Principles of Finance Study
Guide Exam Questions with
Correct Answers
What are the advantages of virtual banks and why are they an advantage? What are the disadvantages
of virtual banks and why are they disadvantages? (short answer) - Correct Answers: Advantages would
include the convenience of it, the act of paying bills online, and/or transferring funds online. These are
advantages because all your banking needs are at your fingertips. Disadvantages of virtual banks would
be that you are exposed to fraud risk, your personal information could be shared, and there are hackers.
These are disadvantages because all these things could put your money, identity, etc. at risk.
Why could a car loan be considered good debt? Why would a car loan be considered bad debt? (short
answer) - Correct Answers: good debt because owning a car can put you in a better position to get or
keep a job, which results in keeping potential money. bad debt because most new cars lose about 20%
of their value, so there is a chance you won't be able to pay off your debt (also bad because many car
loans carry high interest rates).
Describe the types of risk for the following: economic risk, market risk, liquidity risk, inflation (or price-
level) risk, interest rate risk, business risk, and global investment risk. (short answer) - Correct Answers:
Economic risks are risks that affect the entire market and are caused by war, inflation, political changes,
and recession. Market risks are risks that relate to the value of an investment that will decrease due to
changes in the market such as stock prices, interest rates, exchange rates, and other outside forces.
Liquidity risks affect how easily an investment can be brought and sold/converted to cash and are
caused by stock, bonds, and collectables. Inflation risks are risks that are caused by the value declining
which affects how much you can buy. Interest rate risks are risks that are caused by the amount of
money your investments earn, which affects the price of a stock or bond. Business risks are risks that are
caused by a company not going well or going out of business, which affects how much money you have.
Global investment risks are risks that are caused by differences in currency, political stability, and
regulatory agencies, which affects investments made by stocks and bonds offered by companies in other
countries.
Sara just graduated. She has a monthly gross income of $3,000, but after her deductions, her net income
is only $2,100. Sara pays $500 in rent each month for a studio apartment. Her utility bills are usually less
than $50 each month, and her cell phone bill is $100 per month. Sara likes to shop and spends $1,000
each month on clothes, shoes, and accessories which she charges to her credit card. She also spends
$500 each month eating out. Explain Sara's problems per the scenario and how a financial planner may
help her. (short answer) - Correct Answers: she is $50 over budget each month. A financial planner
, would help her balance her life and help her determine what the appropriate amount would be to spend
on the things she wants vs. the things she needs.
Explain ethical decisions. What are ways companies should respond to ethical dilemmas? (short answer)
- Correct Answers: Ethics is a set of moral standards that are based on the conventions and the rules of
the society in which one lives. This relates to the right and wrong conduct and it governs a person,
business, and society. Companies should respond to ethical dilemmas by confronting the situation
decisions based on the severity of the situation.
What types of jobs are within the financial services industry and what do they do? - Correct Answers:
personal teller - (manages customers accounts, opens new accounts, assists customers in selecting
accounts, takes loan applications, answers questions about banking services, and in general acts as a
personal financial advisor), bank teller - (receives and pays out money over the counter or at a drive-up
window), insurance agent - (licensed to sell insurance for one or more specific insurance companies. an
insurance agent solicits, or actively looked for, people who could benefit from the kind of insurance
policy he or she provides. an agent then gives there policy holders help as needed.), insurance claims
representative - (when someone has an accident and contacts the insurance company, the insurance
claim rep investigates what happened. The representative decides whether money should be paid to the
claim seeker, and if so, how much.), financial software designer - (makes tools that deal with accounting
and monetary transactions. there include payroll, account receivables and payables, general ledger,
spreadsheets, financial planning, check writing, and portfolio management.), credit counselor - (helps
individuals figure out their finances and create spending and savings plans. can help set up a formal
debt-management plan, negotiate lower interest rates and more favorable terms, and help people get
out of debt.), stockbroker - (an agent who earns commissions through the purchase and sale of shares
for an investor), investment banker - (works with large corporations, small businesses, and government
entities to find capital for projects and merges, arrange business deals, apply for corporate loans, and
find investors.), mortgage loan processor - (handles paperwork when someone applies for a mortgage,
normally a house. review the applications and work with the applicants to clear up anything amiss. they
verify info on
What are the advantages of choosing a partnership over a sole proprietorship as a form of business
ownership? - Correct Answers: it's easily and inexpensively formed. There are more places/people to get
capital from, and banks are more likely to lend money to businesses with multiple partners. Tax only
once and share profit and workload.
What are the main functions of the financial services industry? - Correct Answers: it helps people,
businesses, and governments manage their money. Includes banks, credit unions, savings and loan
associations, and insurance companies.
