FIN 2100 exam 1

Randal is 36 years old. He has adjusted gross income of $32,000. He has medical expenses for the year of $6,000. How much of these expenses can he deduct from adjusted gross income?

$2,800 (32,000*.10)=3,200 (6,000-3,200)

A tax credit of $50 for a person in a 28 percent tax bracket would reduce a person's taxes by:

$50

Barb Hotchkins is in the 28 percent tax bracket. A tax-exempt employee benefit with a value of $500 would have a tax-equivalent value of:

$694 ---- 500/(1-.28)

Assume a pretax return of 13%, a 10% tax rate and an inflation rate of 3%. What is the real return?

(.13 x (1 - .1)) = .117 minus inflation .03 = .087

If you have $1,000 today, and invest $500 at the beginning of each month, how many months would it take to accumulate $100,000 using a 6% interest rate?

(should display 136.49 which rounds to 136 months) NO SHIFT KEYS FOR CALCULATING N

Calculating Net Present Value (NPV) and Internal Rate of Return (IRR) What is the net present value and internal rate of return of buying an energy efficient appliance today for $200 which saves you $25 per year at the end of the year for the next 10 years using an annual or discount interest rate of 12% (this is the rate you could earn on your money if you invested it somewhere else).

Clear keys, check for 1 payment per year (since payments are annual) and End Mode Enter -200 Hit "CFj Nj" key (a zero appears for time period zero cash flow) Enter 25 (a one appears for first year cash flow, a positive number for cash saved) Hit "CFj Nj" key (a "1" appears for first year cash flow) Enter 10 Hit Orange "shift" key Hit "CFj Nj" key (calculator now knows there are 10 cash flows of 25 each) Enter 12 Hit "I/YR" key Hit Orange "shift" key Hit "PRC NPV" key (should display -58.74, if this is a positive number, then it's a good economic decision; if the number is negative, it's a bad economic decision assuming the given interest rate) Hit "IRR/Yr (this is the CST key in white) = 4.28 The IRR is 4.28%, which is less than 12%. Whenever the NPV is negative, the IRR will be less than the discount interest rate, and when NPV is positive, the IRR will be greater than the discount interest rate.

The credit cardholders who pay off their balances in full each month are known as

Convenience Users

Savings compounded ____________ would have the highest effective yield.

Daily

Debit cards

Debit your account at the time of each purchase

Prices of bonds:

Decreseases with increases in interest rate

Assume you make $60,000 per year ($5,000/month) and save monthly in a 401-K plan. You save 5% and the employer matches 3%. How much will you have in the plan after 35 years assuming a 10% return?

End mode Pmt/yr = 12 Pmt = -400 (5,000 times (5% + 3%)) Int = 10 N = 420 (35 x 12) Solve for FV = 1,518,655.22

Using the information in question 7, assume the employee is paid at month end and earns a 9% return on his/her 401-K investments. How much will be in the 401-K in 40 years?

End mode Pmt/year = 12 Pmt = (50,000/12*.11) Int = 9 N = 40 x 12 FV = 2,145,605

What is the present value of $3,000 received four years from now using a 10% interest rate with interest compounded annually?

Enter 3,000 (positive for cash received in after 4 years) Hit "FV" key Enter 10 Hit "I/YR" key Enter 4 Hit Orange "shift" key Hit "N x P/YR" key (should display 4 after HP multiplies 4 years times 1 payment per year in memory) Hit "PV" (should display -2,049.04)

What is the effective interest rate assuming a 6% annual rate with quarterly compounding of interest?

Enter 6 then hit orange shift key, then NOM% (this is the I/Yr key in white) Enter 4 then hit orange shift key, then P/Yr (this is the PMT key in white) Hit orange shift key then EFF% (this is the PV key in white) Answer = 6.14 or 6.14%

Assume your monthly salary is $4,000. Your employer will match 5% for every 8% you contribute towards your 401-K plan. If you were to contribute 8% for 30 years, howmuch would you have in the plan assuming a 10% return?

FV= $1,175,453.72 (p/y=12 pmt=4000*13% I=10 N=30)

Assume you make $75,000 per year and contribute 10% to your monthly salary to your 401-K account. Your employer will match 3% of your monthly salary and contribute to your plan as well for 30 years. If you expect this account to earn a 10% return, what is the value of the 401-K plan at the end of 30 years?

