Financial Literacy Pt. 2

There are two basic terms that describe the rates paid on all types of interest-paying accounts. The Annual Percentage Rate (APR) is the simple interest rate or the annual rate of return that is paid without the effect of compounding interest. A savings account that offers an APR of four percent is basically promising to pay you $4 if you keep $100 on deposit with them for a full year. If the bank compounds more frequently than once a year, however, you can end up making more than $4 on your deposit. Here's how it works: Suppose that the bank compounds and credits quarterly, which means four times per year. At the end of the first three months, the interest that you earn on your account will be equal to the deposit times the APR divided by four. For a bank that paid an APR of 4% this would equal ($100X.04)/4 = $1. "Big deal," you say, "I get $1 every three months and end up with the same $4 in interest at the end of the year." Wrong! Since your $1 in quarterly interest is credited to your account at the end of the first three months, you will now be earning interest on $101 for the next three months, so your next quarterly interest will be $101x.04)/4 = $1.01. You've made an extra penny because of compounding. In the 3rd quarter, you would make ($102.01x .04)/4 = $1.0201 and in the fourth and final quarter you would make ($103.03x .04)/4 = $1.0303. Now, when we add together the four quarterly interest payments, we get a total of $4.0604. This is 6.04 cents more than we would make with an APR, (simple uncompounded interest rate.) It should be noted that for many years after the financial crisis that began in 2008, banks paid very low rates of interest on deposits. This was because the Federal Reserve, a unit of the government that controls interest rates, tried to keep these rates very low in order to encourage businesses to invest and to employ more people. Since the Federal Reserve focuses primarily on short term rates (rates on loans of less than a year), these rates were driven down close to zero and as a result, banks who pay interest on deposits that can be withdrawn at any time, also paid rates close to (or equal to) zero. As the U.S. began to recover from the economic downturn, the Federal Reserve announced that it would gradually allow rates to increase so eventually banks might someday be again able to pay 3 or more percent interest on savings and even more for longer-term deposits. This increase began in 2016 and continued through 2018. If you deposited $2,000 in a savings account that paid an annual percentage rate of 2 percent and that compounds quarterly, how much would your balance be at the end of a year if you did not take out any funds? A. $1,020.15 B. $1,010.04 C. $2,040.00 D. $2,040.30

D. $2,040.30 The quarterly interest is .005% (.02 divided by 4 quarters) so at the end of the first quarter you would have $2,000 x 1.005 = $2,010. In the second quarter we multiply $2,010 by 1.005 = $2,020.05. In the third quarter we multiply $2,020.05 by 1.005 = $2,030.15. In the fourth quarter we multiply $2,030.15 by 1.005 =$2,040.30

