FIN 2010 OU Chapter 1 Review

T/F According to the course syllabus, the Learnsmart practice questions (your homework) must be completed before the due date to get credit.

TRUE

T/F According to the course syllabus, you can take the quizzes late with a penalty.

TRUE

T/F Inflation is a rise in the general level of prices and it reduces the buying power of the dollar.

TRUE

T/F The financial activities for a young, single person will probably be the same as those for an older couple with no dependent children at home

FALSE *specialized financial activities differ for a young, single versus an older couple without children*

Annual earnings on a $500 Certificate of Deposit earning 3% would be a) $5.00 b) $15.00 c) $25.00 d) $30.00 e) $500.00

b) $15.00 *Future value = $500 × .03 × 1 year = $15.00*

Future value computations are often referred to as: a) Discounting. b) Present value. c) Compounding. d) Simple interest. e) An annuity.

c) Compounding

If a $10,000 investment earns a 7% annual return, what should its value be after 6 years? a) $10,000 b) $10,700 c) $15,000 d) $15,010 e) $15,100

d) $15,010

Place the following steps for a personal financial plan in the proper order: 1. Review and revise the financial plan 2. Identify alternative courses of action 3. Create and implement your financial action plan 4. Determine your current financial situation 5. Evaluate alternatives 6. Develop your financial goals a) 6, 1, 2, 5, 3, 4 b) 4, 2, 6, 5, 3, 1 c) 3, 6, 4, 2, 5, 1 d) 4, 6, 2, 5, 3, 1 e) 6, 2, 5, 4, 1, 3

d) 4, 6, 2, 5, 3, 1

Rhonda Miller wants to take out a 4 year loan to purchase a car. What type of computation would she use to calculate her monthly payments? a) Present value of a single amount b) Future value of a single amount c) Simple interest d) Present value of an annuity e) Future value of an annuity

d) Present value of an annuity

Steve Wilson wants to deposit $150 per month into an account earning 4 percent for the next 3 years, so he can purchase a used car at that time. What type of computation would he use to determine the amount he will have for his purchase? a) Present value of a single amount b) Future value of a single amount c) Simple interest d) Present value of an annuity e) Future value of an annuity

e) Future value of an annuity

If a person spends $20 a week on coffee (assume $1,000 a year), what would be the future value of that amount over 10 years if the funds were deposited in an account earning 4 percent? Use Exhibit 1-B. (Round your FV factor to 3 decimal places and final answer to the nearest whole dollar.)

Future Value: $12,006 *$1,000 × 12.006 = $12,006*

T/F According to the course syllabus you can save your quiz if your not finished and complete it later.

FALSE

T/F Opportunity costs refer to money already spent.

FALSE *An opportunity cost is what a person gives up when a choice is made*

If you desire to have $13,000 for a down payment for a house in eight years, what amount would you need to deposit today? Assume that your money will earn 4 percent. Use Exhibit 1-C. (Round your PV factor to 3 decimal places and final answer to the nearest whole dollar.)

Deposit: $9,503 *$13,000 × 0.731 = $9,503*

T/F Financial Plans are only created by financial planners

FALSE *Financial plans are created by individuals as well as by financial planners or by using a money management software package*

A family spends $40,000 a year for living expenses. If prices increase 2 percent a year for the next two years, what amount will the family need for their annual living expenses in two years? Use Exhibit 1-A. (Round your FV factor to 3 decimal places and final answer to the nearest whole dollar.)

Living Expenses: $41,600 *$40,000 × 1.040 = $41,600*

In 2005, selected automobiles had an average cost of $17,000. The average cost of those same automobiles is now $20,400. What was the rate of increase for these automobiles between the two time periods? (Round your answer to the nearest whole percent.)

Rate of Increase: 20% *($20,400 − $17,000) / $17,000 = 0.20, or (20 percent)*

Ben Collins plans to buy a house for $186,000. If the real estate in his area is expected to increase in value by 1 percent each year, what will its approximate value be eight years from now? Use Exhibit 1-A. (Round your FV factor to 3 decimal places and final answer to the nearest whole dollar.)

