PFIN3 3rd Edition Gitman Test Bank 1

PFIN3 3rd Edition Gitman Test
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Chapter 5—Making Automobile and Housing Decisions
TRUE/FALSE
1. An automobile is a personal use asset for most buyers.
ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-1

NAT: BUSPROG: Analytic skills STA: DISC: Investments
TOP: Bloom's: Comprehension
2. The greatest fixed cost involved with owning an automobile is usually the monthly loan payments.

KEY: Bloom's: Comprehension
3. The greatest fixed cost involved with owning an automobile is usually the auto insurance payments.
ANS: F PTS: 1 DIF: Easy OBJ: LO: 5-1

4. Gasoline is a variable cost of automobile ownership.

5. Automobiles tend to decrease in value over time.

6. Fixed automobile costs increase as the number of miles driven increase.
ANS: F PTS: 1 DIF: Moderate OBJ: L): 5-1

TOP: Bloom's: Analysis
7. Most new car warranties cover a minimum of the first 36,000 miles or 3 years of ownership.

TOP: Bloom's: Knowledge
8. Most new car warranties cover a minimum of the first 72,000 miles or 6 years of ownership.

KEY: Bloom's: Knowledge
9. A closed-end automobile lease is the most popular type of lease.
ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-1

10. Terminating a car lease before expiration is often difficult and costly.

11. The largest single investment you will undertake in your lifetime will probably be the purchase of an
automobile.
ANS: F PTS: 1 DIF: Moderate OBJ: LO: 5-1

KEY: Bloom's: Synthesis
12. Less rapid depreciation is one advantage of buying a new car rather than a used car.

13. Low-balling is a sales technique where the salesperson quotes a low price for a car then tries to get you
to purchase a different, more expensive vehicle.

14. Low-balling is a sales technique where the salesperson quotes a low price for a car to get you to make
an offer, and negotiates the price upward prior to signing the sales agreement.

15. You should secure the trade in value of your current automobile before you start negotiating the final
price on the car you are purchasing.
ANS: F PTS: 1 DIF: Challenging OBJ: LO: 5-1

KEY: Bloom's: Application
16. Capitalized cost on an auto lease is similar to the interest rate on a loan.

17. Capitalized cost on an auto lease is the same as the price of the car.
ANS: T PTS: 1 DIF: Challenging OBJ: LO: 5-2

KEY: Bloom's: Analysis
18. The money factor on an auto lease is similar to the interest rate on a loan.

19. Early termination clauses on an auto lease typically apply to cars that are stolen or totaled in an
accident as well as when you just want to return the vehicle before the end of the lease.

20. When buying a used car, it is very important to have it checked by a reputable mechanic.

21. The sales contract on an automobile purchase contractually binds you to purchase the car at the price
you offered in the contract.

22. To make a legally binding offer on a car, you must sign a sales contract that specifies the offering price
and all the conditions of your offer.

23. One who leases an automobile is typically responsible for early termination costs, even when early
termination is due to theft or auto accidents.

24. The largest single investment you will undertake in your lifetime will probably be the purchase of a
house.

25. The term condominium refers to a style of architecture.

26. Townhome, condominium and co-op owners can deduct real estate taxes and mortgage interest on
their federal income taxes.

27. Condominium and Townhome owners can deduct real estate taxes and mortgage interest on their
federal income taxes but co-op owners cannot take these deductions.

28. A condominium or townhome buyer will make monthly mortgage payments as well as pay a fee for
services and maintenance of common areas.

29. In a co-op, the buyer receives title to a unit and joint ownership of the common areas.

30. In a condominium and townhome, the buyer receives title to an individual unit and joint ownership of
the common areas.

31. A significant legal difference between a cooperative and a condominium is that the condominium
owner normally holds a title to the property.

32. As a homeowner, the federal government may allow you to deduct interest expenses and taxes paid on
the property.

33. There are large regional differences in the price of housing.

34. Condominiums and townhomes are generally less costly than single-family, detached homes.

35. You can deduct mortgage interest and property taxes on your home to reduce your federal income
taxes only if you itemize deductions.

36. The federal income tax advantage gained from home ownership will depend on the amount of
deductible interest and property taxes and your total income.

37. The difference between the market value of your home and the balance of the mortgage is your equity
in the property.

38. A loan-to-value ratio of 80 percent would require a buyer to make a 20% down payment.

39. A loan-to-value ratio of 90 percent would require a buyer to make a 90% down payment.

40. A lender will generally require mortgage insurance if the down payment is less than 20 percent.

41. Points paid to secure a mortgage to purchase a primary residence will generally be tax deductible as
interest in the year they are paid.

42. A 5 percent down payment will result in larger monthly mortgage payments than a 10 percent down
payment on the same house for the same maturity mortgage.

43. The monthly mortgage payment divided by your monthly gross income equals an affordability ratio.

44. The market price of a house is $125,000 and the homebuyer will borrow $100,000. Two points will
equal $2,000.

KEY: Bloom's: Evaluation
45. The market price of a house is $125,000 and the homebuyer will borrow $100,000. Two points will
equal $2,500.

