Final exam Personal Finance
What does the "time value of money" mean? How can you figure this out?
. The increase of the amount of money due to earned interest or dividends; $100 today it worth more than $100 next year. b. You can figure this out by knowing the principal, the the annual interest rate, and the length of time your money will be in an account.
What is a variable expense? Give examples.
An expense that changes from month to month. b. Examples: food store, gas bill, utilities, vacation, entertainment.
Real Estate
An investment purchased with the intention to later sell it at a profit or generate rental income.
Describe one way in which you can use a checking account and one way in which you can use a savings account to efficiently manage your finances when you graduate from high school.
Answers may vary but should include some of the following information: a. Students should discuss opening a student checking account where they can deposit their paycheck from their job, and deposit any other money given to them to be used for expenses. Students would use this account to pay for regular items such as gas, car insurance, and entertainment with friends. Student should discuss this money is saved for short periods of time to pay for items purchased fairly frequently. b. Students should discuss opening a savings account for longer term savings. Students should discuss having a goal for the money they are saving such as school tuition or buying a car.
debit
Any transaction that removes funds from an account, including cash withdrawals, checks written on the account, and fees charged by the bank is called?
Assets
Anything that one owns that brings them value (jewelry, house, car)
Investments
Are putting savings to work to attempt to make more money and increase personal wealth; through interest, dividends, and appreciation.
Financial Planning
Arranging to spend, save and invest money to live comfortably, have financial security and live comfortably.
Which of the following is not an example of a social insurance program in the U.S.? ☐ Social Security ☐ FEMA disaster relief ☐ Federal Life Insurance ☐ Medicaid
Federal Life Insurance
What 3 components affect financial decisions and are an important part of budgeting?
Goals, vales, and attitude
Speculative Investments
High risk investments that may earn a large profit in a short time.
Jimmy is 40 years old and in good health. He recently purchased a 30-year term life insurance for himself. Which of the following statements is true? ☐ If Jimmy dies when he is 72, his beneficiaries will receive the full death benefit, as long as Jimmy paid his monthly premium for the full 30 years. ☐ If Jimmy dies when he is 72, his beneficiaries will receive a fraction of the death benefit, as long as Jimmy paid his monthly premium for the full 30 years. ☐ If Jimmy dies when he is 72, his beneficiaries will not receive any of the death benefit, even if Jimmy paid his monthly premium for the full 30 years. ☐ None of the above statements are true.
If Jimmy dies when he is 72, his beneficiaries will not receive any of the death benefit, even if Jimmy paid his monthly premium for the full 30 years.
worker's compensation.
If someone is injured on the job, they could be compensated through
beneficiary
The person who receives (or is eligible to receive) benefits from an insurance policy, a retirement plan, or another 'contract' is called the
Risk
The possibility of loss, either of the amount invested or the uncertainty that you will receive the promised return. The greater the risk, the greater the return.
Debit Card
a card issued by a bank where you have a checking account. When a person uses this card, it automatically deducts the funds from their account.
values
a person's principles or standards of behavior; one's judgment of what is important in life.
Budgeting
a plan of income and expenses on a monthly basis
Credit Report
a report detailing a person's financial history specifically related to their ability to repay borrowed money.
Scenario: Jackie wanted to buy an outfit for herself for a concert she was going to. She hasn't gotten paid yet, so she decided to charge it on her Chase Credit Card with an Annual Percentage Rate of 20.5%. Jackie got a new pair of jeans from express for $59.50 and a top from H&M for $39.95. a.How long will it take her to pay this off if she only pays $45.00 every month? b.What is the total amount Jackie has paid for this outfit? c.What was her total interest paid?
a. 3 months b.100.56 c.1.11
What is the difference between a budget deficit and a budget surplus? What would you do if you have a deficit? What would you do if you have a surplus?
a. A budget deficit is when you have more expenses than income. You are in the negative. b. A budget surplus is when you have more income than expenses, meaning you have money left over at the end of the month. c. If you had a deficit you could get another job to make more money or cut back on some discretionary expenses like entertainment. d. If you had a surplus, options include putting money away in your savings or emergency fund, or paying down bills, loans, or credit cards.