Value of Increase: $201,438 *$186,000 × 1.083 = $201,438*

Carla Lopez deposits $3,400 a year into her retirement account. If these funds have an average earnings of 8 percent over the 40 years until her retirement, what will be the value of her retirement account? Use Exhibit 1-B. (Round your FV factor to 3 decimal places and final answer to the nearest whole dollar.)

Value of Retirement Account: $880,804 *$3,400 × 259.060 = $880,804 *

Randy Hill wants to retire in 20 years with $1,000,000. If he can earn 10% per year on his investments, how much does he need to deposit each year to reach his goal? Round your answer to the nearest dollar. a) $17,460 b) $18,000 c) $5,727 d) $25,000 e) None of the above

a) $17,460 *Correct answer uses 10% for 20 periods Exhibit 1-B table (Future Value of an Annuity): Future value = annual deposit * factor = $1,000,000 = annual deposit * 57.275 then Annual deposit = $1,000,000/57.275 = $17,460 (rounded). This can also be solved using computer or calculator functions using the following variables: N = 20, I = 10, PV = 0, FV = 1,000,000. Solve for PMT: $17,460 (rounded)*

If a $10,000 investment earns interest of $500 in one year, what is its rate of return? a) 5 percent b) 10 percent c) 50 percent d) 75 percent e) 100 percent

a) 5 percent *Solve for rate: Principal x rate x time = interest ($10,000 x rate x 1 year) = $500 then $10,000 x rate = $500 then rate = $500/$10,000 = .05 = 5%*

The saving component of financial planning focuses on long-term security and includes: a) A regular savings plan for emergencies b) A current will c) Bankruptcy counseling d) A realistic budget for your current financial situation e) Minimizing transportation expenses through careful planning

a) A regular savings plan for emergencies

Which of the following short-term goals is stated most clearly using the SMART approach? a) Buy a car for less than $15,000 within 6 months b) Retire in 10 years at age 65 with $2,000,000 in my 401(k) account c) Purchase a house with a mortgage no greater than $150,000 within 5 years d) Set up an emergency fund e) Invest $50 per month for the next 12 years for my nephew's college fund

a) Buy a car for less than $15,000 within 6 months *The only clearly stated short-term goal listed is A. B and E are long-term goals. C is an intermediate goal. D is a short-term goal; that is not measurable and does not have a time limit*

Present value computations are also referred to as: a) Discounting. b) Future value. c) Compounding. d) Simple interest. e) An annuity.

a) Discounting

Which of the following would increase the interest rate for a loan? a) Poor credit rating b) Higher down payment c) Expected lower inflation d) Lower consumer prices e) Short time to maturity

a) Poor credit rating

Many Americans have money problems because of: a) Poor planning and weak money management habits b) Too many clearly defined goals c) Proper use of credit d) Not enough advertising to make effective decisions e) Controlled spending

a) Poor planning and weak money management habits

Jim Johnson was laid off from his job two months ago. He just received an offer for a position that pays 3/4 the salary of his old job. Why should he set up a financial plan? a) To increase the effectiveness of obtaining, using, and protecting his financial resources. b) To decrease control of his financial affairs regarding debt. c) To accept the loss of freedom from financial worries due to his new position. d) To learn how to manage depending more on others. e) To find out why he was laid off.

a) To increase the effectiveness of obtaining, using, and protecting his financial resources.

Patrick Guitman recently graduated from college with $20,000 in student loans and $5,000 in credit card debt. He usually makes minimum payments on his debt and he has been late with three payments in the last year. He wants to buy a new car but was told that his interest rate on a loan would be very high. What is the most likely reason this might be so? a) General interest rates are very low b) His credit rating is poor which results in a higher interest rate c) He already has a student loan outstanding d) Recent graduates are not allowed to have more than $25,000 in debt outstanding e) Interest rates must be tied to the CPI

b) His credit rating is poor which results in a higher interest rate

The Rule of 72 is: a) A tool to determine the number of years until retirement for an employee b) Used to estimate how fast prices will double using a given annual inflation rate c) The legal code for requiring companies to provide a match on retirement savings d) Used to calculate interest rates for savings e) The number of steps required to complete a financial plan

b) Used to estimate how fast prices will double using a given annual inflation rate