46. You will need to purchase homeowners insurance equal to the purchase price of the house you are
buying.
47. An inflation hedge is an asset that increases in value at a rate equal to or greater than the rate of
inflation.

48. The down payment is typically the only substantial housing cost that must be paid at the time of the
purchase.

49. First-time homebuyers can withdraw up to $10,000 from an IRA without penalty regardless of their
age.

50. First-time homebuyers can withdraw up to $25,000 from an IRA without penalty if they are 30 years
of age or less.

51. A PITI payment is composed of principal, interest, real estate taxes, and insurance.

52. Private Mortgage Insurance (PMI) protects the lender from loss on a loan.

53. Security deposits are controlled by the tenant.

54. A real estate sales contract contains the terms and provisions which establish the sale's transaction.
ANS: T PTS: 1 DIF: Moderate OBJ: LO:5-5

55. Points paid when a home is refinanced can all be deducted as interest in the year they are paid.

56. The cost of a title search and title insurance are typically part of the closing costs on a housing
transaction.

57. Earnest money deposits and contingency clauses are usually specified in the sale contract.

58. If you are buying a house that is for sale by the owners, the earnest money goes directly to the seller.

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

60. If a buyer withdraws from a transaction without a valid reason after signing a sales contract, he
typically loses his earnest money.

61. To be legally binding, real estate buy-sell agreements must be in writing, but leases may be oral.

62. The interest rate charged on adjustable-rate mortgages will change from time to time based on a
specified index.

63. Negative amortization is possible with a fixed-rate mortgage.

64. Negative amortization is possible with an adjustable-rate mortgage.

65. A FHA loan is insured by the federal government.

66. The Veterans Administration guarantees mortgage loans given to qualified veterans.

67. The affordability ratios used to qualify applicants for FHA and VA loans are more stringent than those
used for conventional loans.

68. To refinance a mortgage, the lender typically requires at least 20% equity in the home.

69. Other factors being equal, fixed-rate mortgages will have higher interest rates initially than adjustable-
rate mortgages.

70. Adjustable-rate mortgages with monthly payment caps can lead to negative amortization.

71. Adjustable-rate mortgages with interest rate caps can lead to negative amortization.

72. Graduated payment mortgages and growing equity mortgages are both examples of adjustable-rate
mortgages.

73. Commercial banks are an important source of both mortgage loans and interim construction loans.

74. One can increase the tax benefits of homeownership by selecting a shorter term mortgage, for example
15 years rather than 30 years.

75. Balloon payment mortgages generally must be refinanced.

76. According to federal law, private mortgage insurance on most loans currently made ends automatically
once the mortgage is paid down to 78% of the original value of the house.

77. According to federal law, private mortgage insurance on most loans currently made ends automatically
once the mortgage is paid down to 80% of the original value of the house.

78. An adjustable rate mortgage with a baseline rate of 4%, a margin of 1%, and an annual cap of 1%
would have an initial mortgage rate no higher than 6%.

79. An adjustable rate mortgage with a baseline rate of 5%, a margin of 2%, and an annual cap of 1%
would have an initial mortgage rate of 7%.

80. The interest rate is lower on a 6-year auto loan than on a 3-year auto loan

NAT: BUSPROG: Analytic skills KEY: Bloom's: Analysis
81. The monthly payment is lower in a 6-year auto loan than on a 3-year auto loan.

82. The “rent ratio” has fallen as home prices have fallen.

NAT: BUSPROG: Analytic skills KEY: Bloom's: Knowledge
83. An increase in the “rent ratio” indicates that renting is more affordable relative to housing prices.

84. Renting affords more flexibility than home ownership.

85. A short sale does not affect a distressed homeowner’s credit score as much as a foreclosure.

NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
MULTIPLE CHOICE
1. Variable auto ownership costs are most dependent on

a. driver behavior.
b. mileage driven.
c. city lived in.
d. down payment.
e. hours driven.
ANS: B PTS: 1 DIF: Moderate OBJ: LO: 5-1
2. ____ is a fixed auto ownership cost.

a. Gasoline
b. Installment loan payment
c. Auto insurance
d. Maintenance
e. b and c
ANS: E PTS: 1 DIF: Moderate OBJ: LO: 5-1
3. The loss of value in a car over time is called

a. maintenance.
b. loan payments.
c. sales payments.
d. commissions.
e. depreciation.
4. The first step in the auto-buying process should be