The problem of scarcity is what?
The basic economic problem of limited resources and unlimited wants, requiring that choices be made.
FICA
The federal act under which mandatory contributions for Social Security tax and Medicare tax are deducted from paychecks
Bear Market
The market condition that occurs when investors are pessimistic about the economy and sell stocks (a prolonged period of falling prices)
unemployment compensation
Workers who are involuntarily unemployed and willing to take on new employment are eligible for
List the type of fees that a bank can charge their customers.
. Types of Fees: i. ATM fee (per use) ii. ATM fee to use another bank's ATM (per use) iii. Online bill payment fee (monthly) iv. Insufficient funds fee (per occurrence) v. Overdraft fee (per occurrence) vi. Stop payment (per occurrence) vii. Minimum balance to waive fees
Medicare
A federal government program that pays for certain health care expenses for people aged 65 or older
Medicade
A federal government program that pays for certain health care expenses for people who make less than a certain amount of money, which depends on their state of residence
COBRA
A federal law that provides temporary continuation of health benefits to many employees who have lost their jobs, as well as some retirees, spouses and dependents
Annuity
A fixed amount of money paid to someone every year.
Money Market Fund
A mutual fund that invests in short-term securities, such as T-bills and commercial paper, which aims to provide an alternative for investment of short-term savings; they are widely regarded as being as safe as bank deposits yet providing a higher yield.
Describe the difference between a payee and a payer.
A payee is the business or person to whom a check is paid, while a payer is the business or person who issues the check.
Describe the role of a financial advisor.
A person who provides advice on money matters such as investments, retirement, or college savings depending on the needs of the client.
Auto Insurance
A policy that provides protection against most risks involved in owning an automobile including accidents and theft.
Disability Insurance
A policy that would provide replacement income, should one not be able to work due to illness or injury
bank statement
A printed or online statement that provides the depositor with a record of deposits, checks, ATM transactions, electronic funds transfers, made to an account over a period of time is called?
Explain what a safety deposit box is.
A safety deposit box is rented by individuals, kept in a vault inside the bank, and can be accessed with keys, pin numbers, or other security measures.
health insurance
A type of insurance in which a policyholder will reduce their risk/financial burden should they become injured or ill.
life insurance
A type of insurance in which a policyholder's beneficiary will receive compensation from the insurance company, should the policyholder pass away.
Renters Insurance
A type of insurance that will cover the costs to fix or replace one's assets should they be damaged/stolen while one lives in a rental property.
Homeowners Insurance
A type of insurance that will cover the costs to fix or replace one's home after experiences such as a natural disaster, falling trees, falling wires, etc
property damage liability
A type of insurance that would pay for damage caused to the property of others.
Preferred Stock
A type of stock that gives the owner the priority of receiving cash payments (dividends and return of capital upon liquidation of a company) before common stockholders but the preferred shareholders give up the right to vote.
You are getting ready to purchase items for your new college apartment. You really want a big flat screen TV that you see on sale at Best Buy. The deal was that if you put 10% down, you can be put on a payment plan for the rest. Your parents want to know what your net worth would be after you purchase the TV. The cost of the TV is $2,500, you put 10% down and take a loan for the rest. You have $1200 saved from working over the summer. You also have $370 in credit card bills. Your grandmother also gave you a check for $100 for graduating high school. What are your assets, liabilities, and net worth? Would this be a smart purchase?
Assets: $1,200 + $250 + $100 = $1,550 Liabilities: $2,250 + $370 = $2,620 Net worth after purchasing the TV would be - $1,070. This would not be a smart purchase.
deductible
Before an insurance company will honor a claim, the insured person must pay their policy's (the portion of claim paid directly by an insured person)
You are still on the hunt for the big screen TV, but now you have all of the money! The one you saved your money for was from Best Buy for $2,500. You got your grandmother to throw in $100 and you were able to find a deal from Groupon for the same TV for $2,020. At the last minute, your parents threw you $200 because they saw you were shopping responsibly; but the rest you have to cover yourself. What is your budget variance?
