays his mortgage, utilities, grocery and
other bills and then he makes sure to set aside $150 for his savings and investment accounts
before he spends money to go to movies and other personal expenses. Which suggestion for
obtaining the money he needs for investing is he following?
A. Paying himself first
B. Taking advantage of employer-sponsored retirement programs
C. Participating in an elective savings program
D. Making a special effort once or twice a year to save
E. Taking advantage of gifts, inheritance and other windfalls
Bloom's: Knowledge
Difficulty: Easy
49. (p. 415) Alice Cooper makes sure to contribute ten percent of her monthly earnings to her
401(k) plan at work. Her 401(k) plan allows her to invest in several different types of mutual
funds and her employer matches up to 5% of her salary. Which suggestion for obtaining
money she needs for investing is she following?
A. Paying herself first
Bloom's: Knowledge
Difficulty: Easy
50. (p. 415) James Gripka has a mutual fund that automatically takes $50 out of his checking
account each month. Which suggestion for obtaining the money he needs for investing is he
following?
A. Taking advantage of gifts, inheritance and other windfalls
E. Using financial leverage to increase investment returns
Bloom's: Knowledge
Difficulty: Easy
11-128
11-129
51. (p. 415) After Christmas is over, Ted Riley works hard to control his expenses in February so
that he can make an extra payment into a mutual fund. Which suggestion for obtaining the
money needs for investing is he following?
Bloom's: Knowledge
Difficulty: Easy
52. (p. 415) Sam Waters just received $10,000 from his grandmother's estate. He has thought
about buying himself a new Harley with the money but has decided instead to add the money
to his mutual fund account. Which suggestion for obtaining the money he needs for investing
is he following?
Bloom's: Knowledge
Difficulty: Easy
53. (p. 414-416) Twenty years ago, you began investing $2,000 a year. Because your investments
earned an average of 8 percent a year, your investment portfolio has a current dollar value of
$92,000. How much did you earn on your investments over the 20-year period of time?
A. $2,000
B. $40,000
C. $52,000
D. $92,000
E. $132,000
Difficulty: Hard
11-130
54. (p. 414-416) Twenty years ago, you began investing $250 a month. Because your investments
earned an average of 8 percent a year, your investment portfolio has a current dollar value of
$145,000. How much did you earn on your investments over the 20-year period of time?
A. $142,000
B. $80,000
C. $85,000
D. $140,000
E. $132,000
Difficulty: Hard
55. (p. 417-418) Gina Davidson has received $50,000 in a divorce settlement and is trying to
decide how to invest it. She has looked at stocks but knows that some stocks have lost a lot of
value for their owners recently. What aspect of investing is she most concerned about?
A. Risk
B. Return
C. Diversification
D. Liquidity
E. Investment Growth
Bloom's: Analysis
Difficulty: Medium
56. (p. 418) Which of the following individuals should have a higher tolerance for risk?
A. Joan Cummings who is a single mother with two small children
B. Darren Carter who works for American Airlines and is worried that he is going to be laid
off soon
C. Barry Parks who is an investment banker and earns over $200,000 per year
D. Michael Clark who is 74 years old and been retired for 6 years
E. Fred Funderbunk who is a pizza delivery guy and makes about $15,000 per year
Bloom's: Analysis
Difficulty: Medium
11-131
57. (p. 419) Brenda Lee has received a $10,000 gift from her mother and is trying to decide how
to invest it. She thinks she would like to invest it in stocks because she knows that stocks have
been earning about a 10% rate of return over the last several years. What aspect of investing is
Brenda most concerned about?
A. Risk
B. Return
C. Diversification
D. Liquidity
E. Income
Bloom's: Analysis
Difficulty: Medium

A. When choosing an investment, it is not necessary to consider the risk factor.
B. During inflationary times, there is a risk that the financial return on an investment will not
keep pace with the rate of inflation.
C. The interest rate risk associated with investments in bonds is the result of changes in
business conditions faced by companies.
D. The risk of business failure deals with changes in the value of stocks and bonds due to
changes in interest rates in the market.
E. The price of stocks, bonds, and other investments never fluctuates in the market.
Difficulty: Hard
59. (p. 421) If interest rates in the overall economy decrease, which of the following is most
likely to be the market value of a $1,000 corporate bond with a fixed interest rate?
A. The bond is worthless.
B. $1,100
C. $900
D. The value of the bond will not change.
E. It is impossible to determine if the bond's value will increase or decrease.
Difficulty: Hard
11-132
60. (p. 421) If interest rates in the overall economy increase, which of the following is most
likely to be the market value of a $1,000 corporate bond with a fixed interest rate?
B. $1,100
C. $900
D. The value of the bond will not change
E. It is impossible to determine if the bond's value will increase or decrease
61. (p. 417) After the death of her husband, Gina Baker, 35, received a check for $350,000 from
a life insurance company. Gina has two small children and wants to make sure that both she
and the children are taken care of in the future. Based on this information, which of the
investment factors listed below would be the most important to Gina in her investment
program?
A. beta
B. safety
C. business failure
D. market risk
E. liquidity
Bloom's: Evaluation
Difficulty: Hard
62. (p. 421) If interest rates in the overall economy decrease, what will happen to the market
value of a corporate bond with a fixed interest rate?
B. The value of the bond will increase.
C. The value of the bond will decrease.
D. The value of the bond will not change.
E. It is impossible to determine if the bond's value will increase or decrease.
Difficulty: Hard
11-133
63. (p. 421) An example of ____________ risk occurs when an investment does not keep up
with prices that are increasing in the overall economy.
A. market
B. interest
C. inflation
D. business failure
E. current
Difficulty: Medium
64. (p. 421) A $1,000 corporate bond pays 6.5 percent a year. What is the annual interest you will
receive each year?
A. $0.65.
B. $6.50.
C. $65
D. $1,060.50
E. $1,065
Difficulty: Medium
65. (p. 421-422) Bad products or poor financial management may result in investors experiencing
____________ risk.
A. inflation
B. interest rate
C. business failure
D. market
E. income
Difficulty: Medium
11-134
66. (p. 421) When a bondholder loses money because interest rates in the economy increase, it is
an example of ____________ risk.
A. market
B. interest rate
C. inflation
D. business failure
E. current
Difficulty: Medium
67. (p. 421) Lester McCann wants to invest but is worried about risk. In particular, he is worried
that the money he invests today will not buy as much ten years from now. What type of risk is
Lester most concerned with?
A. Inflation Risk
B. Interest Rate Risk
C. Business Failure Risk
D. Market Risk
Bloom's: Analysis
Difficulty: Medium
68. (p. 421) Edward Milano wants to invest in corporate bonds, but is worried about risk. In
particular, he is worried that if interest rates rise the price he could sell his bond for would
decrease. What type of risk is Edward most concerned with?
A. Inflation Risk
D. Market Risk
Bloom's: Analysis
Difficulty: Medium
11-135
69. (p. 421-422) Allison Peavy wants to invest but is worried about risk: In particular, she is
worried that bad management and increased competition in the wireless phone market will
make these companies less profitable than expected. What type of risk is Allison most
concerned with?
A. Inflation Risk
D. Market Risk
Bloom's: Analysis
Difficulty: Medium
70. (p. 422) Which of the following statements is true?