a. test drive several cars.
b. begin negotiations.
c. consider alternative buying strategies.
d. decide whether to trade in your used car or to sell if yourself.
e. analyze how much car you can afford.
5. Henry has $2,500 for a down payment and thinks he can afford monthly payments of $400. If he can
finance a vehicle with an 8%, 3-year loan, what is the maximum amount Henry can spend on the car?
a. $12,765
b. $14,400
c. $14,079
d. $15,265
e. $16,879
ANS: D PTS: 1 DIF: Challenging OBJ: LO: 5-1
6. Kurt has $4,500 for a down payment and thinks she can afford monthly payments of $300. If he can
finance a vehicle with a 7%, 4-year loan, what is the maximum amount Kurt can afford to spend on the
car?
a. $13,528
b. $14,400
c. $16,028
d. $17,028
e. $18,028
7. Jana has $1,500 for a down payment and thinks she can afford monthly payments of $300. If she can
finance a vehicle with a 7%, 4-year loan, what is the maximum loan amount Jana can afford?
a. $12,528
b. $14,208
c. $16,028
d. $17,900
e. $18,028
ANS: A PTS: 1 DIF: Challenging OBJ: LO: 5-1
8. Advantages of buying a used car rather than a new car include

a. good mechanical condition.
b. will depreciate more quickly.
c. more choices available.
d. less expensive.
e. all of the above.
ANS: D PTS: 1 DIF: Easy OBJ: LO: 5-1
9. Advantages of buying a used car rather than a new car include

a. good mechanical condition.
b. will depreciate less quickly.
c. more choices available.
d. cost.
ANS: B PTS: 1 DIF: Easy OBJ: LO: 5-1
10. One can arrange auto loans through

a. auto dealers.
b. banks.
c. credit unions.
d. consumer finance companies.
ANS: E PTS: 1 DIF: Easy OBJ: LO: 5-1
11. Leasing accounts for about ____ percent of all vehicles sold today.
a. 10
b. 14
c. 19
d. 23
e. 37
ANS: C PTS: 1 DIF: Easy OBJ: LO: 5-2
12. Which of the following are reasons people lease vehicles?

a. Leasing is generally less expensive than buying.
b. Monthly payments for leases are generally less expensive than loan payments.
c. One can afford a more expensive car with the same monthly payment by leasing rather
than buying.
d. b and c only
e. a, b, and c
ANS: D PTS: 1 DIF: Moderate OBJ: LO: 5-2
13. To research used car prices, you can check one of the popular price guides including:
a. National Automobile Dealers Association (NADA)
b. Official Used Car Guide
c. Edmunds Used Car Prices
d. All of the above.
14. At the end of your car lease period, you intend to turn in the car, and you will not pay extra at that time
based on the residual value of the car. You have ____ lease.
a. a residual
b. an open-end
c. a purchase option
d. a closed-end
e. none of these
15. The price of the car you are leasing is called the
a. money factor.
b. capitalized cost.
c. residual value.
d. purchase option.
e. capitalized cost reduction.
16. The financing rate on the car you are leasing is called the
a. money factor.
c. residual value.
d. purchase option.
ANS: A PTS: 1 DIF: Easy OBJ: LO: 5-2
17. The down payment on the car you are leasing is called the
a. money factor.
c. residual value.
d. purchase option.
18. In which of the following situations would you have to pay additional money when returning a vehicle
using a closed-end lease?
a. residual value is less than expected
b. residual value is more than expected
c. mileage limits were exceeded
d. a and c
e. b and c
ANS: C PTS: 1 DIF: Moderate OBJ: LO: 5-2
19. In which of the following situations would you have to pay additional money when returning a vehicle
using an open-end lease?
a. residual value is less than expected
b. residual value is more than expected
c. mileage limits were exceeded
d. a and c
e. b and c
20. Anna purchased a vehicle six years ago for $25,000. She recently sold it for $5,000. Over the years,
she paid a total of $5,800 on auto insurance, $4,800 on gas and maintenance, and $2,500 in interest.
What was her depreciation cost on this vehicle?
a. $ 5,000
b. $10,800
c. $15,000
d. $20,000
e. $25,000
21. Reasons why auto leasing is so popular include all of the following except:
a. lower monthly payments
b. lower down payment
c. lower total cost
d. getting more expensive car for the same monthly payment
e. rising new car prices
22. The capital cost reduction on a vehicle lease is
a. like the down payment on a loan.
b. the rate of interest on a lease.
c. the residual value at the end of the lease.
d. the depreciation on a lease.
e. the same as the purchase option on a lease.
ANS: A PTS: 1 DIF: Moderate OBJ: LO: 5-2
23. When shopping for a lease, you want a

a. high capitalized cost
b. low capitalize cost
c. high money factor
d. low residual value
e. a and d
24. A money factor of 0.00360 on a lease is equivalent to an annual percentage rate of

a. 1.80.
b. 3.60.
c. 4.32.
d. 8.64.
e. 10.80.
25. A money factor of 0.00280 on a lease is equivalent to an annual percentage rate of

a. 2.80.
b. 3.60.
c. 6.72.
d. 8.64.
e. 10.80.
ANS: C PTS: 1 DIF: Challenging OBJ: LO: 5-2
26. At the end of the lease period, you may be required to

a. purchase the vehicle at its residual value.
b. pay for unreasonable wear and tear.
c. pay for additional mileage.
d. b and c.
e. a, b, and c.
27. At the end of the lease period, you are never required to
a. purchase the vehicle at its residual value.
b. pay for unreasonable wear and tear.
c. pay for additional mileage.
d. b and c.
e. a, b, and c.
28. The first choice in housing in the United States is

