Official Guide to Mastering DSST Exams Volume II by Peterson's & Peterson's

Author:Peterson's & Peterson's
Language: eng
Format: epub
Publisher: Peterson's
Published: 2012-05-22T00:00:00+00:00

Answer Explanations

1. The correct answer is (A). Choice (B) is incorrect because the Federal Housing Administration (FHA) doesn’t offer mortgages; it insures mortgages. Choice (C) is incorrect because, like the FHA, the Department of Veterans Affairs (VA) doesn’t offer mortgages; it insures them. In addition, the VA doesn’t require mortgage insurance. Choice (D) is incorrect because there is no requirement for a 25 percent down payment related to mortgage insurance.

2. The correct answer is (B). CDs are purchased for a specified amount of money at a specified interest rate for a specified period. Choice (A) is incorrect because the interest rate doesn’t vary for CDs, but it does vary over time for savings accounts and money market accounts. Choice (C) is incorrect because all three are FDIC-insured as long as they are less than $250,000. Choice (D) is incorrect because all three are good savings vehicles for people with low risk tolerance.

3. The correct answer is (D). Choice (A) doesn’t make sense. Choice (B) defines time value of money, not future value of money. Choice (C) misstates the definition of the present value of money: the current value for a future amount of money calculated with a specific interest rate for a specific period of time.

4. The correct answer is (A). Inflation reduces the buying power of money, so the higher the rate of inflation, the less the interest earned on savings will buy. Choice (B) is incorrect because the lower the rate of inflation, the lower interest rates are. Choice (C) is incorrect because inflation rates impact interest rates either negatively or positively. Choice (D) is incorrect because taxes minimize the amount of interest that a depositor has available for use, not the impact of inflation.

5. The correct answer is (A). A person pays taxes on contributions to a Roth IRA, whereas contributions to traditional IRAs, choice (B), and spousal IRAs, choice (C), are tax-deductible, and the withdrawals are taxed. Contributions to SEPs, choice (D), are made with pretax income, but earnings are taxed when withdrawn.

6. The correct answer is (A). A Chapter 13 bankruptcy filing remains on a person’s credit report for five years. Choice (B), seven years, is the number of years that information about the regular use of credit, such as taking out a car loan, remains on a credit report. A person may file for Chapter 7 bankruptcy only once in eight years, choice (C), and a record of a Chapter 7 bankruptcy filing remains on a person’s credit report for ten years, choice (D).

7. The correct answer is (D). Jason needs some cash to fall back on in case he loses his job, has an accident, or is sick for a prolonged period. Choices (A), (B), and (C) are important, but financial planning involves a series of staged goals. However, he should take advantage of any retirement plan that his employer offers because the employer’s contribution is in effect “free” money; it doesn’t cost Jason.

8. The correct answer is (C). Tax credits are applied

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