Guide Exam Questions with
Correct Answers
What are the advantages of virtual banks and why are they an advantage? What are the disadvantages
of virtual banks and why are they disadvantages? (short answer) - Correct Answers: Advantages would
include the convenience of it, the act of paying bills online, and/or transferring funds online. These are
advantages because all your banking needs are at your fingertips. Disadvantages of virtual banks would
be that you are exposed to fraud risk, your personal information could be shared, and there are hackers.
These are disadvantages because all these things could put your money, identity, etc. at risk.
Why could a car loan be considered good debt? Why would a car loan be considered bad debt? (short
answer) - Correct Answers: good debt because owning a car can put you in a better position to get or
keep a job, which results in keeping potential money. bad debt because most new cars lose about 20%
of their value, so there is a chance you won't be able to pay off your debt (also bad because many car
loans carry high interest rates).
Describe the types of risk for the following: economic risk, market risk, liquidity risk, inflation (or price-
level) risk, interest rate risk, business risk, and global investment risk. (short answer) - Correct Answers:
Economic risks are risks that affect the entire market and are caused by war, inflation, political changes,
and recession. Market risks are risks that relate to the value of an investment that will decrease due to
changes in the market such as stock prices, interest rates, exchange rates, and other outside forces.
Liquidity risks affect how easily an investment can be brought and sold/converted to cash and are
caused by stock, bonds, and collectables. Inflation risks are risks that are caused by the value declining
which affects how much you can buy. Interest rate risks are risks that are caused by the amount of
money your investments earn, which affects the price of a stock or bond. Business risks are risks that are
caused by a company not going well or going out of business, which affects how much money you have.
Global investment risks are risks that are caused by differences in currency, political stability, and
regulatory agencies, which affects investments made by stocks and bonds offered by companies in other
countries.
Sara just graduated. She has a monthly gross income of $3,000, but after her deductions, her net income
is only $2,100. Sara pays $500 in rent each month for a studio apartment. Her utility bills are usually less
than $50 each month, and her cell phone bill is $100 per month. Sara likes to shop and spends $1,000
each month on clothes, shoes, and accessories which she charges to her credit card. She also spends
$500 each month eating out. Explain Sara's problems per the scenario and how a financial planner may
help her. (short answer) - Correct Answers: she is $50 over budget each month. A financial planner
, would help her balance her life and help her determine what the appropriate amount would be to spend
on the things she wants vs. the things she needs.
Explain ethical decisions. What are ways companies should respond to ethical dilemmas? (short answer)
- Correct Answers: Ethics is a set of moral standards that are based on the conventions and the rules of
the society in which one lives. This relates to the right and wrong conduct and it governs a person,
business, and society. Companies should respond to ethical dilemmas by confronting the situation
decisions based on the severity of the situation.
What types of jobs are within the financial services industry and what do they do? - Correct Answers:
personal teller - (manages customers accounts, opens new accounts, assists customers in selecting
accounts, takes loan applications, answers questions about banking services, and in general acts as a
personal financial advisor), bank teller - (receives and pays out money over the counter or at a drive-up
window), insurance agent - (licensed to sell insurance for one or more specific insurance companies. an
insurance agent solicits, or actively looked for, people who could benefit from the kind of insurance
policy he or she provides. an agent then gives there policy holders help as needed.), insurance claims
representative - (when someone has an accident and contacts the insurance company, the insurance
claim rep investigates what happened. The representative decides whether money should be paid to the
claim seeker, and if so, how much.), financial software designer - (makes tools that deal with accounting
and monetary transactions. there include payroll, account receivables and payables, general ledger,
spreadsheets, financial planning, check writing, and portfolio management.), credit counselor - (helps
individuals figure out their finances and create spending and savings plans. can help set up a formal
debt-management plan, negotiate lower interest rates and more favorable terms, and help people get
out of debt.), stockbroker - (an agent who earns commissions through the purchase and sale of shares
for an investor), investment banker - (works with large corporations, small businesses, and government
entities to find capital for projects and merges, arrange business deals, apply for corporate loans, and
find investors.), mortgage loan processor - (handles paperwork when someone applies for a mortgage,
normally a house. review the applications and work with the applicants to clear up anything amiss. they
verify info on
What are the advantages of choosing a partnership over a sole proprietorship as a form of business
ownership? - Correct Answers: it's easily and inexpensively formed. There are more places/people to get
capital from, and banks are more likely to lend money to businesses with multiple partners. Tax only
once and share profit and workload.
What are the main functions of the financial services industry? - Correct Answers: it helps people,
businesses, and governments manage their money. Includes banks, credit unions, savings and loan
associations, and insurance companies.