A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities is a(n): a) Insurance prospectus. b) Financial plan. c) Budget. d) Investment forecast. e) Statement.

b) financial plan

f Melinda Miller estimates that her $100 weekly grocery bill will increase at an annual inflation rate of 4%, what should her weekly grocery bill be in 3 years? a) $100.00 b) $112.00 c) $112.50 d) $114.00 e) $121.60

c) $112.50 *$100 * 1.125 = $112.50.*

If inflation is expected to be 8 percent, how long will it take for prices to double? a) 6 years b) 7 years c) 9 years d) 12 years e) 18 years

c) 9 years *Rule of 72: (72/8 = 9 years)*

The major function of personal financial planning is to: a) Reduce taxes. b) Increase savings. c) Achieve personal economic satisfaction. d) Improve your credit rating. e) Obtain adequate insurance protection.

c) Achieve personal economic satisfaction

Who is less likely to be harmed by inflation? a) Retired people b) Lenders c) Borrowers d) Fixed income consumers e) Financial regulators

c) Borrowers

An advantage of effective personal financial planning is: a) The use of low-interest savings b) Increased impulse spending c) Increased control of financial affairs d) More credit card debt e) Less monitoring of investments

c) Increased control of financial affairs

If I can invest a dollar today and earn interest on it, then it should be worth _________ in the future: a) Less b) The same as c) More d) Either less or the same as e) Either the same as or more

c) More

Which of the following intermediate goals is stated most clearly using the SMART approach? a) Buy a car for less than $15,000 within 6 months b) Retire in 10 years at age 65 with $2,000,000 in my 401(k) account c) Purchase a house with a mortgage no greater than $150,000 within 5 years d) Set up an emergency fund e) Invest $50 per month for the next 12 years for my nephew's college fund

c) Purchase a house with a mortgage no greater than $150,000 within 5 years *The only clearly stated intermediate term goal listed is C. A is a short-term goal; B and E are long-term goals. D is a short-term goal that is not measurable and does not have a time limit*

According to the Investopedia Rule of 72 video, what letter is used in the equation to represent the interest rate? a) G b) I c) R d) Y

c) R

The consumer price index measures: a) The prices of goods and services in the United States b) The prices of goods and services in Bolivia c) The average change in prices of goods and services of urban consumers d) The change in prices of goods and services around the world e) None of the above

c) The average change in prices of goods and services of urban consumers

The goal of purchasing a long-term care insurance policy would be most appropriate for a) A young couple without children. b) A single parent with a preschool daughter. c) An unmarried couple without children. d) An older single person with children. e) A young single individual.

d) An older single person with children

In the Dave Ramsey video, he mentioned that no college student should graduate without knowing about which of the following? a) How the returns in the stock market have outperformed all other investments over time. b) How the rule of 72 works with regards to compound interest. c) How a bank savings account is one of the worst places to invest your money. d) How to explain the impact of investing early versus later in life.

d) How to explain the impact of investing early versus later in life

To develop financial goals, one should: a) Set several general goals for the short-term b) Only set long-term goals after short-term goals have been accomplished c) Focus on intermediate goals first d) Identify specific, realistic goals that are measurable along with a time frame and an action plan e) Not worry about whether or not the goals can be achieved based on one's income and life situation

d) Identify specific, realistic goals that are measurable along with a time frame and an action plan

Which of the following long-term goals is stated most clearly using the SMART approach? a) Buy a car for less than $15,000 within 6 months b) Retire in 10 years at age 65 c) Purchase a house with a mortgage no greater than $150,000 within 5 years d) Set up an emergency fund e) Invest $50 per month for the next 12 years for my nephew's college fund

e) Invest $50 per month for the next 12 years for my nephew's college fund *The only clearly stated long-term goal listed is E. A is a short-term goal. B is a long-term goal; however, it is not measurable. C is an intermediate goal. D is a short-term goal that is not measurable and does not have a time limit*