Akaki Poly Technic College

Accounting and Finance

Level II
Course: Develop Understanding of Debt and Consumer Credit
Work sheet

Part I. Multiple choice Question

1. A common example of secured revolving credit is a secured credit card, which lets you
borrow from a security deposit you place when opening the card.
A. True B. False
2. Unsecured credit is credit backed by collateral, such as a security deposit or property like a
car or a house.
A. True B. False
3. The interest rate charged on secured short-term loans to a corporation is generally higher than
that charged on unsecured short-term loans because …
A. The risk of default is lower on secured loans.
B. Secured loans are less risky than unsecured loans.
C. It is costly to negotiate and administer secured loans.
D. Lenders of secured loans must pay more for their funds.
4. Why does an unsecured loan have a higher interest rate than a secured loan?
A. The bank bears all the risk of the loan.
B. The bank charges more for poor credit scores.
C. The bank bases higher interest rates on market conditions.
D. The bank raises rates unfairly for unsecured loans.
5. What is the difference between installment credit and revolving credit?
A. Installment credit is a type of loan that is guaranteed by the government. Revolving credit
is a type of loan that is not guaranteed by the government.
B. Installment credit is a type of loan that is secured by collateral. Revolving credit is a type
of loan that is not secured by collateral.
C. Installment credit is a type of loan that must be repaid in equal installments over a set
period of time.
D. Revolving credit is a type of loan that allows you to borrow money up to a certain limit
and repay it as you wish.
E. None of the choices listed.
6. If you have a credit card with a $10,000 credit limit and you make a $2,000 purchase, you
only have $8,000 left to spend. Once you pay back the $2,000, though, your limit will be
back up to $10,000. Which type of credit requires you to pay the total balance in 30, 60, or
90 days?
A. Installment credit C. Non-installment credit
B. Revolving credit D. Continuous credit
7. Terry used installment credit to buy a $10,000 car. She has made 10 payments of $1,000 each
and has requested the title (ownership papers) to the car. Will Terry get the title?
A. No, because she still owes interest
B. No, because installment credit is only for leases
C. Yes, because she has paid $10,000
D. Yes, because installment credit users already hold title
8. Which type of credit allows you to request a limit increase if payments are made on time?
A. Revolving credit C. Installment credit
B. Non-installment credit D. Secured credit
9. ________allows you to purchase something right now that you are unable to pay for upfront.
You have to borrow money from a lender and pay it back
A. Credit C. Interest
B. Principle D. Capital
10. Which of the following statements best defines 'credit?'
A. The ability for a buyer to take possession of goods or services prior to payment based on
the trust of the seller in the buyer that payment will occur, based on agreed terms, in the
future
B. The ability for individuals and businesses to trade each other for goods and services,
thereby 'crediting' each other with traded products and services.
C. The difference between an original loan amount and the total amount paid back to the
lender over the course of the loan.
D. The ability to deposit cash with a financial institution and then access those funds with a
card or check.
11. Capacity, which is one of the "Five Cs" of credit analysis, refers to:
A. The general economic climate and its effect on the applicant's ability to pay
B. The willingness of the applicant to meet its financial obligations
C. The financial strength of the applicant (i.e., net worth)
D. The ability of an applicant to meet its financial obligations
12. Which of the following is not one of the '5 Cs' of credit discussed in this lesson?
A. Capacity C. Character
B. Cash Flow D. Conditions
13. Which of the following Five Cs is related to credit reports and credit scores?
A. Conditions C. Capacity
B. Collateral D. Character
14. On a $20,000, 60-month auto loan, about how much more would a borrower with a bad
credit score pay than a borrower with a good report?
A. Under $1,000 B. $1,000- $3,000 C. $3,000-$5,000 D. More than $5,000
15. Which of the following does a credit score mainly indicate?
A. Knowledge of consumer credit
B. Attitude toward consumer credit
C. Amount of consumer debt
D. Risk of not repaying the loan
 E. Financial resources to pay back the loan
16. In the 5 Cs of credit, what does capacity measure?
A. The company’s profitability and cash flow to manage operations and growth
B. The financial structure and overall financial strength of a company
C. The management’s attitude towards risk and growth
D. The assets available to secure the debt in the event of a default
17. What is credit?
A. Money allocated to the specific account for future use by the consumer without
borrowing
B. Goods, services, or money received in exchange for a promise pay a definite sum of
money money at a future date.
C. The ability and willingness of an individual to pay back a loan as perceived by the lender
D. Only a credit card
18. Which of the following are Disadvantages of Credit
A. It allows you to purchase goods and services without having to pay the full cost upfront
B. It can help you build your credit score, which may enable you to access lower interest
rates on future loans and credit cards.
C. It often carries higher interest rates than other forms of financing, increasing the cost of
borrowing.
D. It can provide flexibility and convenience in covering unexpected expenses.
19. What is one characteristics of open line credit?
A. A down payment must be made before receiving the loan
B. Individuals are allowed to borrow an unlimited amount of money as long as they pay it
back
C. Credit is extended in advance so the borrower does not have to apply for credit each time
credit is desired.
D. Payments are equal and are require on a regular basis
20. A credit score is a prediction of your credit behavior, such as how likely you are to pay a loan back on
time, based on information from your credit reports.
A. True B. False
Part II. Practical Work Question
Project / Practical Question #1
This project concerned the following unit competence
LSA ACF2 05 1221 Prepare and Use a Personal Budget and Savings Plan
LSA ACF2 06 1221 Develop Understanding of Debt and Consumer Credit

Ato HYDER is the Supervisor of COC center. His personal Budget of the month January, 2011
E.C will be forecasted has the following. Net salary Br. 11,200, over time Worked Br. 2,400,
Position Allowance Br. 1,100, Transportation Allowance Br. 1,500 earned per monthly.

He has monthly personal expenditure as per the following details the remaining amount will be
deposited to his personal saving account.
Clothing _______________________________ 12%
Food & beverage________________________ 8 %
Food Groceries _________________________ 10%
Medical _______________________________ 3%
Housing _______________________________ 5 %
Transportation__________________________ 4%
Mobile telephone ________________________ 3 %
Educational fee__________________________ 8%
Mortgage loan repayment_________________ 11%
Commission fee_________________________ 2%
Credit Card ____________________________ 4%
Instruction:
Based on the above information perform the following tasks
Task 1: Calculate monthly and annual budget
Task 2: Determine the Net Saving.

He plans to open Internet shop center in Adama town with capital of 210,800.00 ETB after
one year as per his Business plan this capital is covered from annual personal saving account and
the remaining from saving and credit association at 10.5% annual interest rate for 2 years and
the principal amount will be paid semi-annually at equal installment.

Task: 3: Determine:
A. Amount of loan from saving and credit association
B. Amount of principal and interest repayment for the first term.
C. Amount of outstanding principle balance of at the end of the first term.
Task 4: If the Loan payment is made on Revolving credit? What is the amount of principal and
interest repaid at Maturity date with Maturity Value on the above information?

Task 5: If Ato Hyder invested the asset of Br. 400,000 and earned profit from investment is Br.
140,000 per year, what is the amount of investment rate on return?
Rate of return on investment (RRI) is profit over its invested asset
Practical Question #2

If your student loan payment is $150 a month, your auto loan payment is $250 a month and your
mortgage is $1,000 a month, then your total monthly debt is $1,400. If your gross monthly
income is $5,000.

Calculate your Debt to Income ratio?