a. single-family home.
b. condominium.
c. cooperative apartment.
d. manufactured home.
e. rental apartment.
29. The highest average cost housing to purchase would be a

a. cooperative apartment.
b. condominium.
c. single-family detached home.
d. row house.
e. manufactured home.
30. When you receive title to an individual unit and joint ownership of any common areas and facilities,
you have purchased a
a. single family home.
b. cooperative.
c. condominium.
d. row house.
e. mobile home.
31. When you lease your apartment from the corporation that owns the building and your lease is an
ownership share, your apartment is
a. expensive.
b. a cooperative.
c. a condominium.
d. a duplex.
e. permanent.
32. ____ is a reason for owning your own home.

a. Pride of ownership
b. A feeling of permanence
c. A sense of stability
d. A tax shelter
e. All of these are reasons.
33. For most homeowners, the most important financial reason for owning a home is
a. security for loans.
b. an inflation hedge.
c. a tax shelter.
d. a cash flow item.
e. psychic income.
34. ____ is an ongoing cost of home ownership.

a. The down payment
b. Closing costs
c. Property taxes
d. Sales taxes
e. Points
35. ____ is an up-front, one-time cost of home ownership.

a. The down payment
b. Closing costs
c. Property taxes
d. Insurance
e. a and b
36. Which of the following is true regarding cooperative apartments?

a. They are essentially the same as condominiums.
b. It may be more difficult to get a home mortgage than for other types of housing.
c. They tend to be more expensive than single-family dwellings.
d. They produce more tax advantages than other types of homes.
e. All of the above
37. Phil and Christina are recently married and are unsure of where they will be relocated after Christina
finishes her residency in 9 months. Based on this information, which of the following housing
recommendations would be most appropriate for them?
a. Rent a home
b. Buy a condominium
c. Buy a single-family dwelling
d. Buy a cooperative apartment
e. Lease a car
38. ____ could be deducted on your Federal income taxes.

a. Rent payments
b. Mortgage interest
c. Homeowner's insurance
d. Utility bills
e. None of these
39. ____ could be deducted on your Federal income taxes.

a. Rent payments
b. Homeowner's insurance
c. Real estate taxes
d. Utility bills
e. None of these
40. Jackie is in the 28% marginal tax bracket and has no other itemized deductions except those related to
her home. If her standard deduction is $4,750 and she incurs the following costs related to housing,
how much tax savings will she receive as a result of her home purchase?
Mortgage interest $14,000

Principal repayment $ 800
Homeowner's insurance $ 1,000
Real estate taxes $ 4,000
Homeowner's association fees $ 1,200
a. $13,250
b. $ 5,040
c. $ 3,710
d. $ 2,800
e. none
41. If the maximum loan-to-value ratio that a lender will accept on a $100,000 loan is 90 percent, then the
borrower must make
a. a minimum down payment of $10,000 plus closing costs.
b. a minimum down payment including closing costs of $10,000.
c. closing costs plus points of $10,000.
d. a maximum down payment of $10,000.
e. none of these.
42. If the maximum loan-to-value ratio that a lender will accept on a $100,000 loan is 80 percent, then the
borrower must make a down payment of at least
a. $100,000.
b. $ 80,000.
c. $ 50,000.
d. $ 20,000.
e. none of these.
43. If you made a down payment of $11,000 on a $110,000 house, the lender no doubt will require ____ as
a result of the size of the down payment.
a. closing points
b. a bond
c. mortgage insurance
d. application fees
e. homeowner's insurance
44. A lender will usually require a loan-to-value ratio of ____ or less for you to avoid having to pay
private mortgage insurance (PMI).
a. 75%
b. 80%
c. 85%
d. 90%
e. 95%
45. What is the maximum amount a first-time home buyer who is not 59 years old can withdraw from
an IRA without penalty?
a. $25,000
b. $15,000
c. $10,000
d. $ 5,000
e. $ 2,000
46. Which of the following is not associated with buying a home with a lower-than-typical down
payment?
a. Adjustable-rate mortgage
b. Fannie 3/2
c. Fannie 97
d. FHA mortgage
e. VA mortgage
47. The following is/are major source(s) of home mortgages:

a. Commercial Banks
b. Thrift Institutions
c. Mortgage Bankers and Brokers
d. Credit Unions
e. All of the above
48. A fee charged by lenders as a condition of a mortgage loan that effectively raises the interest rate is
called
a. mortgage points.
b. a down payment.
c. a commission.
d. an add-on charge.
e. loan fee.
49. If you purchase a $110,000 and make a 10% down payment, how much would 1 point cost at closing?
a. $ 765
b. $ 990
c. $1,100
d. $1,530
e. $1,800
50. One would be more likely to pay discount points if she expected
a. to live in the house a short period of time.
b. to live in the house a long period of time.
c. interest rates to go up.
d. interest rates to go down.
e. interest rates to remain constant.
ANS: B PTS: 1 DIF: Challenging OBJ: LO: 5-4
51. Points can be deducted from federal income taxes in the year paid when they are used to
a. finance a first home.
b. finance a second home.
c. refinance a first home.
d. refinance a second home.
e. a and c only
52. The seller of the house typically pays the