FV= $1,836,646.43 (p/y=12 pmt=75,000/12 I=10 N=30) 6,250*13%

Changes in fiscal and monetary policy do not generally impact a person's net worth:

False

Your bankcard has an APR of 18% and there is a 2% fee for cash advances. The bank starts charging your interest on cash advances immediately. You get a cash advance of $600 on the first day of the month. You get your credit card bill at the end of the month. What is the total finance charge you will pay on this cash advance for the month?

Finance charge = [.02 x $600] + [(.18/12) x $600] = $21

Investors A and B each own 1,800 shares of a Total U.S. Stock Market Index Fund, worth $100,000 on December 31. Investor A holds his/her shares in a taxable brokerage account with a $100,000 cost basis while Investor B holds his/her shares in traditional IRA account. Which investor has the highest net worth (i.e. who is worth more money, or are they worth the same)?

Investor B (IRA)

_____________ are the next group of expenses that a taxpayer is allowed to deduct once adjusted gross income is calculated.

Itemized deductions

Over the long term, which type of investment gives highest rate of return?

Stocks

(Card 9) How much of the monthly payment, and what is the balance due after two years of payments?

To determine the interest, principal and balance on the mortgage for year two (payments 13-24), Enter orange shift key, then AMORT (FV key in white) Display shows 1-12 first year Enter orange shift key, then AMORT (FV key in white) Display shows 13-24 second year Hit white equal sign "=" key at bottom of calculator three times, display shows PRIN 980.28 the amount of principal paid in year 2 INT 6,204.96 the amount of interest paid in year 2 BAL 88,105.52 the balance due on the mortgage after two years of payments

Credit unions typically offer lower loan rates than other financial institutions.

True

The first step of the career planning process is to:

assess your interests, abilities, and goals

Whole life insurance is ___________ than term insurance

cheaper

Annual Percentage Yield (APY)

is the appropriate measure of effective interest earnings or cost

A taxpayer is in a 37% tax bracket. A broker offers a tax free money market mutual fund yielding 2%. What is the pre-tax equivalent interest rate?

.02/(1 - .37) = .032 taxable equivalent rate

A savings account earns 4 percent. If the saver is in a 28% tax bracket, the after-tax savings rate of return would be ____ %?

2.88 = 4%(1-.28)

If you invest $1,000 today, receive quarterly dividends of $20 at quarter end, and sell your investment three years later for $2,900, what is your rate of return?

42.32%

An employee makes $50,000 per year and contributes 6% to his/her 401-K and the company matches 5%. The employee also pays $100/month in premiums for health insurance. What is the employee's W-2 income?

50,000 minus 3,000 (401-K) minus 1,200 (health insurance) = 45,800

Chandler borrows $1,000 for school this year. He is charged $50 in interest and pays a onetime fee of $15. What is the cost of financing and the APR?

6.5%

If the pretax return on an investment is 8% and you fall into the 15% tax rate bracket, what would be your after-tax return?

6.8% TAKING THE 15% FROM THE INVESTMENT 8(.15)=1.2 MINUS THE INVESTMENT FROM THE AMOUNT THAT'S BEING TAXED TO FIND THE AFTER-TAX RETURN: 8-1.2= 6.8

A savings amount of $5,000 on deposit for 8 years at 4 percent interest (compounded annually) would earn about ______ in interest.

???? ($1,840)

A saver will usually earn the highest rate with which of the following types of savings plans?

A 5 year certificate of deposit

A bank that is looking at your past payment records on your loans is most likely examining which aspect of the 5Cs of lending?

A. character B. capacity C. collateral D. capital E. conditions ->A. Character

Which of the following situations is a person who could be insolvent?

Assets $40,000; liabilities $45,000

The use of legitimate methods to reduce one's taxes is tax ____________.

Avoidance

A major activity in the planning component of financial planning is:

allocating current resources for spending.

A home owner paid $40,000 for their home. After refinancing, the owner owes $180,000. If the bank will provide home equity loans up to 80% of the value of the home and the maximum the homeowner can borrow is $50,000, what is the value of the home?

Chapter 6 ...????

A taxpayer 25 year old has adjusted gross income of $45,000 and out of pocket medical expenses of $5,000. How much can be deducted on Schedule A for medical expenses?

Medical expenses = 5,000 less limit of 3,375 (7.5% of AGI) = 1,625 deduction.

Financial experts advise that people keep an emergency reserve savings fund. What investment would be best suited for keeping an emergency reserve?

Money market account

To avoid high fees for loans, a person should not borrow from a:

Pawn Shop

Your FICO credit score is based primarily on:

Payment history and outstanding debt