Since a vehicle is likely to be the second most expensive item you will buy, it pays to prepare yourself by shopping around. According to Edmunds.com, the following steps are important parts of your preparation:1: Find the vehicle or vehicles in which you have an interest including the features that you would like. Edmunds has an app and website that can help, but you can also look at recommendations in objective consumer magazines such as Consumer Reports and specialty automotive magazines such as Car and Driver. Your research should give you an estimate of the price of each vehicle so you can narrow down the choices to those that you can afford.2: Get pre-approved for a vehicle loan from a local credit union or bank with which you are familiar. This will give you an estimate of what you can afford to pay each month as well as an annual percent interest rate that you will be able to compare to the rate offered at the vehicle dealers. You are not locked into using the lender who has pre-approved you.3: If you plan to trade in a vehicle, get its value so that you come prepared when you visit the dealer. Edmunds.com, for example, will give you three values for your car: the likely trade-in value that the dealer may offer, the private party value that you could probably get if you sold the car yourself, and the dealer retail which is an estimate of what the dealer would charge for a used car like yours.4. Test-drive a vehicle with the features you want. Features you don't want add to the cost of the vehicle, and if you are buying new, you can ask the dealer to locate the model you want with the features you want (including color). Dealers who don't have exactly what you want can get on their computer to find your perfect vehicle or, if you have enough time, even order it for you from the factory. You are not obligated to buy the car you test drive and can go home to consider it overnight or even for a few days. 5. Once you have located the vehicle you want, contact the Internet sales department of 3 or more dealerships that sell it to find out the total price including all accessories. Take the best price to the dealerships in your area to see if they can beat it.6. Once you find the best price for the vehicle you want at a dealership, they will offer to finance it for you. Compare their rate to your pre-approval rate to choose the lowest-cost financing.While these steps apply to the purchase of a new vehicle, shopping for a used vehicle involves the same type of preparation. You want to know what makes, models and years you can afford and what your car is worth, if you plan to sell it to purchase a new one. You also want to line up financing in advance, if possible and check out the used car with a trusted mechanic if it is not still in warranty. Samantha is about to buy her first new vehicle. She knows the model that she wants but all of the vehicles available at the dealer's showroom have accessories, like fancy wheel hubs, that she doesn't need or want. Which of the following is likely to be true? A. They won't charge her for the accessories she doesn't like. B. They will remove all of the accessories she doesn't like to make the sale. C. She has no choice; take what they have or go elsewhere. D. They will locate the model that she likes with the accessories she wants at another dealer.

D. They will locate the model that she likes with the accessories she wants at another dealer. Dealers want to make the sale and will try to find exactly the car she wants at other dealers, even if they are far away. They are unlikely to remove the accessories that she doesn't want because some are built in during manufacturing and can't (easily) be removed. They are certainly not likely to give her expensive accessories for free since they (the dealer) has paid for them. Therefore, they will get on their computer to locate a car with the chosen color and accessories at another dealer and have it shipped to them for their customer.

Stocks are bought and sold through stockbrokers. Brokers make their money by charging you a certain percentage, called a commission, every time they buy or sell stocks for you. Regular commissions can be pretty steep. The average full-service broker in a company such as Merrill-Lynch or Smith Barney will charge about two percent of the amount of the purchase or sale. If you buy 100 shares of stock for $20 per share, your total purchase is $20 x 100 = $2,000. If your commission is two percent, your commission cost for making that purchase is $2,000 x .02 = $40. While $40 doesn't seem like a lot of money, it can add up quickly if you buy and sell stocks often. Each time you buy and sell some stocks, you end up paying four percent of the value (two percent to buy and two percent to sell). Since we have just seen that the return on stocks is expected to be only about 6.2 percent per year, if you subtract a 4 percent commission, you are left with a return of just 2.2 percent. Many people now buy and sell their stocks online, through brokers such as E-Trade, which may charge as little as ten dollars or less per trade. Investors, who know what they are doing, can save a great deal of money by using an online brokerage firm. These days, most full-service and discount brokers also offer online brokerage services to their customers to keep from losing them entirely to the strictly online brokerage firms. Marisa wants to buy 200 shares of IBM at $90 per share. Her regular, full-service broker will charge her a commission of two percent. She can do the transaction with an online broker for a fixed commission of $19. How much would she save by doing it online? A. $341. B. $251. C. $161. D. $19.

A. $341. The total cost of 200 shares of IBM at $90 per share would be 200 x $90 = $18,000. A commission of two percent would be $18,000 x .02 = $360. If Marisa bought her shares online, she would pay $19, saving $360 - $19 = $341.