A. Global investments must be evaluated like other investment alternatives.
B. Since global investments can only be bought in the U.S. there is no need to worry about
currency exchange rates.
C. Today very few investors are investing in stocks and bonds issued by foreign firms and in
global mutual funds.
D. For most small investors, it makes more sense to invest in stocks and bonds issued by
individual foreign firms.
E. Evaluating global investments is easy because there is plenty of good information
available.
Difficulty: Hard
11-136
71. (p. 423) John Hernandez is 24 and has saved enough money to fund an adequate emergency
fund. In addition, he has saved $5,600 that can be used to fund an investment program. He is
single, has no dependents, and would like to retire when he is 60. Which of the investment
factors listed below would be most important for an investor like Mr. Hernandez?
A. beta
B. income
C. growth
D. risk
E. liquidity
Bloom's: Evaluation
Difficulty: Hard
72. (p. 422) A decrease in the value of stocks, bonds, or other investments may cause investors to
experience ____________ risk.
A. inflation
B. interest rate
C. business failure
D. market
E. income
Difficulty: Medium
73. (p. 422) An investor concerned with a predictable source of income provided by an
investment would choose:
A. government bonds.
B. commodities.
C. options.
D. common stocks.
E. speculative investments.
Bloom's: Analysis
Difficulty: Medium
11-137
74. (p. 423) Which of the following investments offers the least amount of growth potential?
A. real estate
B. common stock
C. mutual funds
D. options
E. None of these investments provide growth potential.
Bloom's: Analysis
Difficulty: Medium
75. (p. 423) Which of the following investments offers the greatest growth potential?
A. bank accounts
B. common stock
C. corporate bonds
D. government bonds
E. option bonds
Bloom's: Analysis
Difficulty: Medium
76. (p. 423, 426) Matt Jackson is single and 24. He has just graduated from college and obtained a
job making $26,400 a year. He would like to establish a long-term investment program.
Which of the following investments would you recommend for his investment program?
A. corporate bonds
B. government bonds
C. growth stocks
D. commodities
E. a money-market fund
Bloom's: Evaluation
Difficulty: Medium
11-138
77. (p. 423) The ease with which an investment can be converted to cash without a substantial
loss in dollar value is called the:
A. asset value.
B. liquidity factor.
C. immediate quotient.
D. fixed cost factor.
E. variable cost factor.
Bloom's: Knowledge
Difficulty: Easy
78. (p. 423) Which of the following investments offers the greatest liquidity?
A. savings accounts
B. common stock
C. corporate bonds
D. real estate
E. collectibles
Bloom's: Analysis
Difficulty: Medium
79. (p. 423) Which of the following investments offers the least liquidity?
A. checking accounts
B. government bonds
C. real estate
D. savings accounts
E. None of these investments offer liquidity.
Bloom's: Analysis
Difficulty: Medium
11-139
80. (p. 423) Bill Teague has just gotten a gift of $20,000 from his parents and is trying to decide
how to invest it. He is thinking about investing in a money market mutual fund because he
knows he can withdraw the money from the money market mutual fund whenever he needs it
with little chance of loss in value. What aspect of investing is Bill most concerned about?
A. Risk
B. Return
C. Diversification
D. Liquidity
Bloom's: Analysis
Difficulty: Medium
81. (p. 423) Carl Reimer has just received an inheritance of $40,000 from his mother and is
trying to decide how to invest it. Carl is young and earns a good salary. Carl wants to invest in
a small cap mutual fund because while he won't receive much in the way of cash dividends,
the companies are reinvesting significant amounts in the companies so the sales revenue and
earnings in the future will be much larger. What aspect of investing is Carl most concerned
about?
A. Risk
B. Return
C. Diversification
D. Liquidity
Bloom's: Analysis
Difficulty: Medium
11-140
82. (p. 424) According to Roger Ibbotson, which of the following investments is projected to
provide an average return of 10 percent a year between now and the year 2025?
A. U.S. Treasury bills
B. corporate bonds.
C. stocks
D. options
E. zero-coupons
Bloom's: Knowledge
Difficulty: Medium
83. (p. 424) Terry Hamilton has just received $30,000 from an uncle who died and is trying to
decide how to invest it. She has done some research has decided that about 30% of the money
should go into large cap stocks, 20% into medium cap stocks, 15% into small cap stocks, 10%
into bonds, 10% into foreign stocks and 15% into cash. She thinks that even if one area does
not do that well, the rest will so that her overall return will be pretty good. What aspect of
investing is Terry most concerned about?
A. Income
B. Return
C. Diversification
D. Liquidity
Bloom's: Analysis
Difficulty: Medium
84. (p. 424) An individual can reduce the amount of risk associated with an investment program
by using:
A. an investment timer.
B. asset allocation.
C. a portfolio picker.
D. speculative investments.
E. a personal investment notebook.
Difficulty: Medium
11-141
85. (p. 424-426) Which of the following statements is false?

A. Investors often make the mistake of putting all of their "eggs in one basket."
B. The type of investments that individuals choose is often tied to their tolerance for risk.
C. Diversification in an investment portfolio is one way to lessen the risk factor.
D. The amount of time a specific investment has to work is of little importance when
choosing the investment alternative.
E. Younger investors tend to invest a large percentage of their nest egg in growth-oriented
investments.
Difficulty: Hard
86. (p. 426, 428) Which of the following investments would rank the highest with regard to
safety?
A. government bonds
B. common stock
C. preferred stock
D. corporate bonds
E. real estate
Bloom's: Analysis
Difficulty: Medium
87. (p. 427) Equity capital is money:

A. obtained from the owners of the business.
B. borrowed through banks.
C. obtained by employee benefit programs.
D. that has to be repaid.
E. that has been allocated to a retirement program.
Bloom's: Knowledge
Difficulty: Easy
11-142
88. (p. 427-428) A firm is short on cash. Which of the following would be paid first?
A. Dividends to common stock owners.
B. Interest to preferred stock owners.
C. Dividends to bond owners.
D. Interest to bond owners.
E. Dividends to preferred stock owners.
Difficulty: Hard
89. (p. 428) Garrett Jennings is thinking about buying an investment. The investment option that
he is thinking about buying represents the most basic form of ownership and pays a dividend.
The dividend on this investment is paid after all other payments and dividends have been
made. What investment is Garrett thinking about purchasing?
A. Common Stock
B. Preferred Stock
C. Corporate Bond
D. Real Estate
E. Mutual fund
Bloom's: Synthesis
Difficulty: Medium
90. (p. 428) Mike Lively is thinking about buying an investment. The investment option that he
is thinking about buying is an ownership claim on the company. The most important priority
he has with this investment is receiving dividends before dividends are paid to other types of
investments. What investment is Mike thinking about purchasing?
A. Common Stock
B. Preferred Stock
C. Corporate Bond
D. Real Estate
E. Mutual Fund
Bloom's: Synthesis
Difficulty: Medium
11-143
91. (p. 428) Kevin Bacon is thinking about buying an investment. The investment option that he
is thinking about buying is a written pledge by a corporation to repay a specified amount of
money. It also pays interest payments every 6 months until it matures. What investment is
Kevin thinking about purchasing?
A. Common Stock
B. Preferred Stock
C. Corporate Bond
D. Real Estate
E. Mutual Fund
Bloom's: Synthesis
Difficulty: Medium
92. (p. 428) A corporation selling stock is obligated to:

A. guarantee your investment.
B. repay money obtained from the sale of stock.
C. repurchase shares of stock at a later date.
D. pay dividends.
E. pay dividends to preferred stockholders before dividends are paid to common stockholders.
Difficulty: Medium

A. A corporation generally obtains equity capital from bondholders.
B. A corporation must issue either preferred stock or common stock but not both.
C. When a corporation is experiencing financial problems, an investor should purchase
common rather than preferred stock.
D. Most corporations sell options to satisfy a large part of their financing needs.
E. The most important priority a preferred stockholder enjoys is receiving cash dividends
before common stockholders receive cash dividends.
Difficulty: Hard
11-144
94. (p. 428) An investor can make money on a common stock investment by:
A. waiting for the corporation to repurchase the stock.
B. waiting for the stock's value to increase and then selling it.
C. waiting for the stock's value to decrease and then selling it.
D. waiting for the stock to reach the maturity date.
E. converting common stock to preferred stock.
Difficulty: Medium
95. (p. 428) The money obtained from selling corporate bonds:
A. is obtained from lenders.
B. is obtained from the owners of the business.
C. is obtained from employee stock option programs.
D. does not have to be repaid.
E. has been allocated to retirement programs.
Bloom's: Knowledge
Difficulty: Medium
96. (p. 428) Normally, corporate bondholders receive interest:

A. monthly.
B. every three months.
C. every six months.
D. yearly.
E. when the bond matures.
Bloom's: Knowledge
Difficulty: Medium
11-145
97. (p. 428) The maturity dates for most bonds range between ____________ years.
A. 0 to 5
B. 5 to 20
C. 10 to 20
D. 1 to 30
E. 15 to 40
Bloom's: Knowledge
Difficulty: Medium
98. (p. 428) A type of investment that combines and invests the funds of many investors and
manages it with a professional manager is called a(n):
A. NOW account.
B. securities exchange.
C. certificate of deposit.
D. mutual fund.
E. option fund.
Bloom's: Knowledge
Difficulty: Easy

A. Professional management is an especially important factor for investors purchasing a
mutual fund.
B. One of the many reasons why investors purchase mutual funds is interest rate risk.
C. With mutual funds, an occasional loss in one security is often accompanied by losses in
other securities.
D. Mutual funds are designed to appeal to conservative investors with no investment goals.
E. Professional market timers will choose the right mutual fund for a particular individual.
Difficulty: Hard
11-146
100. (p. 428-429) Hugh Jackman is thinking about buying an investment. The investment option
that he is thinking about buying is an investment where investors pool their money. One of the
key features is that it is managed by professional managers. What investment is Hugh
thinking about purchasing?
A. Common Stock
B. Preferred Stock
C. Corporate Bond
D. Real Estate
E. Mutual Fund
Bloom's: Synthesis
Difficulty: Medium
101. (p. 429) Chris O'Donnell is thinking about investing in an investment that is high risk in the
hopes of earning a relatively large profit in a short amount of time. What is he investing in?
A. A safe investment
B. Retained earnings
C. Dividends
D. A speculative investment
Bloom's: Synthesis
Difficulty: Medium
102. (p. 429) Bob McDowell is thinking about buying an investment. The investment option that
he is thinking about buying is a piece of property. The most important consideration when
making this investment is the location of the property. What investment is Bob thinking about
purchasing?
A. Common Stock
B. Preferred Stock
C. Corporate Bond
D. Real Estate
E. Mutual Fund
Bloom's: Synthesis
Difficulty: Easy
11-147
103. (p. 429) Which one of the following is not a true statement?
A. Most mutual funds invest in stocks, bonds, and other securities.
B. Diversification provided by a mutual fund reduces risk.
C. The goals of one mutual fund investor may differ from those of another.
D. Since mutual fund managers are professionals, there is no need to evaluate a mutual fund.
E. Mutual fund investments range from very conservative to very speculative investments.
Difficulty: Hard

A. It is not possible to overpay for real estate.
B. Location is the least important factor when making a real estate investment.
C. There are many factors to consider before investing in real estate.
D. There is no reason to evaluate a real estate investment because real estate always increases
in value sooner or later.
E. Finding a buyer for a piece of real estate is always easy.
Difficulty: Medium
105. (p. 430) Which of the following would not be considered a safe investment for a
conservative investor?
A. corporate bonds
B. certificates of deposit
C. passbook savings accounts
D. blue-chip stocks
E. collectibles
Difficulty: Medium
11-148
106. (p. 422, 426) Which of the following investments would provide the most predictable source
of income?
A. commodities
B. options
C. precious metals
D. common stock
E. government bonds
Difficulty: Medium
107. (p. 429) For an investor who wants to speculate, which of the following investments would
be appropriate?
A. blue-chip stocks
B. options
C. utility stocks
D. corporate bonds
E. preferred stock issues
Difficulty: Medium

A. When establishing an investment program, you should begin by monitoring your
investments.
B. When you are choosing an investment, you should examine only the interest rate risk factor
associated with each investment.
C. When establishing an investment program, you should examine the potential return offered
by different investment alternatives.
D. Leave the financial planning to the professionals.
E. There is no need to know the value of your investments after you have made your
investment decision.
Difficulty: Medium
11-149
109. (p. 434) Which of the following is the most readily available source of current price
information for an investment in stocks or bonds?
A. the daily newspaper
B. government publications
C. corporate reports
D. investor newsletters
E. business periodicals
Difficulty: Easy
110. (p. 435) Which of the following is not a business periodical?

A. Barrons
B. Business Week
C. New York Stock Exchange Report
D. Forbes
E. Fortune
Bloom's: Knowledge
Difficulty: Easy
111. (p. 434) Which of the following is not a true statement?