Budgeted - Actual = Variance (Actual - Budgeted is also accepted.) $2,500 - ($2,020-100-200) $2,500 - $1,720 = $780 left over
Bonds
Certificates of debt issued by a government or corporation that offers payment of the original investment plus interest by a specified future date.
Treasury Securities
Debt securities sold by the U.S. Federal Government and considered the safest investment. They could be T-bills (maturity of less than 1 year), T-notes (1 - 10 years), or T-bonds (greater than 10 years).
How do you determine your budget variance?
Either by subtracting your actual amount spent from your budgeted amount; or budgeted from actual; both methods are use; also worded as the difference between.
It is important to have disability insurance so that if you get sick you do not need to pay all of the medical expenses
F
What is the cost of using money and describe how this cost is allocated for depositors and borrowers.
Interest; depositors get paid interest by the bank for depositing and keeping money in an account that the banks will use to lend to borrowers. Borrowers will pay interest to the bank for taking a loan.
What is money management?
Keeping track of all income coming in and all living expenses going out, and creating a plan for the future use of money, including savings and investments.
Interest
Money accumulated over time that is paid by the borrower.
check cashing service
Name a service that can charge for cashing checks
Koby's grandmother is a retired widow. Describe three government benefits that can help keep Koby's grandmother healthy and secure.
Responses could include Social Security, Medicare, and Medicaid.
Alejandro recently graduated college. Describe three types of insurance that Alejandro should purchase in order to protect his assets
Responses may vary, but could include health, auto, disability, homeowners', and/or renters' insurance.
Borrow until payday
Small dollar, short term, unsecured loans that borrowers promise to repay out of their next paycheck or regular income.
Bodily injury liability coverage will pay for physical injuries caused to other individuals in the event of a motor vehicle collision
T
Current employees pay a FICA tax, which funds Social Security payments for people who are currently retired.
T
Government uses "social insurance" programs to provide a minimum level of assistance to members of society who are in need.
T
Medicaid is a federal health insurance program for low-income families, whereas Medicare is a federal health insurance program for retirees
T
Purchasing insurance is an important part of financial planning, because it offers a way to protect your hard-earned assets
T
Whole life insurance is active until the policyholder dies, while term life insurance is only active for a predetermined length of time
T
Credit Union
This type of bank is a non-profit deposit institution that is owned and operated by its members. This organization typically makes loans and gives it back to its members in the form of higher interest on savings and lower interest on loans.
The Federal Reserve
This was created on December 23, 1913 by Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system.
Reconciliation
What is it called when you cross check your own records with the records your bank has in a bank statement?
overdraft
What is it called when you write a check that exceeds the amount of funds in the account on which the check is written?
bounced check
What is it when a bank returns a check because it is not payable due to insufficient funds?
intrest
What is the cost of using someone else's money?
transfer
What is the movement of funds from one account to another called?
underbanked
What is the term for people or businesses that have poor access to mainstream financial services normally offered by retail banks
unbanked
What is the term for people who do not use banks or banking institutions in any capacity?
endorse
What is the term for the action of signing the back of a check, in order to cash it or specify another payee, who then can endorse and cash it?
checking
What type of account do you have easier access to and typically keep money in it for a shorter period of time?
Explain the difference between a debtor and the creditor.
a. A debtor (borrower) is any person or company who borrows money for the purchase of goods and services, with an agreement to repay within a certain timeframe. b. A creditor (lender) is any person or company who lends money, goods, services or securities.
What is a Mortgage Loan? Why is your credit rating so important when you are considering taking out a Mortgage Loan.
a. A loan in which property or real estate is used as collateral. The borrower will get the large sum of cash and will then be required to pay the loan back with interest over a long period of time (usually 15-30 years). b. Your credit rating will determine not only if you can obtain the loan but also the interest rate you will pay to the bank and subsequently the large amount of extra money paid over the principle of your mortgage.
What is capacity
a. A person's ability to repay a loan based off the income you are earning b. Can you handle more debt? Can you repay the loan?