You will often hear stocks referred to by terms that tend to indicate whether they pay dividends and the amount of risk that they have. Blue chip companies are older, financially strong companies that are leaders in industries that have been around for some years. Examples are DuPont and ExxonMobil. Blue chip companies tend to pay out much of their earnings as regular dividends. Growth stocks are companies whose earnings per share are growing faster than the economy in general. As we mentioned earlier, their dividends are relatively low because of their desire to retain earnings for future growth. Emerging companies, which typically experience the greatest growth, are riskier than better-established companies. Growth stocks include many high tech companies such as Amazon and Facebook. Income stocks refer to companies that pay large dividends relative to their price per share. Regulated public utilities such as gas and electric companies can afford to pay large, regular dividends because their regulators tend to set gas and electric rates that guarantee them a profit. Foreign stocks or international stocks are a useful way to diversify out of dependence on the economy of a single country, including the U.S. Shares of large foreign corporations may be purchased directly through a broker or through mutual funds that invest overseas. Penny stocks are highly risky shares that sell for very little money per share, often only a few cents. Although you can buy 1,000 shares of 2-cent stock for $20 (not counting commissions, which may be more than the cost of the stock), penny stocks tend to be very poor investments. What would you call a stock that doesn't fluctuate much in price and tends to pay a relatively large, regular dividend? A. An income stock B. A growth stock C. A foreign stock D. A penny stock

A. An income stock A relatively safe stock, such as a utility, which pays large, regular dividends, is generally called an "income stock."

As we mentioned earlier, many companies pay their stockholders dividends, but dividends are not guaranteed. The firm may not be profitable, or it may not decide to declare a dividend and will use the money instead to invest more in the company. In fact, some rapidly growing companies choose to reinvest all of their earnings and never pay dividends. Many firms that do pay dividends offer their shareholders a means of forced saving called a dividend reinvestment plan ("DRIP"). Rather than give you the dividend in cash, the company automatically invests it in additional shares of its stock. Since the cash dividend doesn't usually translate into a precise number of shares, fractional shares are purchased with the difference. Many people like the forced saving feature of dividend reinvestment plans, which often offer shareholders a discount on the price of the shares in addition to no brokerage commission cost. Even though you don't receive the cash from the dividend, you must still pay the taxes on it. A number of firms give their shareholders stock dividends along with, or in place of cash dividends. Stock dividends are based upon the number of shares already owned so an owner of 100 shares will receive 10 additional shares if a 10 percent stock dividend is declared. In the event that fractional shares are generated, the shareholder will generally receive the choice of taking the fractional share in cash or purchasing the remainder of the share. A stock split is virtually identical to a stock dividend, except for a small accounting adjustment. In the event of a two-for-one split, the shareholder will be sent one additional share of stock for every share already owned. Each share will be worth half as much as before so the total value of an investor's share remains the same. Stock splits and stock dividends generate no actual income so no income tax is due on them unless they are sold and generate capital gains. Which of the following is NOT an advantage of a dividend reinvestment plan (DRIP) to an investor who wants to own more of a company's stock? A. They save taxes over getting a cash dividend. B. It is a type of forced saving. C. They often get a discount on the stock price. D. They save the brokerage commission.

A. They save taxes over getting a cash dividend. The dividend is taxable (at a maximum rate of 15 percent) when it is paid, regardless of whether the investor takes it in cash or in shares of stock through a dividend reinvestment plan.