a. loan application fee.
b. real estate agent's commission.
c. appraisal fee.
d. points.
e. title search and insurance.
53. The majority of each monthly payment at the beginning of the loan goes to pay
a. principal.
b. interest.
c. real estate taxes.
d. homeowner's insurance.
e. private mortgage insurance.
54. Most lenders do not want mortgage payments to exceed ____ percent of your gross monthly income.
a. 10-15
b. 15-18
c. 25-30
d. 30-33
e. 33-38
55. Most lenders do not want mortgage payments plus other debt payments to exceed ____ percent of your
gross monthly income.
a. 10-15
b. 15-18
c. 25-30
d. 30-33
e. 33-38
56. An escrow account is used to collect ____ from one's monthly mortgage payment.
a. interest
b. principal
c. real estate taxes
d. homeowner's insurance
e. c and d only
57. Homeowner's insurance will cost about ____ percent of the market value of the home.
a. 1/4
b. 1/4 to 1/2
c. 1/2
d. 1/2 to 3/4
e. 3/4
58. A financial advantage of renting compared to purchasing housing is

a. income tax treatment.
b. no need for a down payment.
c. required security deposit.
d. the legal obligation.
e. stable monthly payments.
59. Terms of renting a housing unit may be contained in a contract called a

a. deposit requirement.
b. renewal option.
c. lease.
d. housing code.
e. housing standard.
60. The ____ would be included in a rental contract or lease agreement.

a. amount of the monthly payment
b. payment date
c. length of lease agreement
d. deposit required
e. all of these would be included
61. ____ is a reason for preferring to rent rather than to buy.

a. Mobility
b. No maintenance worries
c. Lower monthly cash flows
d. Down payment money better used elsewhere
e. All of these are reasons
62. Generally, renting would be preferred to buying when

a. you have no money to make a down payment.
b. you know your job will be temporary.
c. you have just gone through a divorce.
d. all of these.
e. none of these.
63. A real estate sales contract will include

a. the amount you are willing to pay for the property.
b. the terms of the mortgage loan.
c. deed restrictions.
d. market value of the property.
e. none of the above.
64. Earnest money is the sum of money the home buyer deposits with the
a. realtor to view homes.
b. realtor for finding the desired home.
c. lender to originate the loan.
d. seller to indicate intent of purchase.
e. lender to guarantee the purchase.
65. The most popular mortgage loan for financing a home purchase is a(n)
a. conventional fixed-rate loan.
b. FHA loan.
c. VA loan.
d. adjustable-rate loan.
e. Fannie Mae loan.
66. The interest rates and monthly mortgage payments will not change over the life of your mortgage; you
have a(n)
a. reverse-annuity mortgage.
b. fixed-rate mortgage.
c. adjustable rate mortgage.
d. rollover mortgage.
e. graduated-payment mortgage.
67. The monthly interest on your mortgage was $690; you paid $650. The result is
a. growing equity.
b. negative amortization.
c. fixed interest expense.
d. shrinking principal.
e. indexed equity.
68. The FHA ____ high loan-to-value ratio mortgages.

a. guarantees
b. insures
c. subsidizes
d. grants
e. allows
69. The act requiring mortgage lenders to give borrowers HUD booklets and good faith estimates of the
closing costs is called the
a. Equal Credit Opportunity Act.
b. Truth-in-Lending Act.
c. Real Estate Settlement Procedures Act.
d. Mortgage Lenders Act of 1980.
e. None of the above.
70. When refinancing your mortgage, you should consider
a. the interest rates of the old and new mortgages.
b. the years you expect to remain in the home.
c. any prepayment penalties on the old mortgage.
d. closing costs of the new mortgage.
e. all of these.
71. Sean and Lisa (age 25 and 28, respectively) are purchasing their first home for $200,000 with a 5%
down payment. They will withdraw the down payment from Lisa's IRA. They will have to pay ____
on the IRA withdrawal.
a. federal income taxes
b. an early withdrawal penalty
c. Social Security taxes
d. a and b
e. a, b, and c
72. Mike (age 40) is purchasing his second home for $200,000 with a 25% down payment. He will
withdraw some of the down payment from his IRA. He will have to pay ____ on the IRA withdrawal.
a. federal income taxes
b. an early withdrawal penalty
c. Social Security taxes
d. a and b
e. a, b, and c
73. Which of the following is tax deductible if one itemizes deductions?