1. What is a portfolio? What is its purpose?
a. A portfolio is a collection of all the investments held. b. The purpose of a portfolio is to diversify investments to decrease risk.
Differentiate between a secured loan and an unsecured loan. Your response should include the concept of collateral.
a. A secured loan is a loan that has collateral attached to the repayment of the loan. If the loan is not repaid (according to the loan agreement), then the collateral can be taken by the lender. (for a car loan or mortgage, the car/home would act as the collateral) b. Collateral is an asset pledged against the repayment of the loan. c. An Unsecured loan is A loan that does not have collateral. The lender can seek reparation for the loan, but through legal means.
Explain a stock split. Why does this happen? Why is it good for investors?
a. A stock split is the increase in the number of shares that are outstanding by issuing more shares to current shareholders as decided by a company's board of directors. It increases the number of shares a stockholder owns, but decreases the price per share. b. The purpose of a stock split is to adjust the price of the stock to a level the Board of Directors is more appropriate. If the price gets too high (or low), people will not want to invest in it. The new adjusted price will attract new investors. c. It is important to investors because more interested investors gives current shareholders greater opportunities to see their investment increase in value.
What is a credit score? What is the range for FICO credit scores? Explain which score is considered bad. Explain which score is considered excellent.
a. A system creditors use to rate how willing and able you are to pay back loans. b. 300 to 850 i. 300-629: Bad credit ii. 630-689: Fair credit iii. 690-719: Good credit iv. 720 and up: Excellent credit
Name two advantages and two disadvantages of online banking.
a. Advantages i. Convenient ii. Expedient iii. Inexpensive iv. Paperless v. Convenient bill paying medium vi. Bank any time of day or night vii. Bank weekdays, weekends, and even holidays viii. Bank from anywhere in the world b. Disadvantages i. Need an account with an Internet Service Provider (ISP) ii. Security concerns, like "hackers" accessing your bank accounts iii. Original setup for bill paying time is time-consuming but will ultimately be a time-saver iv. Switching banks can be more cumbersome online than in person v. Must have basic computer skills and Internet knowledge vi. Must be comfortable using a computer
Explain the advantages and disadvantages of owning a mutual fund.
a. Advantages: professional management, diversification. b. Disadvantages: management and administrations costs, taxes.
What is a fixed expense? Give examples.
a. An expense that stays the same from month to month. b. Examples: rent, insurance, cell phone, cable.
What is appreciation? What is depreciation? What items are affected?
a. Appreciation: increase in value of an investment for more than its purchase price. i. Items: real estate, stocks, bonds, mutual funds. b. Depreciation: decrease in value to less than its purchase price, usually because of wear or age. i. Items: cars, buildings, equipment
In order to avoid identity theft, what important information should be kept private?
a. Bank account information b. Credit card or debit card number c. Children's personal information d. Driver's license information e. Login and passwords f. Social security number
Explain the differences between a bank card, a store card, and a travel & entertainment card.
a. Bank card: credit cards issued by financial institutions, works like a revolving charge. b. Store card: credit card from a specific store that can only be used at that store or a specific group of stores. Can only be used in those stores, works like a revolving charge. c. Travel and entertainment card: credit cards issued by financial institutions, used for travel and/or business purposes (flights, hotels, restaurants), works like a regular charge. Must be paid in full at the end of a period.
Describe what reconciling a bank statement is and what can occur when you do not reconcile your bank statement.
a. Bank reconciliation - (also known as balancing your checkbook) the process of comparing and updating the account holder's balance and the bank's balance to determine agreement on the funds available for future transactions. b. Possibility of human and/or technological error c. Insufficient funds (ISF): when a bank account does not have enough money to cover written checks or debit card purchases d. Overdraft: when a check is written or a debit card is used for an amount of money that exceeds the funds in the account at the time e. Bounced check: A check that a bank returns because it is not payable due to insufficient funds. Banks charge a fee for checks that are returned.