A. You can obtain recommendations to buy or sell stocks and other securities by accessing
Internet sites.
B. There is a wealth of investment information available, but most small investors cannot
afford to use it.
C. You can obtain current price information for stocks, bonds, and mutual funds by using the
Internet.
D. A search engine is a research tool that helps you find the investment information you want.
E. Both government and businesses provide individuals with investment information.
Difficulty: Hard
11-150
112. (p. 436) The fees for investor services and newsletters generally range from ____________
a year.
A. $10 to $20
B. $20 to $30
C. $30 to $1,000
D. $300 to $1000
E. over $1000
Bloom's: Knowledge
Difficulty: Easy
113. (p. 436-437) Standard & Poor's and Mergent's are companies that would be examples of
A. stockbrokers.
B. securities exchanges.
C. stock regulations.
D. investors' services.
E. stock underwriters.
Difficulty: Easy
11-151
Essay Questions
114. (p. 412-415, 431) After graduating from a community college, you obtain a job as a medical
records technician. Your monthly take-home salary is $2,000. Your monthly expenses are
$1,600. Based on this information, what steps should you take to establish a long-term
investment program?
The following steps for establishing an investment program are described in Chapter 13: (1)
The individual should establish investment goals and objectives. (2) The individual should
perform a financial checkup. (3) The individual should obtain enough money to start an
investment program. (4) The individual should establish a personal plan of action for
investing that includes the steps illustrated in Exhibit 13.6.
Bloom's: Synthesis
Difficulty: Medium
115. (p. 427-430) Choose four of the investment alternatives presented in Chapter 13 and describe
how the factors of safety, risk, income, growth, and liquidity affect that investment
alternative.
The answer to this question depends on which four investment alternatives students choose.
Exhibit 13.5 provides a summary of each factor for all investment alternatives presented in
this chapter.
Difficulty: Medium
11-152
116. (p. 424-425) Bob and Mary Martin are both 35 years old. And although they graduated from
college almost 15 years ago, they have never developed a diversified investment program.
What extra money they had was invested in high-tech stocks that did quite well until the last
five years. Then, with the economic downturn, they encountered major losses. How could
asset allocation have reduced the dollar amounts of the Martin's losses?
Asset allocation is the process of spreading your assets among several different types of
investments to lessen risk. Instead of investing all of their money in high-tech stocks, the
Martins could have taken a more diversified approach with some of their money invested in
more conservative stocks or mutual funds. Depending on their risk tolerance, they could have
also chosen to invest some of their money in corporate or government bonds. Using the
method of well-known personal financial expert, Suze Orman, the Martins should have 75
percent of their investments in growth-oriented investments. (The number 110 minus the
Martin's age 35 equals 75, p426.) The remainder of their money (25 percent) should have
been invested in safer, more conservative investments.
Bloom's: Synthesis
Difficulty: Hard
117. (p. 434-437) Describe the sources of investment information investors can use to evaluate a
potential investment.
In Chapter 13, the following sources of information were described: (1) the Internet and
online computer services, (2) newspapers and news programs, (3) business periodicals and
government publications, (4) corporate reports, and (5) investor services and newsletters.
Bloom's: Knowledge
Difficulty: Medium
11-153
1. (p. 447) Since 1926, stocks as measured by the Standard & Poor 500 Stock index have
returned on average about 10 percent a year.
TRUE
Bloom's: Knowledge
Difficulty: Easy
2. (p. 446) At maturity, corporations must repay stockholders the money they invested in the
company.
FALSE
Difficulty: Easy
3. (p. 446-447) Dividend payments on common stock are guaranteed, but the amount is
determined by the board of directors.
FALSE
Bloom's: Knowledge
Difficulty: Medium
4. (p. 447) A proxy is a legal form that lists the issues to be decided at a stockholders' meeting
and requests that stockholders transfer their voting rights to some individual or individuals.
TRUE
Bloom's: Knowledge
Difficulty: Easy
11-154
5. (p. 447-448) The record date is the date that the actual dividend payment is made to
stockholders.
FALSE
Bloom's: Knowledge
Difficulty: Medium
6. (p. 449) A stock split is a procedure in which a stockholder's common stock is exchanged for
preferred stock.
FALSE
Bloom's: Knowledge
Difficulty: Medium
7. (p. 450) Par value is the dollar value that an investor must pay in order to purchase preferred
stock.
FALSE
Bloom's: Knowledge
Difficulty: Medium
8. (p. 450) Preferred stock is often referred to as a middle investment somewhere between
common stock (an ownership position for the stockholder) and corporate bonds (a creditor
position for the bondholder).
TRUE
Difficulty: Medium
11-155
9. (p. 450) If an investor owns cumulative preferred stock, missed or omitted dividends
accumulate and must be paid before any cash dividend is paid to common stockholders.
TRUE
Bloom's: Knowledge
Difficulty: Medium
10. (p. 451) Convertible preferred stock may be exchanged, at the corporation's option, for a
specified number of shares of common stock.
FALSE
Difficulty: Easy
11. (p. 452) A blue-chip stock is too speculative for most investors.
FALSE
Difficulty: Easy
12. (p. 452) A stock that pays higher than average dividends is called an income stock.
TRUE
Bloom's: Knowledge
Difficulty: Easy
11-156
13. (p. 452) A cyclical stock is a stock that follows the business cycle of advances and declines
in the economy.
TRUE
Bloom's: Knowledge
Difficulty: Easy
11-157
14. (p. 452) A defensive stock is a stock that typically sells for less than $1.
FALSE
Bloom's: Knowledge
Difficulty: Easy
15. (p. 452) A large cap stock is a stock issued by a company that has capitalization of $10
billion or more.
TRUE
Bloom's: Knowledge
Difficulty: Medium
16. (p. 452) Because of the need for secrecy, most corporations do not supply financial
information about the company on their Web sites.
FALSE
Bloom's: Knowledge
Difficulty: Medium
17. (p. 455) Today, it is possible for investors to use newspapers to obtain current price
information about a corporation's stock values.
TRUE
Difficulty: Medium
11-158
18. (p. 453) By using the Internet, it is possible to find market price quotations, but more detailed
financial information about a corporation is unavailable to the average investor.
FALSE
Bloom's: Knowledge
Difficulty: Medium
19. (p. 453) It is common for professional advisory services like Morningstar, Standard & Poor's,
and Value Line to charge for more detailed financial information than provided on other
Internet Web sites.
TRUE
Bloom's: Knowledge
Difficulty: Hard
20. (p. 457) Many investors and analysts believe that a corporation's ability or inability to
generate earnings in the future may be one of the most significant factors that account for an
increase or decrease in the value of a stock.
TRUE
Difficulty: Medium
21. (p. 457) If a corporation's earnings decline, the stock's value usually increases.
FALSE
Difficulty: Medium
11-159
22. (p. 457) Earnings per share is a corporation's after-tax earnings divided by the number of
stockholders.
FALSE
Bloom's: Knowledge
Difficulty: Medium
23. (p. 457) An increase in a corporation's earnings per share is a healthy sign.
TRUE
Difficulty: Medium
24. (p. 457) The price-earnings ratio is the price of a share of stock divided by the corporation's
earnings per share of stock.
TRUE
Bloom's: Knowledge
Difficulty: Medium
25. (p. 457) Stocks issued by large corporations in mature industries often have high PE ratios.
FALSE
Bloom's: Knowledge
Difficulty: Medium
11-160
26. (p. 458) From an investor's standpoint, an increase in estimates for earnings per share is a
good sign.
TRUE
Difficulty: Medium
11-161
27. (p. 459) The dividend yield for a stock investment is calculated by dividing the annual
income amount by the stock's current market value.
TRUE
Bloom's: Knowledge
Difficulty: Medium
28. (p. 459) The total return calculation includes only an increase or decrease in the original
purchase price of the investment.
FALSE
Difficulty: Hard
29. (p. 460) The annualized holding period yield calculation takes into account the time the
investment is held.
TRUE
Difficulty: Medium
30. (p. 461) The book value for a share of stock is determined by deducting all liabilities from
the corporation's assets and dividing the remainder by the number of outstanding shares of
common stock.
TRUE
Difficulty: Medium
11-162
31. (p. 461) The beta is a measure that compares the volatility associated with a specific stock
issue with the volatility of the Standard & Poor 500 Stock index.
TRUE
Bloom's: Knowledge
Difficulty: Medium
32. (p. 462) The fundamental theory is based on the assumption that a stock's intrinsic or real
value is determined by the future earnings of the company.
TRUE
Bloom's: Knowledge
Difficulty: Easy
33. (p. 463) An investment bank is a financial institution where large corporations can deposit
excess cash for short periods of time.
FALSE
Bloom's: Knowledge
Difficulty: Medium
34. (p. 464) A securities exchange is a marketplace where member brokers who are representing
investors meet to buy and sell securities.
TRUE
Bloom's: Knowledge
Difficulty: Easy
11-163
35. (p. 465) The Nasdaq is an electronic marketplace for over 10,000 different stocks.
FALSE
Bloom's: Knowledge
Difficulty: Medium
36. (p. 468) A market order is a request that a stock be purchased or sold at the current market
price.
TRUE
Bloom's: Knowledge
Difficulty: Medium
37. (p. 467) The minimum commission charged by most brokerage firms for buying or selling
stock is between $7 and $55.
TRUE
Bloom's: Knowledge
Difficulty: Easy
38. (p. 468) A limit order allows investors to specify the price at which a security will be bought
or sold.
TRUE
Difficulty: Medium
11-164
39. (p. 465) The Securities Exchange Act of 1934 created the Securities and Exchange
Commission.
TRUE
Bloom's: Knowledge
Difficulty: Medium
40. (p. 469) Most speculators use a buy and hold technique.
FALSE
Bloom's: Knowledge
Difficulty: Medium
41. (p. 469) Dollar cost averaging enables investors to avoid the problem of buying high and
selling low.
TRUE
Difficulty: Medium
42. (p. 471) When investors purchase stock on margin, they borrow stock from a stockbroker or
brokerage firm.
FALSE
Difficulty: Medium
11-165
43. (p. 472-473) A call option gives the purchaser the right to sell 100 shares of a stock at a
guaranteed price before a definite expiration date.
FALSE
Bloom's: Knowledge
Difficulty: Medium
44. (p. 447) Amy Farmer receives something in the mail from the company she has purchased
stock in. This legal form lists the issues to be decided at the annual stockholders' meeting and
asks her to sign something that allows someone else to vote for her. What has she received in
the mail?
A. Equity
B. Proxy
C. Voting rights
D. Dividends
Difficulty: Medium
45. (p. 446) Jeff Goldblum has just purchased a security from a company. It has no maturity date
and can only receive the value of the security by selling it to another individual, or to the
company itself if the company offers to buy back the security. What type of security does Jeff
have?
A. Equity
B. Proxy
C. Voting Rights
D. Dividends
Difficulty: Medium
11-166
46. (p. 447) Matt Dannon just bought the stock of a company. He knows that with this stock
comes the responsibility to approve major actions taken by the company. What gives Matt this
responsibility?
A. Equity
B. Proxy
C. Voting Rights
D. Dividends
Difficulty: Medium
47. (p. 446-447) James Green just bought the stock of a company. He knows that he will receive a
cash payment from the company once a quarter, although the company is not obligated to
make this payment. What will he receive?
A. Equity
B. Proxy
C. Voting Rights
D. Dividends
Difficulty: Medium
48. (p. 449) Valerie Kilmer has purchased the stock of the Williams Widget Company. After she
buys the stock she is told that the number of shares she owns will be divided into a larger
number. In fact, she will get two shares for every share that she owns today. What has
happened to this company?
A. Dividend split
B. Proxy split
C. Stock split
D. Banana split
Bloom's: Evaluation
Difficulty: Medium
11-167
49. (p. 447-448) Sean Rouse has purchased the stock of the Stowaway Transportation Company.
The company is getting ready to pay a dividend. He knows he must be registered on the
corporation's books on the ________________ in order to receive the dividend.
A. Record date
B. Ex dividend date
C. Payment date
D. Purchased date
Bloom's: Evaluation
Difficulty: Medium
50. (p. 448) Orlando Blodgett is buying the stock of the Getaway Caribbean Cruise Company.
However, if he buys the stock today, he knows it is the first day it is selling without the
dividend for this quarter. What date is Orlando buying the stock on?
A. Record Date
B. Ex dividend date
C. Payment date
D. Sale date
Difficulty: Medium
51. (p. 449) Beverly Frickel purchased 100 shares of Gleason Systems stock for $42.50 per
share. Her commission for this purchase was $35. She sold the stock two years later for $55
per share and a commission of $50. While she held the stock it paid a dividend of $1.50 per
share. What was Beverly's total dollar return on this stock?
A. $1250
B. $1165
C. $150
D. $1315
E. $1400
Difficulty: Hard
11-168
52. (p. 449) Arnell Johnson bought 200 shares of Black Petroleum Company for $95 per share.
He paid a commission of $60 when he purchased this stock. He sold the stock five years later
for $120 per share. He paid a commission when he sold it of $75. While he held the stock, it
paid a dividend of $5.50 per share. What was Arnell's total dollar return on this stock?
A. $5000
B. $4865
C. $1100
D. $6100
E. $5965
Difficulty: Hard
53. (p. 450) Trevor Conklin is thinking about buying the preferred stock of Galloway Gems
Company. He knows that the dividend is a fixed amount and is determined by taking a
percentage of what value?
A. Par value
B. Market value
C. Present value
D. Future value
Difficulty: Medium
54. (p. 450) Bill Affleck is thinking about buying preferred stock of Ceylon Holdings. He wants
to be protected if the company needs to omit a dividend payment. He wants any unpaid
dividends to accumulate and be paid before any common stock dividends are paid. What
feature of preferred stock would protect Ben?
A. Convertible
B. Callable
C. Cumulative
D. Credible
Bloom's: Analysis
Difficulty: Medium
11-169
11-170
55. (p. 455-456) The federal government requires corporations selling new issues of securities to
disclose information about itself in a prospectus. Which of the following must be disclosed?
A. Corporate earnings.
B. Assets and liabilities.
C. Products or services.
D. Qualifications of top management.
E. All of the choices.
Difficulty: Medium
56. (p. 446) To raise capital, many corporate financial managers prefer selling common stock
because
A. it doesn't have to be repaid until 10 to 15 years after it has been issued.
B. interest payments to stockholders are lower than interest paid to a bank.
C. stockholders have no voice in selecting the board or directors.
D. interest paid to stockholders is tax deductible.
E. the money obtained from stockholders does not have to be repaid.
Difficulty: Hard
57. (p. 446) Dividends are paid out of profits, and:

A. dividend payments must be approved by the firm's board of directors.
B. dividends are guaranteed.
C. dividends are paid before a firm's taxes are paid.
D. dividends are usually paid twice a year.
Difficulty: Hard
11-171
58. (p. 446) Equity financing is a popular choice to provide long-term financing for a corporation
because:
A. a lender is always available to provide this type of financing.
B. it does not have to be repaid.
C. repayment doesn't have to be made for ten years or more.
D. only interest must be paid for the first five years.
E. it does not cost anything to sell in the primary market.
Difficulty: Medium
59. (p. 447) Apple Computer Corporation holds its annual meeting in April. Maxine Star, who
owns stock in the company, cannot attend the meeting. She can vote by:
A. voluntary certificate.
B. preemptive right.
C. proxy.
D. cumulative certificate.
E. participatory certificate.
Bloom's: Knowledge
Difficulty: Medium

A. Corporations are required by law to report all activities to their stockholders each month.
B. Stockholders must approve major changes to corporate policies.
C. Stockholders must approve the sale of all goods and services by the company.
D. Corporations are required by law to have two stockholder meetings each year.
E. Stockholders may vote only by proxy.
Difficulty: Medium
11-172

A. Most board members do not care what stockholders think.
B. Stockholders do not care what dividend a company pays.
C. Intelligent investors must be concerned about future after-tax profits.
D. If a cash dividend is declared by the board of directors, each stockholder receives a
different amount depending on who they know in the company.
E. Corporate dividends are always paid in cash.
Difficulty: Hard
62. (p. 448) Dividends remain with the stock until:

A. two business days before the date of record.
B. two business days after the date of record.
C. five days before the date of record.
D. five days after the date of record.
E. five days before the actual payment date.
Bloom's: Knowledge
Difficulty: Hard
63. (p. 447-448) Patsy Banz owns 220 shares of General Mills Corporation. For the last calendar
quarter, General Mills Corporation paid a dividend of $0.47 a share. What is the total amount
she received in her dividend check for this quarter?
A. $0.47
B. $47
C. $94
D. $103.40
E. It is impossible to calculate the total dividend amount with this information.
Difficulty: Medium
11-173
64. (p. 449) Jo Bower owns 150 shares of Data General stock. She purchased the stock for $24 a
share. She sold her stock for $30 a share. The commissions required to buy and sell her stock
totaled $120. Assuming that she received no dividends during the time she owned the stock,
what is her total return for this transaction?
A. $600
B. $780
C. $900
D. $2,400
E. $3,000
Difficulty: Hard
65. (p. 449) James Turbyfil purchased 100 shares of IBM for $72. James also paid $55
commission. What was the total purchase price for this transaction?
A. $55
B. $72
C. $7,237.50
D. $7,255.00
E. $7,347.50
Difficulty: Hard
66. (p. 449) If the board of directors approves a two for one stock split, an investor who owns
150 shares before the split owns ____________ shares after the split.
A. 75
B. 150
C. 225
D. 300
E. 450
Difficulty: Medium
11-174
67. (p. 449) When the board of directors approves a two for one stock split, the price for each
share of stock most likely:
A. decreases in value.
B. increases in value.
C. remains unchanged.
D. is guaranteed to go up within a short period of time.
E. increase to twice of its former value.
Difficulty: Hard
68. (p. 450) The par value for a share of preferred stock is:
A. what an investor can buy a share of preferred stock for on the open market.
B. an assigned dollar value that is printed on a stock certificate.
C. always twice the actual market price that an investor pays for a share of the stock.
D. always one half the market price that an investor pays for a share of the stock.
E. no longer used.
Bloom's: Knowledge
Difficulty: Easy
69. (p. 450) The type of stock in which stockholders are assured that omitted dividends will be
paid to them before other dividends are paid is ____________ stock.
A. common
B. convertible preferred
C. participating preferred
D. cumulative preferred
E. callable preferred
Bloom's: Knowledge
Difficulty: Medium
11-175
70. (p. 451) The type of preferred stock that may be exchanged at the stockholder's option for
common stock is:
A. corporate bond.
B. convertible preferred stock.
C. participating preferred stock.
D. cumulative preferred stock.
E. callable preferred stock.
Bloom's: Knowledge
Difficulty: Medium
71. (p. 452) A very safe investment that generally attracts conservative investors is called a(n)
____________ stock.
A. penny
B. cyclical
C. growth
D. small cap
E. blue chip
Bloom's: Knowledge
Difficulty: Easy
72. (p. 452) A stock that pays higher than average dividends is called a(n) ____________ stock.
A. defensive
B. cyclical
C. growth
D. income
E. blue-chip
Bloom's: Knowledge
Difficulty: Easy
11-176
73. (p. 452) A stock that remains stable during declines in the economy is called a(n)
____________ stock.
A. defensive
B. cyclical
C. growth
D. income
E. blue-chip
Bloom's: Knowledge
Difficulty: Easy
74. (p. 452) A stock that follows the business cycle of advances and declines in the economy is
called a(n) ____________ stock.
A. defensive
B. cyclical
C. growth
D. income
E. blue-chip
Bloom's: Knowledge
Difficulty: Easy
75. (p. 452) A stock issued by a corporation that has the potential of earning above-average
profits when compared to other firms in the economy is called a(n) ____________ stock.
A. defensive
B. cyclical
C. growth
D. income
E. blue-chip
Bloom's: Knowledge
Difficulty: Medium
11-177
76. (p. 452) A stock that sells for less than $1 per share is called a:
A. fractional stock.
B. penny stock.
C. dollar stock.
D. ten-dollar stock.
E. bad investment.
Bloom's: Knowledge
Difficulty: Medium
77. (p. 452) A stock that is issued by a corporation that has a large amount of capitalization is
called a(n) ____________ stock.
A. small cap
B. midcap
C. large cap
D. unlimited cap
E. giant cap
Bloom's: Knowledge
Difficulty: Easy
78. (p. 452) A small-cap stock is defined as a corporation that has total capitalization of between
$250 million and
A. $500 million.
B. $750 million.
C. $1 billion.
D. $2 billion.
E. no capitalization.
Bloom's: Knowledge
Difficulty: Medium
11-178
79. (p. 452-453) Which of the following statements is true?

A. It is possible to obtain financial information about a corporation that issues stock by using
the Internet.
B. While it is possible to obtain information about a company by accessing the Internet, the
information is usually out of date.
C. You can use an Internet search engine to only access a company's price information.
D. Corporations do not have home pages.
E. By using the Yahoo finance Web site, investors can access financial information only about
the economy as a whole.
Difficulty: Medium
80. (p. 452-453) By using the Yahoo! Finance Web site, an investor can find information on all of
the following except:
A. historical prices.
B. the corporation's stock symbol.
C. current market values.
D. research information.
E. actual market values in the future.
Bloom's: Knowledge
Difficulty: Hard
81. (p. 452-453) Which of the following is a true statement?

A. When choosing a stock advisory service that charges fees for their investment advice, the
quality of the information is always excellent.
B. Mergent's Investors Service provides information about bonds only.
C. Value Line provides information about bonds and mutual funds, but not common stocks.
D. The information provided by investors' services consists of simple alphabetical listings
only.
E. Online computer services may be used to research companies and to obtain current stock
prices.
Difficulty: Hard
11-179
82. (p. 455-456) The federal government requires that a corporation selling a new issue of
securities must disclose information about the company and its finances in a(n):
A. annual report.
B. quarterly report.
C. accountant's audit report.
D. prospectus.
E. stock guide.
Bloom's: Knowledge
Difficulty: Medium
83. (p. 452) Anthony Edwards wants to diversify his portfolio. He wants to add a stock that
remains stable when there is a decline in the economy. What type of stock does Anthony want
to add to his portfolio?
A. Defensive stock
B. Cyclical stock
C. Small cap stock
D. Blue chip stock
E. Growth stock
Bloom's: Analysis
Difficulty: Medium
84. (p. 452) George Clancy wants to diversify his portfolio. He wants to add a stock that follows
the business cycle. When the economy advances his stock advances and visa versa. What type
of stock is George thinking about adding to his portfolio?
A. Defensive stock
B. Cyclical stock
C. Small cap stock
D. Blue chip stock
E. Growth stock
Bloom's: Analysis
Difficulty: Medium
11-180
85. (p. 452) Mary Sheets wants to diversify her portfolio. She wants to add a stock that has
capitalization between $250 million and $2 billion. What type of stock is Mary thinking about
buying?
A. Defensive stock
B. Cyclical stock
C. Small cap stock
D. Blue chip stock
E. Growth stock
Bloom's: Analysis
Difficulty: Medium
86. (p. 452) Sean Barber is a conservative investor. He wants to invest in a stock that is safe and
suitable for conservative investors and less speculative than other stocks. What type of stock
would be the best type of stock for Sean to purchase?
A. Midcap stock
B. Cyclical stock
C. Small cap stock
D. Blue chip stock
E. Growth stock
Bloom's: Analysis
Difficulty: Medium
87. (p. 452) Kay Powers wants to diversify her portfolio. She wants to add a stock that has the
potential to earn above average profits compared to other firms in the economy. What type of
stock is Kay thinking about adding to her portfolio?
A. Defensive stock
B. Cyclical stock
C. Small cap stock
D. Blue chip stock
E. Growth stock
Bloom's: Analysis
Difficulty: Medium
11-181
88. (p. 452, 457) Which of the following statements is false?