a. Principal, interest, real estate taxes, and insurance
b. Principal, interest, and real estate taxes
c. Principal and interest
d. Interest, real estate taxes, and insurance
e. Interest, PMI, and real estate taxes
ANS: E PTS: 1 DIF: Challenging OBJ: LO: 5-6
74. ____ and ____ are often paid as part of one's house payment and held in an escrow account.
a. Closing costs; interest
b. Insurance; real estate taxes
c. Principal; interest
d. Insurance; utilities
e. Utilities; real estate taxes
75. Barb and Bob want to purchase a new home but don't know how much mortgage they can qualify for.
The lender requires total installment loan payments not exceed 35% of gross monthly income. Based
on Barb and Bob's financial data below, what is the maximum monthly mortgage payment for which
they can qualify?
Monthly Gross Income $4,000

Car payment 350
Student loan payment 200
a. $1,400
b. $1,208
c. $1,050
d. $ 850
e. $ 500
76. Pete and Pam want to purchase a new home but don't know how much mortgage they can qualify for.
The lender requires total installment loan payments not exceed 32% of gross monthly income. Based
on Pete and Pam's financial data below, what is the maximum monthly mortgage payment for which
they can qualify?
Monthly Gross Income $5,000

Car payment 400
Student loan payment 300
Current rent payment 1,000
a. $1,700
b. $1,600
c. $ 900
d. $ 600
e. $ 500
77. The type of mortgage that will most likely need to be refinanced is the ____ mortgage.
a. fixed-rate
b. adjustable-rate
c. balloon-payment
d. graduated-payment
e. growing-equity
78. Which of the following is true regarding auto loans?

a. Longer term, lower rate, lower payment
b. Shorter term, lower rate, lower payment
c. Longer term, higher rate, lower payment
d. Shorter term, higher rate, higher payment
NAT: BUSPROG: Analytic skills KEY: Bloom's: Comprehension
79. As home prices have fallen in recent year, the rent ratio
a. has increased and rent affordability has increased
b. has decreased and rent affordability has decreased
c. has increased and rent affordability has decreased
d. has decreased and rent affordability has increased
ANS: B PTS: 1 DIF: Challenging OBJ: LO: 5-3
NAT: BUSPROG: Analytic skills KEY: Bloom's: Evaluation
80. Homeowners may be allowed to deduct the following on their taxes

a. homeowners insurance
b. mortgage interest
c. home improvements
d. mortgage principal
81. A declining rent ratio indicates