Aside from a small number of brand new shares of stock that are sold by companies in public offerings, most shares of stock are sold "second-hand" in the secondary market. This market includes the stock exchanges, which are specific physical locations such as the New York Stock Exchange on Wall Street. Other secondary markets include the over-the-counter market and the Nasdaq Stock Market, both of which consists of networks of dealers who are all over the place but are linked together by computers. In recent years, nearly all shares of stock that are traded are done so electronically, regardless of whether they are listed on an exchange such as the New York Stock Exchange or are traded over the counter. Buying and Selling Stocks: Like anything else we buy and sell, including cars and houses, the price of a security is determined by supply and demand, regardless of whether a security is listed on an exchange such as the New York Stock Exchange or listed over-the-counter. And like purchasing a car or a house, you can purchase shares of stock by accepting the offer price that is what the seller wants, or by putting in a bid and waiting for the price to (perhaps) come down to your level. The market order is the most basic order for the purchase or sale of securities. This occurs when the investor places an order to buy or sell at the current price. If you call your broker to buy 100 shares of Pepsi, she will ask you whether you want to buy it at market, which is the lowest price anyone is willing to sell it for at this moment, or whether you want to place a limit order. Limit orders are orders to buy or sell at your price (or better price). For example, your broker may tell you that, currently, the best offer for Pepsi is 30, which is $30 per share. If that is too high for you, you can put in a limit order for 100 shares at 29 and make the order good for the whole day (or for any period of time you would like). If, during that day, the price of Pepsi falls to 29, your order to buy 100 shares will be filled. If the price doesn't fall to 29 and, instead, shoots up to 35, you are out of luck. You will wish that you hadn't been so greedy and were willing to put in a market order for 30. If you don't have the time to monitor your portfolio on an ongoing basis (say you are in school or working), you may want to limit the amount you can lose if your stock starts to fall. You can do this through a stop-loss, which is an order to sell when the price of the stock falls to a certain level. If you bought Pepsi at 23 and it has gone up to 30, you could put in a stop-loss order at 28, so that your broker is automatically instructed to sell when the price hits 28, even if you are nowhere to be found.If a lot of people are selling their Pepsi stock at the same time, the stop loss order at 28 may not yield $28 per share. It could be lower. A stop-limit order combines a stop loss and a limit order. Once the stop price is reached, the stop-limit order becomes a limit order to buy or to sell at a specified price. The benefit of a stop-limit order is that the investor can control the price at which the trade will get executed. For example, a stop-limit order that has a stop of $30 and a limit of $28 means that if the price of the stock drops to $30, sell it only if it can be sold at $28 or more. Kate calls her broker to purchase 200 shares of IBM. The broker tells her that the price of a share is currently $90. Kate decides that she isn't willing to pay more than $88. What type of order will she put in? A. Limit B. Stop limit C. Stop Loss D. Market

A. Limit Kate will put in an order to buy IBM at no more than $88 per share. Since that is her limit, she puts in a limit order.

A load mutual fund is one that is sold through a licensed mutual fund salesperson, such as a stock broker or a direct employee of the mutual fund. Service fees of as much as 8 1/2 percent of the investment are paid by the buyer at the time of purchase and are called front-end loads because they are paid when the investment is made. To disguise the size of the commission, the front-end load is deducted from the investment rather than charged separately to the investor. If, for example, you invest $1,000 in a mutual fund that has the maximum 8½ percent front-end load, you would still pay only $1,000. However, since the front-end load is equal to $1,000 x .085 = $85, this is deducted from the value of your investment and you start off with only $1,000 - $85 = $915 rather than the $1,000 you thought you were investing. Load fees may be even higher than 8 1/2 percent if investors sign up for a systematic savings plan that takes small monthly payments. Here, investors may pay up to half of the total payments made to this plan during the first year as a sales and creation charge. In addition to any front-end loads, a load fund may charge the buyer an additional fee known as a back-end load when sold. This may also be called a redemption fee, an exit fee, or deferred sales charge. It is important for you to know that many funds have fees that are far more reasonable, and that the law requires mutual fund salespersons to disclose all fees before you buy. Those who sell mutual funds argue that Americans do not like to save so it takes a lot of time and effort to get someone to commit to a mutual fund, and they need to be paid for this work. If you know what you are doing, however, you can save a lot of money buying mutual funds. Christopher puts $2,500 into a mutual fund with an 8 ½ percent front end load. When the sale has been completed, what is the net asset value of Christopher's shares? A. $3,202.50 B. $2,287.50 C. $2,745 D. $2,500

B. $2,287.50 The 8 ½ percent front end load is deducted from Christopher's investment to determine the initial net asset value of his shares. $2,500 x .085 = $212.50 that is deducted from the $2,500 investment, leaving him with just $2,500 - $212.50 = $2,287.50.