A. Numerical measures can help investors decide if it is time to buy or sell a stock.
B. Future earnings may be one of the most significant measures to examine when evaluating a
stock.
C. Higher earnings generally equate to higher stock value.
D. Corporate earnings are reported in a firm's annual report.
E. To date, it is impossible to determine corporate earnings by using the Internet.
Difficulty: Hard
89. (p. 457) Mellon Manufacturing has after-tax income of $3 million. It also has 2 million
shares of stock outstanding. What is the firm's earnings per share?
A. $3 a share
B. $2 a share
C. $1.50 a share
D. $0.67 a share
E. None of these answers is correct.
Difficulty: Hard
90. (p. 457) Barker Creek Clothing has after-tax income of $12.8 million. It also has 32 million
shares of stock outstanding. What is the firm's earnings per share?
A. $4.48 a share
B. $3.20 a share
C. $1.28 a share
D. $0.40 a share
E. $0.80 a share
Difficulty: Hard
11-182
91. (p. 457) Masterworks Manufacturing has after-tax profits that total $625,000. If the firm has
250,000 shares, what is the amount of earnings per share?
A. $0.40
B. $1
C. $2
D. $2.50
E. It is impossible to calculate earnings per share with this information.
Difficulty: Medium
92. (p. 457) Last year, High-Tech Electronics earned $1.50 per share. If the current market value
for a share of stock is $45, what is the firm's PE ratio?
A. 0.033
B. 3.3
C. 30
D. 33
E. It is impossible to calculate a PE ratio with this information.
Difficulty: Hard
93. (p. 457) Acme Widget, Inc. has 1,000 shareholders who own a total of one million shares of
its common stock currently selling at $5 per share. The company earned $10,000,000 after
taxes. The annual dividend is $0.50 per share. The firm has assets of $125,000,000 and
liabilities of $25,000,000. What are the earnings per share for Acme Widget's common stock?
A. $1
B. $10
C. $100
D. $1,000
E. $10,000
Difficulty: Hard
11-183
liabilities of $25,000,000. What is the dividend yield for Acme Widget's common stock?
A. $10,000
B. $5.00
C. 5%
D. 10%
E. Depends on the stockholders purchase price of the stock.
Difficulty: Hard
95. (p. 459) To calculate dividend yield, the annual income amount is divided by:
A. market value.
B. original value.
C. future return.
D. current return.
E. total return.
Difficulty: Medium
96. (p. 459) Becky Martinez owns stock in GBX Corporation. The GBX stock has a market
value of $50 a share. If Becky receives $4.50 a year in dividends, what is the dividend yield?
A. 7 percent
B. 8 percent
C. 9 percent
D. 11.1 percent
E. It is impossible to calculate the current yield with the above information.
Difficulty: Hard
11-184
97. (p. 459) General Electric has a current market price of $75. The corporation has paid a
dividend of $3.75 over the last 12 months. What is the dividend yield?
A. 2 percent
B. 4 percent
C. 5 percent
D. 10 percent
E. 20 percent
Difficulty: Hard
98. (p. 459-460) Assume that you purchased 100 shares of Exxon stock for $55 a share, that you
received an annual dividend of $2.00 a share, and that you sold your Exxon stock for $65 a
share at the end of one year. What is the total return for your investment? (Ignore commission
amounts for this question.)
A. $200
B. $1,000
C. $1,200
D. $1,500
E. $2,200
Difficulty: Hard
99. (p. 459-460) Assume that you purchased 100 shares of Home Depot stock for $70 a share, that
you received an annual dividend of $0.60 a share, and that you sold your Home Depot stock
for $80 a share at the end of one year. What is the total return for your investment? (Ignore
commission amounts for this question.)
A. $10
B. $60
C. $760
D. $860
E. $1,060
Difficulty: Hard
11-185
100. (p. 460) A yield calculation that takes into account the total return, the original investment,
and the time that the investment is held is called ____________ yield.
A. current
B. dividend
C. annualized holding period
D. capital gain
E. original investment
Bloom's: Knowledge
Difficulty: Medium
liabilities of $25,000,000. What is the book value per share for Acme Widget's common
stock?
A. $100,000,000
B. $125
C. $10
D. $100
Difficulty: Hard
102. (p. 461) Assume the beta for the stock market in general is 1.0 and that the beta for World-
Wide Television Productions is 2.4. If the stock market increases by 10 percent, how much
will the stock for World-Wide Productions increase?
A. 12 percent
B. 20 percent
C. 24 percent
D. 48 percent
E. It is impossible to calculate the amount of increase with this information.
Difficulty: Hard
11-186
103. (p. 461) Book value is determined by:

A. deducting liabilities from assets and dividing the remainder by owner's equity.
B. deducting liabilities from assets and dividing the remainder by the number of shares of
stock outstanding.
C. dividing liabilities by the number of shares of stock outstanding.
D. dividing assets by the number of shares of stock outstanding.
E. dividing the sum of assets and owner's equity by the number of shares of stock outstanding.
Difficulty: Hard
104. (p. 461) ABC Corporation has assets that total $12 million and liabilities that total $4
million. It also has 500,000 shares of stock outstanding. What is the ABC's book value per
share?
A. $32
B. $24
C. $16
D. $8
E. $0
Difficulty: Hard
105. (p. 461) Quincy Martin Manufacturing stock has a market value of $48 a share. If the book
value is $40 a share, the firm's market-to-book ratio is
A. 0.83
B. 1
C. 1.2
D. 2
E. It is impossible to calculate the market-to-book ratio with this information.
Difficulty: Hard
11-187
106. (p. 462) An investment theory based on the assumption that a stock's intrinsic or real value
is determined by the future earnings of the company is called the ____________ theory.
A. fundamental
B. technical
C. efficient market
D. primary
E. market
Bloom's: Knowledge
Difficulty: Medium
107. (p. 462) An investment theory based on the assumption that a stock's market value is
determined by the forces of supply and demand in the stock market as a whole is called the
____________ theory.
A. fundamental
B. technical analysis
C. efficient market
D. primary
E. market
Bloom's: Knowledge
Difficulty: Medium
108. (p. 462) An investment theory based on the assumption that stock price movements are
purely random is called the ____________ theory.
A. fundamental
B. technical
C. efficient market
D. primary
E. market
Bloom's: Knowledge
Difficulty: Medium
11-188
109. (p. 457, 460) The Arnold Fertilizer Company's stock is selling for $55 in the market and its
earnings per share is $5. The Arnold Fertilizer Company is projected to grow at a rate of 22%
over the next year. What is this company's price/earnings to growth (PEG) ratio?
A. 11
B. 2
C. .5
D. 50
Difficulty: Hard
110. (p. 459) Jackie Artmeyer has purchased the stock of Fred Manufacturing Company. Fred
Manufacturing Company paid an annual dividend of $0.65. Its earnings per share was $2.50.
This stock is selling in the market for $35. What is this firm's dividend payout ratio?
A. 1.86%
B. 3.85%
C. 14%
D. 26%
Difficulty: Hard
111. (p. 463) A market in which an investor purchases financial securities (via an investment
bank or other representative) from the issuer of those securities is called the ____________
market.
A. technical
B. fundamental
C. efficient
D. secondary
E. primary
Bloom's: Knowledge
Difficulty: Easy
11-189
112. (p. 463) A market for existing financial securities that are currently traded between
investors is called the ____________ market.
A. technical
B. fundamental
C. efficient
D. secondary
E. primary
Bloom's: Knowledge
Difficulty: Easy

A. An investment bank is a financial firm that assists organizations in raising funds.
B. A corporation often deposits excess cash in an investment bank.
C. An investment bank provides checking services for large corporations.
D. Most investment banks help investors buy and sell a corporation's stock.
E. Under current laws, an investment bank provides services to individuals but cannot provide
banking services to corporations.
Difficulty: Hard
114. (p. 464) In order for a corporation's stock to be bought and sold on the New York Stock
Exchange, a corporation must do all except one of the following. Which of the statements
below is incorrect?
A. A corporation's annual earnings before federal taxes must be at least $10 million for the
most recent three years.
B. A corporation's stock must be approved for listing on the NYSE.
C. The market value of its publicly held stock must exceed $25 million.
D. A corporation must have a total of at least 400 shareholders who each own 100 or more
shares or there are at least 2,200 total shareholders.
E. A corporation must have at least $75 million in revenues for the most recent year.
Difficulty: Hard
11-190
115. (p. 464-465) Which one of the following is a true statement?

A. The over-the-counter market is a network of account executives who buy and sell the
securities of corporations that are not listed on a securities exchange.
B. Account executives in the OTC market specialize or make a market in any listed security.
C. OTC trading is for investors who want to buy or sell stocks in stores.
D. Account executives' operating in the OTC market use specialists to help them trade
securities.
E. Nasdaq is regulated by the New York Stock Exchange.
Difficulty: Hard
116. (p. 468) A request that a stock be bought or sold at the current market price is called a
____________ order.
A. market
B. limit
C. stop
D. round
E. discretionary
Bloom's: Knowledge
Difficulty: Easy
117. (p. 468) A request that a stock be bought or sold at a specified price is called a
____________ order.
A. market
B. limit
C. stop
D. round
E. discretionary
Bloom's: Knowledge
Difficulty: Easy
11-191
118. (p. 468) A request that an order be executed at the next available opportunity after the
market price of the stock reaches a specified price is called a ____________ order.
A. market
B. limit
C. stop
D. round
E. discretionary
Bloom's: Knowledge
Difficulty: Easy
119. (p. 468) Jennifer Fritz is thinking about purchasing the stock of the Sunshine Corporation at
the current market value. What type stock transaction is she making?
A. A market order
B. A limit order
C. A stop order
D. A discretionary order
Bloom's: Analysis
Difficulty: Medium
120. (p. 468) Sarah Harper wants to buy the stock of Experian Company at a specified price.
What type of stock transaction is she making?
A. A market order
B. A limit order
C. A stop order
Bloom's: Analysis
Difficulty: Medium
11-192
121. (p. 468) Carol Fisher wants to sell the stock of Hathaway International at the next available
price after the prices reaches $50 per share. What type of transaction is Carol making?
A. A market order
B. A limit order
C. A stop order
Bloom's: Analysis
Difficulty: Medium
122. (p. 469-470) A long-term technique used by investors who purchase an equal dollar amount
of the same stock at equal intervals in time is called:
A. dollar cost averaging.
B. dividend reinvestment plan.
C. buy and hold technique.
D. regulated transaction.
E. secured transaction.
Bloom's: Knowledge
Difficulty: Medium
123. (p. 470) A long-term investment technique used by investors to purchase stock without
paying a commission to a broker is called
A. dollar cost appreciation.
B. direct investment plan.
C. unregulated transaction.
D. regulated transaction.
E. over-the-counter transaction.
Bloom's: Knowledge
Difficulty: Medium
11-193