a. lower housing prices relative to renting
b. lower rent relative to housing prices
c. higher housing prices relative to renting
d. none of the above
COMPLETION
INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement.
Select A for the first item, B for the second item, and C if neither item will correctly complete the
statement.
1. The first major expenditure most people make is to buy a [house | car].
ANS: b
PTS: 1 DIF: Easy OBJ: LO: 5-3 NAT: BUSPROG: Analytic skills
STA: DISC: Investments KEY: Bloom's: Knowledge
2. The biggest fixed cost of owning a car is [the loan payment | insurance].
ANS: a
3. A major variable cost of owning a car is [the loan payment | gasoline].
ANS: b
4. If you drive a lot of miles each year rather than a few, the operating cost per mile will [increase | stay
the same | decrease].
ANS: c
PTS: 1 DIF: Challenging OBJ: LO: 5-1 NAT: BUSPROG: Analytic skills
STA: DISC: Investments KEY: Bloom's: Analysis
5. With a [closed-end | open-end] lease, you turn in the car at the end of the term and have no additional
financial obligation as a result of the residual value.
ANS: a
PTS: 1 DIF: Moderate OBJ: LO: 5-2 NAT: BUSPROG: Analytic skills
STA: DISC: Investments KEY: Bloom's: Comprehension
6. The most popular type of lease is the [closed-end | open-end] lease.
ANS: a
7. Terminating a lease early is typically [difficult | easy].
ANS: a
8. The average cost of owning is typically much less than leasing if you own the vehicle over [two | four]
years.
ANS: b
STA: DISC: Investments KEY: Bloom's: Synthesis
9. With a(n) [closed-end | open-end] lease, one owes more at the end of the lease if the car is worth less
than its projected value at the end of the lease.
ANS: b
10. It would make sense to purchase a vehicle at the end of a close-end lease period if the residual value in
the lease agreement was [more | less] than the car's market value.
ANS: b
11. The term condominium/townhome refers to a type of [architecture | ownership].
ANS: b
12. The condominium/townhome buyer shares joint ownership of [common areas | his living space].
ANS: a
13. In the same geographic area, the cost of a [detached home | condo] will usually be lower.
ANS: b
14. When buying a home, the [emotional | financial] factors often carry the greatest weight.
ANS: a
15. There is direct ownership of your living space in a [condo | co-op apartment].
ANS: a
16. As a homeowner, you can deduct the mortgage interest and [property taxes | property insurance] if
you itemize on your federal taxes.
ANS: a
17. A lender gives you a choice of an 80% loan-to-value ratio or a 90% loan-to-value ratio. The interest
rate for the 80% loan-to-value ratio loan will typically be [higher | lower] than the 90%.
ANS: b
18. The purchase price of the house you are buying is $140,000. A loan-to-value ratio of 80% will require
a down payment of [$34,000 | $28,000].
ANS: b
STA: DISC: Investments KEY: Bloom's: Evaluation
19. The purchase price of the house you are buying is $180,000. A loan-to-value ratio of 90% will produce
a mortgage amount of [$162,000 | $180,000].
ANS: a
20. If your lender charges 1 1/2 mortgage points on a house selling for $100,000 on which there is to be a
$90,000 loan, the points will cost you [$1,350 | $1,500].
ANS: a
21. You have a choice of a 25-year or 30-year mortgage. Your monthly payments will be [more | less]
with the 30-year loan.
ANS: b
22. The total amount of interest you would have to pay would be less with a [25 | 20] year mortgage.
ANS: b
23. Most lenders do not want your monthly installment loan payments to exceed [36 | 50] percent of your
monthly income.
ANS: a
24. You are paying on a car loan, a furniture loan, and a student loan. This will have [an | no] effect on the
lender's decision to grant you a mortgage loan.
ANS: a
25. [Lessor | Lessee] is another term for landlord.
ANS: a
26. The choice of the index used with an ARM will make [much | little] difference in the volatility of your
payment changes.
ANS: a
27. A real estate agent will typically be paid by the [buyer | seller] of the house.
ANS: b
28. Seeking mortgage preapproval [is | is not] recommended when you begin your house search.
ANS: a
29. The earnest money deposit is a payment to the [real estate agent for his services | seller to show good
faith when making an offer to buy].
ANS: b
30. With most ARMs, the interest rate over the lifetime of the loan can [increase to any level | increase
only up to the pre-stated maximum].
ANS: b
31. The interest rate on an ARM can be increased [automatically every year | only when a designated
index increases].
ANS: b
32. You made an $800 mortgage payment. The interest on the mortgage for this month was $850. You
have just experienced [negative | positive] amortization.
ANS: a
33. You made an $900 mortgage payment. The interest on the mortgage for this month was $850. You
have just experienced [negative | positive] amortization.
ANS: b
34. Using an FHA mortgage to finance your home would require a [lower | higher] down payment than a
conventional loan.
ANS: a
35. The Real Estate Settlement Procedures Act [limits the amount of closing costs a lender can charge |
requires advance disclosure of closing costs].
ANS: b
36. If you qualify, you might be able to buy a home with no down payment with [an FHA | a VA] loan.
ANS: b
37. The [longer | shorter] the period of time you expect to live in a house, the more likely refinancing is a
sound financial decision.
ANS: a
38. Paying mortgage points to get a lower rate of interest makes more sense if you expect to live in a home
for a [longer | shorter] period of time.
ANS: a
39. The Real Estate Settlement Procedures Act governs [mortgage regulations | mortgage closings].
ANS: b
40. A convertible ARM will have a [higher | lower] interest rate than a traditional ARM.
ANS: a
41. The 11th District Cost of Funds index is much [more | less] volatile than LIBOR and CD-based
indexes.
ANS: b
42. Shorter term auto loans offer the benefit of [lower payments | lower interest rate]
ANS: b
43. Longer term auto loans have a [lower rate but higher payment | higher rate but lower payment]
ANS: b
44. As home prices have fallen the “rent ratio” has [increased | decreased].
ANS: b
45. A decrease in the “rent ratio” indicates that housing is relatively [more | less] affordable than renting.
ANS: a
46. Homeowners may be able to deduct from their taxable income [mortgage principal | mortgage
interest]
ANS: b
47. For most homeowners, the most important financial reason for owning a home is for the [inflation
hedge | tax shelter].
ANS: b
PROBLEM
1. Janice wants to buy a new car. The cost is $30,000. At the end of six years, the car is expected to be
worth 20% of the original price. (Show all work.)
a. What will the car value be in six years?

b. What is the annual depreciation on the car?
ANS:
a. Value of car = 0.20  $30,000 = $6,000
b. Annual depreciation = = $4,000