What are the five types of investment risk? Explain each.
a. Business failure risk - the risk the company you invest in fails. b. Financial market risk - the performance of the financial markets. c. Global market risk - the economic stability of a country. d. Interest rate risk - if interest rates go up, your investment may go down if you are locked into a specific rate. e. Inflation risk - you could lose buying power, meaning your money won't be able to buy as much.
Explain the difference between a capital gain and a capital loss
a. Capital gains are profits from selling or transferring an investment at a higher price than the purchase price. b. Capital losses are the sale of an investment for less than its purchase price.
What three items does a budget track? How often is this tracked?
a. Cash flow, income, and expenses. b. Usually every month.
Your younger brother needs $15.00 to buy gas to get to work. He says he will pay you back tomorrow when he gets his paycheck. You remind him that he already owes you $15.00 from the last time he needed gas money and has a history of not paying you back as promised. He offers to let you keep his Xbox one until he pays you back. Explain if your brother is creditworthy, using the 3 C's.
a. Character - he has not paid back his previous loan b. Capacity - he'll owe $30 but gets paid tomorrow c. Capital - if he doesn't pay $30 back the collateral you keep is his Xbox one (which is worth more than $30)
What are the 3 C's of credit? What do they represent?
a. Character, Capacity, Capital b. A creditor considers these when deciding to whom he/she should lend money
Why do corporations issue shares of stock? Why do people buy shares of stock?
a. Companies issue shares of stock to raise capital to purchase things for the company. b. People purchase shares of stock to receive potentially higher return on their investments (make a profit).
Credit Cards vs. Debit Cards: Explain 2 advantages and 2 disadvantages of credit cards. Explain 2 advantages and 2 disadvantages of debit cards.
a. Credit cards: i. Advantages of credit: Use goods and services today, but pay for them later, Keep track of all purchases, Build a good credit reputation, Not have to carry cash, Take advantage of items on sale for items the consumer may need to purchase in the near future. ii. Disadvantages of credit: Not keeping track of all your purchases, Careless buying, Overuse of credit, Getting too far into debt and not being able to repay, Losing your good credit reputation, Bankruptcy. b. Debit Cards: i. Advantages of debit cards: no interest/fees, limits buying, Deducts amount from your account immediately. ii. Disadvantages of debit cards: activity could lead to overdrafts on checks, need good record-keeping, Does not build credit.
What is the difference between a "debit" and a "credit" in your account?
a. Debit- any removal of funds from your account balance b. Credit - any addition of funds to your account balance
What is the difference between discretionary and non-discretionary spending? Give examples of each.
a. Discretionary spending is when the buyer has a choice (also called discretionary expenses). i. Examples: saving for a vacation, delaying a purchase to a later date. b. Non-discretionary spending is expenses over which one does not have control (also called non-discretionary expenses). ii. Examples: taxes, mortgage payments, insurance, social security.
What is compound interest? How is it calculated?
a. Earning interest on the amount invested plus the interest you have already earned. The principle plus interest earned together gets reinvested in the following term. b. P(1+r/1)yearsExample: You made $1,800 from gifts from your high school graduation. You are taking a few years off before heading to college. If this is compounded annually at 6.5%, how much will you have in 3 years? $1,800(1 +(.065/1)) 3 = $ 2,174.31
List the items that need to be considered when reconciling your bank account?
a. Electronic Transactions b. Deposits c. Fees d. Paid checks
Explain the four laws that are meant to protect consumers when using credit.
a. Equal Credit Opportunity Act: this federal law makes it unlawful for any creditor to deny an applicant seeking credit based on race, color, religion, national origin, sex, marital status, or age. b. Fair Credit Billing Act: a federal law that protects consumers against unfair billing practices and provide a way for consumers to address billing errors. Some errors include: charges not made by the consumer, charges in the wrong amount, statements mailed to the wrong address, charges not actually made by the consumer. c. Fair Credit Reporting Act: a federal law that regulates the collection, dissemination, and use of consumer information, including consumer credit information. This federal law gives any consumer the right to obtain a free copy of their Credit Report from all three national credit reporting companies once a year. The three companies are: Equifax, Experian, and TransUnion. d. Truth in Lending Act: a federal law that requires lenders to provide the consumer with loan cost information so a consumer can calculate the cost of borrowing and comparison shop for types of credit.