There's an old saying that you don't put all your eggs in one basket. This was meaningful to farm children of 100 years ago since if they dropped the basket with all the eggs in it, nobody got omelets for breakfast. A person who puts all of his or her savings in a single stock is asking for trouble. It is the same as putting all your eggs in one basket because if bad luck or mismanagement hits that company, you could lose all your savings. Therefore, all stockholders are urged to diversify, or spread their holdings over several companies, to avoid the possible bad luck of a single company. You can diversify away some of the risk of owning stocks by dividing your stock investment into a number of different companies. Most experts recommend at least seven and up to 15 company stocks to get the benefits of diversification. Remember, while you can diversify away company-specific risk, you cannot diversify away market risk that is due to price fluctuations of all stocks. If you follow the stock market, you will see that when it has a bad day, the prices of most stocks tend to fall. The opposite is true if stocks have a good day. You can reduce some of the effect of overall stock market risk by holding a portion of your assets in bonds and a portion in the bank. This may lower the returns on your investments by a little over a number of years, but it can give you better protection for your savings should you need to use them. Meredith puts all of her college savings into Pepsi stock because she feels it will go up in value. Gideon has his savings spread among several different stocks that are expected to do equally well in the future. Whose portfolio of stocks is riskier? A. Gideon's B. Meredith's C. They are expected to do equally well so they are of equivalent risk. D. Neither portfolio has any risk, whatsoever.

B. Meredith's While Gideon's individual stocks are as risky as Meredith's single stock, his portfolio is diversified so if one stock collapses because of bad management decisions, his savings aren't wiped out.

Diversification also applies to a person's human capital or ability to earn a living. If Jamal works for a regional lumber company, it would not be a good idea for Jamal to buy that company's stock as well, either as part of his pension or directly. If the company fails, Jamal can lose his pension and his other investments in addition to losing his job and sole source of income. When Enron, one of the largest companies in the US failed, many of its employees were found to have all of their pension money and most of their other money invested in Enron stock. They were totally wiped out! Based on the principal of diversification, is it a good idea for Michelle to invest her pension money in the stock of the company that he works for? A. No because the stock of her company will do worse than other stocks. B. No because her job-related income also depends on the company. C. Yes because it is safer than investing in stocks of other companies. D. Yes because she wants to get rich if the company's products take off.

B. No because her job-related income also depends on the company. The principle of diversification says not to put all your eggs in one basket. If you are dependent on a company for all of your work-related income, it is not a good idea to also risk your retirement income on the same company because it may do poorly or even go out of business. When Enron, one the largest US companies failed, many employees had their 401(k) pension money also invested with them and, in addition, had bought a lot of company stock through a stock purchase plan. When Enron failed, they lost everything!

Stocks also tend to do better than most other financial investments in terms of protecting your savings against inflation. This is because companies can generally raise their prices during inflation to offset their increasing costs. In addition, the value of the assets of corporations, such as factories, office buildings and vehicles, will also tend to go up during an inflationary period. The table we just saw anticipated a future rate of inflation that will average 2.1 percent. This means that large-cap stocks are expected to do about (6.2-2.1 = 4.1) percent better than inflation. Note that a sudden period of inflation may disturb an economy and hurt business for a while, lowering profits and stock prices. Over a longer period of time, however, stock prices tend to outperform inflation by a fairly high margin. Tim and Rebecca just had a baby. They received money as baby gifts and want to put it away for the baby's education. Which of the following is likely to have the highest growth over the next 18 years? A. A savings account B. Stocks C. A U.S. government savings bond D. A checking account

B. Stocks While the growth of stocks is unpredictable within a given year or so, over a long period of time, such as 18 years, stocks almost always have a much higher rate of growth than any of the other assets listed here.

