Finance Notes Chapter 1
John Gleason is interested in purchasing a 46" rear projection TV for his living room. He knows that right now the TV will cost approximately $1500. John wants to borrow the money to purchase the TV but is a little concerned because he thinks interest rates are going to fall in the future. He is worried that he might get stuck with a loan at a high interest rate. What type of risk is John worried about?
Interest Rate Risk
One aspect of financial planning is to buy stocks, bonds and mutual funds with the potential for long term growth. Which aspect of financial planning does this deal with?
Investing
As Jean Tyler plans to set aside funds for her young children's college education, she is setting a(n) ____________ goal.
Long Term
One aspect of financial planning is to make sure you maintain adequate insurance coverage for your needs. Which aspect of financial planning does this deal with?
Managing Risk
Brad Johnson has a goal of "saving $50 a month for vacation." Brad's goal lacks:
A Time Frame
Mary Sander's new job is very demanding. She regularly works long hours and on the weekends. As a result, Mary has not had much time for her family and friends. This is an example of:
Personal opportunity cost
Developing and using a budget is part of which component of financial planning?
Planning
Which type of computation would a person use to determine current value of a desired amount for the future?
Present Value of a single account
Which of the following goals would be the easiest to implement and measure its accomplishment?
Save $100 a month to create a $4,000 emergency fund.
One aspect of financial planning is to make wise decisions as to what to purchase and when to purchase it. Which aspect of financial planning does this deal with?
Spending
The main economic influence that determines prices is:
Supply and Demand
The annual price increase for consumer goods and services measured by the Bureau of Labor Statistics is called ________.
The consumer price index
The risk premium you receive as a saver is based in part on:
The uncertainty associated with getting your money back and the expected rate of inflation
A decrease in the demand for a product or service may result in a decrease in wages for people producing that item.
True
Analyzing your current financial position is a part of the first stage of the financial planning process.
True
Inflation reduces the buying power of money.
True
Opportunity costs refer to time, money, and other resources that are given up when a decision is made.
True
Opportunity costs refer to what a person gives up when making a decision.
True
Trade balance is defined as the difference between a country's exports and its imports.
True
The main goal of personal financial planning is:
achieving personal economic satisfaction
The stages that an individual goes through based on age, financial needs, and family situation is called the:
adult life cycle
The first step of the financial planning process is to:
analyze your current personal and financial situation
The problem of bankruptcy is associated with poor decisions in the ______________ component of financial planning.
borrowing
Future value calculations involve:
compounding
Using the services of financial institutions will be most evident in your effort to:
implement the financial plan
Which of the following would cause prices to drop?
increased production by business
Higher prices are likely to result from:
increased spending by consumers without increased production.
The time value of money refers to
increases in amount of money as a result of interest
Higher interest rates can be caused by:
lower money supply
Melanie Walsh likes to go to the movies once a week. When she is at the movies, she generally gets large popcorn and a drink. Melanie wants to be sure that she sets aside money each week so she can continue going to the movies. What type of goal would this be for Melanie?
Consumable products goal
Lynn Roy will retire in the next year and has $675,000 in savings and investments and owns her own home that is worth $250,000. Which step in the financial planning process does this situation demonstrate?
Determining her current Financial situation
Changes in income, values, and family situation make it necessary to:
Evaluate and revise your actions
Lynn Roy knows that if she continues to work full time, it will be difficult for her to get the time off she needs to be able to travel around the world. However, if she continues to work full time she will more easily earn the money she needs to take her trip and still have money left for her living expenses after she gets back from her trip. Which step in the financial planning process does this scenario demonstrate?
Evaluating her alternatives
A financial plan is another name for a budget.
False
Developing financial goals is the first step in the financial planning process.
False
Economics is the study of using money to achieve financial goals.
False
Increased demand for a product or service will usually result in lower prices for the item.
False
Interest on savings is calculated by multiplying the money amount times the opportunity cost times the annual interest rate.
False
Lenders benefit more than borrowers in times of high inflation.
False
Most decisions have only a few alternatives from which to choose.
False
Planning to buy a house is an example of an intangible goal.
False
Present value is also referred to as compounding.
False
Risks associated with most financial decisions are fairly easy to measure.
False
Time value of money refers to changes in consumer spending when inflation occurs.
False
A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends a direction for your financial activities is a(n):
Financial Plan
Increased consumer spending will usually cause:
Higher employment levels
Higher consumer prices are likely to be accompanied by:
Higher interest rates
The success of a financial plan will be determined by:
How resources are used
John Gleason is interested in purchasing a 46" rear projection TV for his living room. He knows that right now the TV will cost approximately $1500. However, John is a little concerned about his job. John is a pilot for Delta Airlines and he thinks it is possible that he could be laid off in the near future. What type of risk is John worried about?
Income Risk
____________ risk refers to the danger of lost buying power during times of rising prices.
Inflation
John Gleason is interested in purchasing a 46" rear projection TV for his living room. John knows that right now the TV will cost approximately $1500. John is not sure he can afford this TV right now but is worried that if he waits, the cost of the TV will rise to $1800. Which type of risk is John worried about?
Inflation Risk
The changing cost of money is referred to as ____________ risk.
Interest Rate
If you desire your money to double in 6 years, what rate of return would you need to earn?
12 percent
More recently, the annual price increase for most goods and services as measured by the consumer price index has been less than ____ percent.
2
If inflation is increasing at 3 percent per year, and your salary increases at the same rate, how long will it take your salary to double?
24 Years
With an inflation rate of 9 percent, prices would double in about ___________ years.
8
John is planning to go to graduate school in a program that will take three years. John wants to have available $10,000 available each year for his school and living expenses. If he earns 6% on his investments, how much must be deposited at the start of his studies for him to withdraw $10,000 a year for three years?
$26,730
A family spends $40,000 on living expenses. With an annual inflation rate of 3 percent, they can expect to spend approximately _______ in three years.
$43,720
The future value of $1,000 deposited a year for 5 years earning 4 percent would be approximately:
$5,400
You are planning to buy a house in five years. How much do you need to deposit today to have a $10,000 down payment if your investment will make 6%?
$7,470
When prices are increasing at a rate of 6 percent, the cost of products would double in about how many years?
12 Years
Paul Carter is 43 years old, married and has three children, ages 13, 10 and 5. Which influence on financial planning does this demonstrate?
Adult Life Cycle
One aspect of financial planning is to control your use of credit. Which aspect of financial planning does this deal with?
Borrowing