What is equity capital? Why is it generated?
a. Equity capital is money the businesses get from their stockholders in order to operate. b. It generates money so corporations have the ability to purchase items like buildings, equipment, and fund other operations.
What is the difference between an explicit cost and an implicit cost?
a. Explicit Cost is the total of the out-of-pocket costs; those you actually pay for. b. Implicit Cost is the value of other alternatives that are foregone when making a choice.
Explain the formula for debt-to-income ratio. What are the tiers? What does it gauge? When trying to pay down one's debt, explain the Debt Ladder Method. Example: Suppose that your monthly net income is $2333.00. Your monthly debt payments include your gas credit card, your gym membership, and your health insurance. These bills all total $395. What is your debt payments-to-income ratio? [Show work]
a. Formula: Monthly Debt Payments = Debt Payments-to-Income Ratio, then convert to percentage. Monthly Net Income. b. Less than 15% means good; 15%-20% means caution; over 20% is dangerous. Meaning you are more likely to go into debt. c. Gauges if a person can handle all monthly expenses. d. First list all of your debt from largest to smallest including the total debt, the interest rate, and the minimum monthly payment. Next determine how much money you can put aside for debt this month and set aside the funds to make the minimum monthly payment for each account. With the leftover allocated money toward monthly debt apply it all to the account with the highest interest rate. e. Pay the highest interest rate cards first, in the long run you'll be paying less. f. Example: $395/$2,333= 0.169= 16.9%
You are currently a high school student but will be attending college in the fall. Make a list of 3 variable expenses and 3 fixed expenses you incur as a high school student and predict 3 variable expenses and 3 fixed expenses you will incur as a college student living in a dorm room.
a. High school student. i. Fixed expenses: cell phone, savings from working, car insurance. ii. Variable expenses: automobile gas, prom expenses, entertainment. b. College student. i. Fixed expenses: tuition, cell phone, monthly meal plan. ii. Variable expenses: entertainment, books, school supplies.
What is the Rule of 72? How is it calculated?
a. This is a way to estimate the number of years it will take you to double your investment, with a given rate of return. b. Rule of 72: 72 / annual interest rate = years to double
What is identity theft? Explain the two types
a. Identity theft is a crime that includes the fraudulent possession of another person's private personal information (name, Social Security number, driver's license, bank information) and uses it for personal financial gain. b. Two types of identity theft are: i. Account takeover: thief gains access to existing accounts, thief usually changes the address and runs up limit before it is discovered by the owner of the account. ii. True name: thief uses personal information to open new accounts (credit cards, cellular phone services, bank accounts).
What is an IPO? What is the purpose of this?
a. Initial Public Offering is the first time shares of stock are ever publicly offered. b. The purpose is to help the company raise money.
How do businesses demonstrate the use of credit?
a. Lines of credit to open a business b. For research and development c. Used for expansion and growth
Name two rules that protect your online banking.
a. Make sure you log off when you are done using a bank account b. Avoid using small hosted web sites using community forums (such as computer game sites) c. Dedicate a home computer or virtual website just for your online banking d. Avoid tapping into free wifi networks when banking e. Create a difficult password such as a three/four/five word phrase followed by a number and a symbol f. Lookup third party bank apps before you download for safety and security rating first g. Never write the password down or have your computer save it
Explain the significant roles that banks play a part in our society
a. Makes Commerce much easier (We trust the bank to write checks, withdraw, deposits, bank cards, etc.) b. Your money is FDIC insured on deposits up to $250,000. c. Source for loans - Bank loans provide an opportunity to make big purchases.
Explain the difference between the New York Stock Exchange (NYSE) and the NASDAQ. What is the function of each?
a. NYSE is a number of different markets or exchanges, it is located in NY. It is responsible for setting policies, supervising member activities, listing securities, evaluation applicants, and overseeing the transfer of seats. b. NASDAQ is known as an over the counter market. It is a market that has no central location; rather it operates electronically as a computer network. The system keeps watch on trades to be sure all rules and regulations are fair and are being followed.