A. When buying stock on margin, an investor borrows stock from the brokerage firm.
B. Usually, a bank arranges for the loan in a margin transaction.
C. Investors buy on margin because doing so offers them the potential for greater profits.
D. The margin requirement is established by the New York Stock Exchange.
E. The current margin requirement is 25 percent.
Difficulty: Hard

A. When an investor buys stocks and assumes they will increase in value, he or she is using a
procedure called selling short.
B. Selling short is selling stock that has been borrowed a from brokerage firm.
C. When you sell short, you buy today, knowing that you must sell or cover your short
transaction at a later date.
D. In a short transaction, if the stock increases in value, the investor makes money.
E. To make money in a short transaction, you must be correct in predicting that a stock will
increase in value.
Difficulty: Hard
126. (p. 473) To safeguard investments, stock owners who believe that the price of their stock
will go down during an option period will purchase a
A. futures contract.
B. short contract.
C. call option.
D. put option.
E. margin contract.
Difficulty: Easy
11-194
Essay Questions
127. (p. 446-450) Describe why corporations issue common stock. Describe why investors
purchase common stock.
Corporations issue common stock for the following reasons. First, common stock is a form of
equity financing that does not have to be repaid. Second, dividends are not mandatory. It
should be pointed out that corporations do have to consider voting rights and control of the
company before issuing common stock.
Investors purchase common stock for three reasons. First, an investment in common stock can
provide income from dividends. Second, an investment in common stock can appreciate or
increase in value. Finally, an investment in common stock can increase in value as a result of
stock splits. Note: There are no guarantees that a stock's market value will go up after a stock
split.
Difficulty: Medium
128. (p. 450-451) What is the primary difference between common stock and preferred stock?
The most important priority that an investor in preferred stock enjoys is receiving cash
dividends before common stockholders are paid any cash dividends. This factor is especially
important when a corporation is experiencing financial problems and cannot pay cash
dividends to both preferred and common stockholders. Of lesser importance is the fact that
preferred stockholders do have a first claim when compared to common stockholders if the
firm enters bankruptcy or is dissolved. In reality, this priority claim is seldom of value
because if the firm enters bankruptcy the creditors (including bondholders) have to be paid in
full before preferred or common stockholders receive anything.
Difficulty: Medium
11-195
129. (p. 466-467) Describe the difference between a full-service, discount, and online brokerage
firms.
While student answers may vary, answers should include information about the level of
service, the amount of research available, and the dollar amount of commissions charged to
buy and sell securities.
Difficulty: Medium
130. (p. 469-473) Matthew Boyd asks for your help! He has saved $10,000 and wants to invest in
common stock. Choose one of the long-term or short-term techniques described in this
chapter and explain how that method could help Matthew achieve his investment goals.
Students may choose one of the following methods: (1) buy and hold technique; (2) dollar
cost averaging; (3) direct investment; (4) dividend reinvestment; (5) day trading; (6) buying
stock on margin; (7) selling short; or (8) trading in options. Specific material that should be
included for each of these topics is included in Chapter 14. Also, this question is an
opportunity to point out that most investors should be interested in long-term investment
techniques as opposed to short-term, more speculative techniques.
Bloom's: Evaluation/Analysis
Difficulty: Medium
131. (p. 469-470) Explain what dollar cost averaging is and why an investor would use the
technique.
Dollar cost averaging is a long term technique used by investors who purchase equal amounts
of the same stock at equal intervals. According to the book, dollar cost averaging helps avoid
the "common pitfall" of buying high and selling low. With dollar cost averaging, the investor
will make money as long as the stock is sold at a price higher than the average cost for a share
of stock.
Difficulty: Medium
11-196

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Chapter 011 Health, Disability, and Long-Term Care Insurance

True / False Questions

50. (p. 362) Medicare Supplement insurance is a government-sponsored program.

Multiple Choice Questions

77. (p. 343) Health insurance includes:

101. (p. 345) A good health insurance plan should:

104. (p. 345) A good health insurance plan should:

109. (p. 347) Dental expense insurance provides reimbursement for:

112. (p. 346) Which of the following is true?

113. (p. 346) Which of the following is false?

114. (p. 351) In choosing health insurance, ideally, you should:

117. (p. 353) Health insurance is available from:

123. (p. 361) What is covered by Medicare?

126. (p. 361) Medigap is sold or serviced by:

132. (p. 358) Hospital insurance is which part of Medicare?

133. (p. 358) Medical insurance is which part of Medicare?

142. (p. 366) The definition of disability:

148. (p. 367) In most employer-sponsored disability income insurance plans:

152. (p. 344) Which of the following is true?

154. (p. 366) Which of the following is false?

True / False Questions

8. (p. 378) Life insurance proceeds may provide a retirement income.

27. (p. 384) Most life insurance companies are mutuals.

Multiple Choice Questions

85. (p. 377) Which is a correct statement about life insurance?

87. (p. 378) Probability as used in life insurance relates to the:

95. (p. 381) A two-earner couple may have:

102. (p. 382) The DINK method assumes that:

117. (p. 384) Which of the following is not true?

118. (p. 384) A participating life insurance policy has

119. (p. 384) Most participating policies are sold by

135. (p. 390) Fundamentally, group insurance is ____________ insurance.

154. (p. 393) A beneficiary is a person who:

158. (p. 396) In planning your insurance program, you should:

166. (p. 399) The prices of life insurance policies:

170. (p. 403) The annuity is often described as being:

171. (p. 403) A prime reason for buying an annuity is to:

True / False Questions

6. (p. 415) Generally, it is not a good idea to participate in an employer-sponsored retirement

9. (p. 417) There is no relationship between risk and safety.

Multiple Choice Questions

37. (p. 412) Which of the following is a true statement?

43. (p. 413) An emergency fund should be deposited in a:

58. (p. 421) Which of the following is a true statement?

70. (p. 422) Which of the following statements is true?

85. (p. 424-426) Which of the following statements is false?

87. (p. 427) Equity capital is money:

92. (p. 428) A corporation selling stock is obligated to:

93. (p. 428) Which of the following is a true statement?

96. (p. 428) Normally, corporate bondholders receive interest:

99. (p. 428) Which of the following is a true statement?

104. (p. 429) Which of the following is a true statement?

108. (p. 430) Which of the following statements is true?

110. (p. 435) Which of the following is not a business periodical?

111. (p. 434) Which of the following is not a true statement?

True / False Questions

Multiple Choice Questions

57. (p. 446) Dividends are paid out of profits, and:

60. (p. 447) Which of the following statements is true?

61. (p. 447) Which of the following statements is true?

62. (p. 448) Dividends remain with the stock until:

79. (p. 452-453) Which of the following statements is true?

81. (p. 452-453) Which of the following is a true statement?