Week 5 (Tutorial Exercises)

Chapter 7 Student and Consumer Loans: The Role of Planned Borrowing

1) According to the Keown book, a(n) ________ is a loan involving a formal contract that details
exactly how much you're borrowing and when and how you're going to pay the loan back.
A) balloon loan
B) consumer loan
C) bridge loan
D) installment loan

2) An example of a consumer loan is a(n)

A) unsecured loan.
B) pre-payment loan.
C) interim loan.
D) both A and C.

3) Which statement is false regarding consumer loans?

A) Consumer loans are usually used for bigger purchases.
B) Consumer loans can range from open credit to credit cards.
C) Consumer loans are sometimes called "planned borrowing."
D) Consumer loans can range from single-payment loans to installment loans.

4) Which of the following is the correct formula to calculate the after-tax cost of a home equity
loan?
A) After-tax cost of a home equity loan = before-tax cost (1 + marginal tax rate)
B) After-tax cost of a home equity loan = before-tax cost (1 - marginal tax rate)
C) After-tax cost of a home equity loan = before-tax cost (marginal tax rate - 1)
D) After-tax cost of a home equity loan = before-tax cost (marginal tax rate + 1)

5) A short-term loan that provides funding until a longer-term loan can be secured is called a(n)
A) bridge loan.
B) gap loan.
C) straddle loan.
D) amortized loan.

6) A(n) ________ loan calls for the repayment of both the interest and the principal at regular
intervals and is commonly referred to as loan amortization.
A) term
B) simple interest
C) installment
D) personal
E) none of the above

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7) You are considering building a new deck on your home, what factors should you consider
when deciding whether to borrow the money or take the money out of your savings account?
A) You should compare the after-tax return on your savings with the after-tax APR on your loan.
B) It's simple, if you can afford to pay cash then you should not take out the loan.
C) What impact the savings withdrawal will have on your liquidity.
D) Both A and C are correct.

8) Which of the following characterize secured loans?

A) They are typically easier to get.
B) Interest rates tend to be lower than unsecured loans.
C) They reduce the lender's risk.
D) They are backed with either physical or investment assets.
E) All of the above

9) A ________ is tied to a market interest rate, such as the prime rate or the six-month Treasury
bill rate.
A) prime-rate loan
B) convertible-rate loan
C) flexible-rate loan
D) variable-rate loan

10) Variable-rate loans

A) usually have rate caps that prevent them from varying too much.
B) always adjust every month.
C) are never a better option than fixed-rate loans.
D) all of the above.

11) What are the risks to the borrower with adjustable-rate loans?
A) During times of inflation your salary may increase during the term of the loan.
B) That the market rates of interest may increase during the term of the loan.
C) It is harder to budget for loan payments that may increase during the term of the loan.
D) Both B and C are correct.

12) Joshua recently purchased a new home. His lender required him to purchase credit life
insurance on the loan in the event that he died before the mortgage is paid off. What is the loan
clause that allows his lender to require him to purchase this additional insurance.
A) Insurance agreement clause
B) Default contingency clause
C) Early payment clause
D) Recourse clause
E) None of the above

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13) Suppose you borrowed the money you needed to purchase an automobile and then failed to
make a scheduled payment by the due date. Technically, you
A) are bankrupt.
B) are in default.
C) are usually not given a chance to make good on the overdue payment.
D) none of the above

14) The "Repo Man" recently repossessed your car for failure to make payments. You still owed
$5,000 on the loan, but since it was always broken, you were glad to get rid of it anyway. The
bank sold the car at a wholesale auction for $3,000. The bank also paid the "Repo Man" $200
and paid attorney fees of $300. Based on the deficiency payments clause in your loan, what are
you liable for?
A) $0; repossession means the bank must "eliminate" the debt
B) $500
C) $2,000
D) $2,500
E) None of the above

15) What is the name of the formal document that outlines the legal obligations of both the
lender and the borrower?
A) Default
B) Claim
C) Debenture
D) Note
E) Tort

16) Which one of these clauses is not found in a typical loan contract?
A) Recourse
B) Deficiency payments
C) Acceleration
D) Withdrawal terms
E) Insurance agreement

17) The loan contract is a formal document called a(n) ________ and may contain a(n)
________ specifying who retains control over the item being purchased in the case of default.
A) agreement, insurance clause
B) indenture, security agreement
C) note, security agreement
D) agreement, indenture
E) note, legal transaction

18) What happens when you default on a car loan where your Title is held as collateral?
A) You damage your credit history but you keep the car.
B) You lose the car and damage your credit history.
C) You face liability under the deficiency payments clause.
D) Only choices B and C are correct.
E) All of the above choices are correct.

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19) If you own a home with a market value of $175,000 and you have an outstanding balance on
your mortgage of $60,000, your home equity is
A) $57,500.
B) $97,750.
C) $115,000.
D) $235,000.

20) Home equity/second mortgage loans have two important advantages over most other types of
loans. They are
A) tax deductibility of payments and longer terms.
B) tax deductibility of interest and lower interest rates.
C) no risk for borrower and less amortization.
D) increase in future financing flexibility and no recourse clause.
E) none of the above.

21) Which of the following is not required by law to be on a loan disclosure statement?
A) Annual percentage rate
B) All finance charges
C) The total amount financed
D) The total amount of payments
E) All of the above are required.

22) The finance charges for a loan may include

A) fees for a credit check.
B) required insurance fees.
C) interest payments.
D) only choices A and B.
E) All of the above choices.

23) Payday lenders

A) make money by providing one-time assistance during a time of financial need.
B) make money by keeping borrowers in debt.
C) encourage repeat borrowing.
D) all of the above.

24) In driving around town one day, you noticed most of the payday loan companies were
located close to the college and the local military base and there were none out in the newer
neighborhoods. Why do you think this is so?
A) The rent on these locations is less expensive.
B) Payday lenders tend to focus on less experienced borrowers who typically don't make a lot of
money.
C) Because their terms are so affordable people with low incomes really take advantage of them.
D) There are zoning laws that require these types of locations for these types of services.

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25) Calculate the interest on $6,000 borrowed at an annual rate of 9% under the simple interest
loan method for 9 months.
A) $270
B) $360
C) $405
D) $450
E) $540

26) Which of the following does not require you to have a good credit rating to issue you a loan?
A) Your family
B) Savings and loan
C) Commercial bank
D) All of the above require a good credit rating to issue a loan.

27) Which of the following statements would most correctly complete the following sentence?
As the interest rate on a loan increases
A) the loan maturity would decrease (other things held constant).
B) the payment amount would decrease (other things held constant).
C) the amoritization would increase (other things held constant).
D) the payment amount would increase (other things held constant).
E) none of the above.

28) With a(n) ________ installment loan, interest charges are calculated using the original
balance, and these charges are then added to the loan.
A) simple interest method
B) partial amortization method
C) discount method
D) add-on method
E) none of the above

29) What is the type of loan where the entire interest charge is subtracted from the loan principal
before you receive the money, and at maturity you repay the entire principal?
A) Simple interest method
B) Partial amortization method
C) Discount method
D) Add-on method
E) None of the above