What is the difference between needs and wants? Give examples.
a. Needs are for survival. i. Food, shelter, clothing, medicine b. Wants are for comfort. ii. Designer clothing, electronics, high end meals
Jason purchases organic produce despite the higher cost of these products. However, Jason is also a single parent with two children. Due to the higher cost of organic groceries, he cannot afford his family's current weekly food budget. Explain how needs, wants, value, and scarcity affect Jason.
a. Needs: Jason needs food for his family. b. Wants: Jason wants to shop organic only. c. Values: Jason values fresh grown vegetables vs ones grown with chemicals. d. Scarcity: Jason doesn't have enough money to buy organic only, so he has to choose enough food for the family or healthier lifestyle yet starving by the end of the week.
What is net worth? How is it calculated?
a. Net Worth is a person's overall wealth, as measured by the difference between a person's assets and liabilities. b. Create a personal balance sheet, calculating person's total assets and total liabilities. Subtract total liabilities from total assets.
List ways to build or keep a good credit score
a. Pay your bills on time. Avoid late payments. b. Keep balances low on credit cards. c. Keep your balance at no more than 30% of your limit. d. Keep a credit card you have had for a while open (as long as balance is low and paid on time), the longer the history the less unknown for the lender. e. Keep a healthy mix of credit such as credit card, auto loan, mortgage. f. Avoid too many inquiries for new credit in a short period of time.
1. Explain the difference between present value and future value.
a. Present value is the amount of money you would need to deposit today in order to have a desired amount in the future. b. Future value is the amount your original deposit will be worth in the future based on earning a specific interest rate over a specific period of time.
How does the government demonstrate the use of credit?
a. Providing goods and services to citizens b. Building schools, highways, hospitals, airports, etc. c. Paying government employees' salaries
Explain the concept of "living within your means."
a. Spend less than you earn. b. Regardless of income, if you spend more than you earn, you will have financial trouble. c. Cost of living may vary, so you could be rich in one state and poor in another.
Explain the difference between the Future Value of a series of deposits and the Present Value of a series of deposits.
a. The Future Value of an Annuity is if you deposit a set amount of money into your account each year at a fixed interest rate for a fixed period of time, how much will you have in the future. This is making continuous deposits. b. While the Present Value of an Annuity is if you would like to remove a set amount of money from your account each year, how much do you have to deposit today based on a fixed interest rate for a fixed period of time. This is making continuous withdrawals.
What is capital?
a. The assets a borrower has that the lender could go after, if the borrower doesn't meet his/her financial obligations. b. Collateral is a specific asset pledged to back up a loan. c. What are your assets and net worth?
What is liquidity risk? Give an example of what would be a high liquidity risk?
a. The risk that you will not have the ability to easily convert financial assets into cash without loss in value. b. House, car, collectibles.
What is simple interest? How is it calculated?
a. This is a way to calculate the interest you will earn on savings or have to pay on a loan; multiply the principle by the interest rate by the length of time. b. A=p×(1+rt). Example: You just bought a computer for $1,200 from the electronics store. They offered a deal for 3 years with simple interest at 7 percent. How much interest will you pay? How much will this computer cost you total? $1,200 * [ 1 + ( .07* 3 ) ] = $1,452 You will pay $1,452 total for the computer. You will pay $252 in interest.
Name the at least three reasons why it is important to use a bank?
a. To provide protection for savings and help lower the risk of theft b. To allow safe use of borrowing money with interest rates that are not exploitive, c. To provide an efficient way of transferring money from one group to another
How do you know when you have a balanced budget?
a. When your money coming in (income) is equal to the amount going out (expenses). b. Zero balance.
What is the "catch 22" when it comes to building credit?
a. You have to use credit (and have some debt) in order to build your credit and obtain a credit score. b. If you never use credit or take out loans, your credit score with be very low and/or zero.
What is character?
a. Your willingness to pay your bills b. Your credit history is the past record of your repayments. c. Will you repay your loans?