or: $30,000 - $6,000 = $24,000/6 = $4,000
2. Leslie has been offered the choice of either a $1,000 rebate or a 5.5%, 48-month loan for the new car
she is purchasing. If Leslie will be financing $15,000 and she can get a 7.5%, 48-month loan at her
credit union, should she take the $1,000 rebate or the 5.5% loan? (Show all work.)
ANS:
7.5% loan: PV=15,000, I=7.5/12, N=48, PMT=362.68 362.68  48 = 17,408.64
5.5% loan: PV=15,000, I=5.5/12, N=48, PMT=348.85 348.85  48 = 16,744.80
663.84
Take the $1,000 rebate since the 5.5% loan saves only $663.84 over the life of the loan.
3. Patrick would like to know the monthly payments and the total finance charges on the following 2
loans: (Show all work.)
a. $30,000, 9%, 36 months
b. $30,000, 9%, 48 months
ANS:
a. 36 month loan: PV=30,000, I=9/12, N=36, PMT=953.99 (953.99  36) - 30,000 = 4,344
b. 48 month loan: PV=30,000, I=9/12, N=48, PMT=746.55 (746.55  48) - 30,000 = 5,834
4. Greg has negotiated a $20,000 price on a new pick-up truck. The manufacturer is offering a $1,500
rebate or 3.9 %, three-year financing. Greg is also able to get 7 %, three-year financing at his credit
union. If Greg plans to finance $18,000 over three years, should he take the rebate or the 3.9 %
financing? (Show all work.)
ANS:
7.9% loan: PV=18,000, I=3.9/12, N=36, PMT=530.63 530.63
8.0% loan: PV=18,000, I=7.0/12, N=36, PMT=555.79 555.79
Difference: 25.16  36 months = $905.76
Since the 3.9 % financing saves Greg only $905.76 over the loan period, he should take the $1,500
rebate and finance his new truck through the credit union.
5. Judy has $2,000 for a down payment on a vehicle and she can afford monthly payments of $400. She
wants to finance a vehicle over no more than 4 years. If lenders are currently offering 6 percent interest
on 5-year loans, what is the maximum price Judy can pay for a vehicle?
ANS:
PMT= $400, I=6/12, N=60, PV = $20,690 + $2,000 = $22,690
6. Your mortgage payment is $1,500 per month. Of this amount, insurance is $50, property taxes are
$200, and interest is about $1,100. Assuming you have other itemized deductions that already exceed
your standard deduction and that you are in the 31% marginal tax bracket, what is the reduction in
your tax liability as a result of owning a home with this mortgage. (Show all work.)
ANS:
Monthly tax deduction = $200 + $1,100 = $1,300.
Annual tax deduction = $1,300  12 = $15,600.
Reduction in taxes = $15,600 .31 = $4,836.
7. Dick and Jane (and their dog Spot) have just purchased a house and are calculating how much money
they will need when the closing day rolls around. The purchase price is $200,000. They will make a
20% down payment, and they must pay 2 points on the loan. Closing costs should be 3% of the
purchase price. What is the total dollar amount they will need at closing? (Show all work.)
ANS:
Down payment = .20  $200,000 $40,000
Points = .02  $160,000 3,200
Closing costs = .03  $200,000 6,000
Total Needed $49,200
8. Billy and Suzie want to calculate the difference in monthly payments on a $110,000 home as a result
of a $5,000 down payment or a $10,000 down payment. Use your financial calculator to figure the
monthly payments, assuming they get a 6.5%, 30-year mortgage.
ANS:
$ 5,000 down payment: PV = $105,000, I = 6.5/12, N = 30  12, PMT = $663.67
$10,000 down payment: PV = $100,000, I = 6.5/12, N = 30  12, PMT = $632.07
The difference in monthly payments = $31.60
9. If a lender requires that mortgage payments cannot exceed 30% of gross income and total loan
payments cannot exceed 38% of gross income, calculate the monthly payment for which a person with
the following financial data could qualify.
Gross Income $5,500

Stereo loan payment 250
Furniture loan payment 200
Auto loan 400
ANS:
$5,500  0.3 = $1,650
$5,500  0.38 = $2,090 - $250 - $200 - $400 = $1,240
The maximum monthly payment would be $1,240.

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PFIN3 3rd Edition Gitman Test

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Chapter 5—Making Automobile and Housing Decisions

1. An automobile is a personal use asset for most buyers.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-1

ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-1

ANS: F PTS: 1 DIF: Easy OBJ: LO: 5-1

4. Gasoline is a variable cost of automobile ownership.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-1

ANS: F PTS: 1 DIF: Easy OBJ: LO: 5-1

6. Fixed automobile costs increase as the number of miles driven increase.

ANS: F PTS: 1 DIF: Moderate OBJ: L): 5-1

ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-1

ANS: F PTS: 1 DIF: Easy OBJ: LO: 5-1

9. A closed-end automobile lease is the most popular type of lease.

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-1

ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-1

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 5-1

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 5-1

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 5-1

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-1

ANS: F PTS: 1 DIF: Challenging OBJ: LO: 5-1

ANS: F PTS: 1 DIF: Challenging OBJ: LO: 5-2

ANS: T PTS: 1 DIF: Challenging OBJ: LO: 5-2

ANS: T PTS: 1 DIF: Challenging OBJ: LO: 5-2

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-2

ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-1

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-1

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-1

ANS: T PTS: 1 DIF: Challenging OBJ: LO: 5-2

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-3

25. The term condominium refers to a style of architecture.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 5-3

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-3

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 5-3

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-3

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 5-3

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-3

ANS: T PTS: 1 DIF: Challenging OBJ: LO: 5-3

ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-4

33. There are large regional differences in the price of housing.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-3

ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-3

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-4

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-4

ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-4

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-4

ANS: F PTS: 1 DIF: Easy OBJ: LO: 5-4

ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-4

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-4

ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-4

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-4

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-4

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 5-4

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-4

ANS: F PTS: 1 DIF: Easy OBJ: LO: 5-4

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 5-4

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 5-4

ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-4

ANS: T PTS: 1 DIF: Easy OBJ: LO: 5-4

53. Security deposits are controlled by the tenant.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 5-3

ANS: T PTS: 1 DIF: Moderate OBJ: LO:5-5