Example of FV/PV Table. a. How much will John have if he puts $6,000 into his savings account every year for 5 years at a 5% interest rate? (Use FV and PV Table) i. What table did you use b. Starting next year, you plan to take out $1,000 out of your savings account each year for 5 years. Your account earns 7% interest. How much will you need to deposit now to make this plan work? (Use FV and PV Table) i. What table did you use?
a.$6000 * 5.526 = $33,156, Table B b.$1000* 4.100 = $4,100, Table D
a. Using the compounding interest annually method complete the table below. How much will you have at the end of 3 years if you are making 5% on $3,000? P(1+r/1)years b. Using the compounding interest quarterly method complete the table below. How much will you have at the end of 3 years if you are making 5% on $3, c. What is the difference?
a.P(1+r/1)years $3,000(1+0.05/1)3 = $ 3,472.88 b.P(1+r/4)quarters $3,000(1+0.05/4)12 = $3,482.26 c.$3,482.26 - $ 3,472.88 = $ 9.38
What is an opportunity cost? What can this also be known as?
a.The cost of making a choice. b. Including the explicit costs and the implicit costs. c. Also known as trade-off.
emergency fund
an account of money set aside for use in a financial crisis
Regular Charge Account
an account that works like a tab a store, billed monthly, and payment is usually due in full at the end of the period.
income
any money earned from either working or other financial instruments.
liability
anything that one owes that is considered debt (loans, mortgage, balance left on car loan).
What is the general term for an establishment that takes deposits and provides loans and other financial service?
bank
What is a type of bank whose main purpose is to take deposits and make loans for profit?
commercial bank
Secured Credit
credit backed by collateral; usually required when the value of the item purchased is very large(car/home), sum of a loan is very large, or for someone who has a less than desirable credit rating (credit risk).
Sales Credit
credit that is being used to promote sales.
Where should you have at least 3-6 months of money saved, in case of hardship?
emergency fund
Budget Charge Account
equal monthly payments, possibly including interest, over a specific period of time.
Usury Law
government regulations that set a limit on the amount of interest that can be charged on a loan.
1. What is the rate of return? How is it calculated? a. Example: The total amount earned on an investment of $2,100 in 6 years is $450.
i. Rate of Return is a percentage amount of the return on an investment or loan. ii. The greater the risk you take on the investment, the greater the potential rate of return as well as the greater the potential chance that you may not receive that return. iii. Total Amt Earned ÷Number of Years = Ave Return Amt Average Return Amount ÷ Number of Years = Average Rate of Return (%) iv. 450/6=75/6=12.5%
Revolving Credit
is a system of retail credit where buyers make periodic payments on purchases and service charges.
Installment Credit
is given for the purchase of durable goods, on condition of its repayment at regular intervals over a specified period of time until paid in full. The seller remains the legal owner until the last installment is paid.
Annual Percentage Rate (APR)
it is the annual percentage you will be charged to borrow money. It includes all additional fees and how often interest is charged into an account. The higher the APR the higher the cost to borrow.
A person or entity that obtains a _____________ (i.e. temporary transfer of money) from one person or institution with a promise to repay it is called a _______________.
loan/borrower
The person who makes regular insurance payments for insurance coverage is called the; these payments are also called
policyholder premiums
Which of the following will not affect your auto insurance premiums? ☐ Your age ☐ Your address ☐ Your race ☐ Your gender ☐ Your marital status
race
Playing football, smoking cigarettes, and traveling to exotic places are all activities that involve some degree of risk. ☐ Disability ☐ Risk ☐ Insurance ☐ Catastrophe
risk
Credit
the ability to receive goods, services, or money now with an arrangement to pay for them later.
Cashflow
the actual amount of cash transferring in and out of somewhere
standard of living
the amount of wealth, comfort, and other factors that a person has.
Minimum Payment
the amount that must be paid off each month to remain in good standing.
The federal government provides retirement, disability, and survivor's benefits through which program? ☐ Medicare ☐ Medicaid ☐ FICA ☐ Social Security
☐ Social Security