Mutual funds come in two general types. Open-end funds are the most common funds. They are called "open-end" because they are open to new investors at any time. They sell their mutual fund shares directly to investors and use the new money to buy additional shares of stock. They will also buy their mutual fund shares back from the investor ("redeem" the shares) on any day that the stock market is open. Open-end funds buy and sell at a price equal to current net asset value of the fund. The net asset value is equal to the value of all assets held by the fund when markets close that day (generally 4PM Eastern Time), divided by the number of shares outstanding. Since open-end funds are not traded on the stock exchange, a regular commission is not charged when you buy and sell them. If you buy these funds through a broker or salesperson, however, a significant sales charge, called a load may be added to your cost. Which of the following is true about open-end mutual funds? A. They are sold on the New York Stock Exchange. B. They are bought or sold at their net asset value. C. They can never have a sales charge or commission. D. They are the least common type of mutual fund.

B. They are bought or sold at their net asset value. Open-end mutual funds are bought and sold directly by the fund company for net asset value, which is equal to the value of the entire portfolio divided by the number of shares outstanding.

Equities are shares of ownership in a business. A more common word for equity is "stock." If you own shares of stock in a company, you own a portion of that company. There are other ways of owning all or part of a company, such as owning it all yourself, if it is a small business, or owning it with someone else, as a partnership. An advantage of owning shares of stock in a large corporation, however, is that most are publicly traded. This means you can buy or sell your shares at any time. If you wanted to sell a whole business or a partnership in a business, it would take a long time to find the right person and convince them to buy your ownership interest. If you want to sell shares of stock in Disney or Microsoft, you can do it in minutes by calling your broker or even doing it yourself online. Equities are riskier than bonds because they offer no guarantees to the investor. Bonds promise to pay you a set amount of money (interest) every six months and then promise to pay you the face amount at maturity. Equities, on the other hand, don't have to pay you a set amount of money every year. Nor do they promise to be worth a certain amount when you sell them. In fact, equities have no maturity. They are issued forever. Why do stocks tend to be a riskier investment than bonds? A. They have a shorter maturity than bonds. B. They promise no set payments in the future. C. They never pay an annual income to owners. D. They are publicly traded.

B. They promise no set payments in the future. Bonds promise set payments of interest and repayment of the face value at specific times in the future. Stocks, or equities, make no such promises, so they are considered to be riskier.

Annuities are a type of mutual fund offered by insurance companies as a way for people to save for their retirement. The tax law provides some advantages to those who invest in annuities that have been "qualified" to provide tax benefits for those saving for retirement. With regular mutual funds, you have to pay taxes on income and capital gains earned by the funds each year. With a qualified annuity, taxes on both the money you put aside for retirement and the earnings on that money are not due until you pull money out of the fund. Since many people wait until they are retired to take their money, they will probably have a lower income and will be in a lower tax bracket than when they were working. Insurance companies offer two basic classes of retirement funds: fixed annuities, which guarantee a rate of return, and variable annuities, which do not because they are invested in stocks and bonds. Fixed annuities are more stable but may also lose buying power because of unanticipated inflation. Like mutual funds, annuities may have a number of fees. Annual total fees in excess of 2.5 percent are not uncommon for variable annuities while those for fixed annuities tend to be lower. Which of the following is an advantage of buying a variable annuity rather than a similar mutual fund? A. They have no back-end loads. B. You don't have to pay taxes until money is taken out. C. There are more types of variable annuities than mutual funds. D. Fees are lower than fixed annuities.

B. You don't have to pay taxes until money is taken out. With a variable annuity, taxes are due on income and capital gains only when the money is taken out.

Exchange-traded funds (ETFs) are a rapidly growing type of fund that is traded on stock exchanges, rather than purchased directly from the fund company. While there are thousands of ETFs, most of the money is invested in "index ETFs" that track popular stock indexes such as the S&P 500 and the Dow Jones Industrial Average. Since a computer does the tracking and trading, these funds are very inexpensive to run and many are offered with very low expense ratios. In general, ETFs that track the S&P 500 cost less than 10 basis points (a basis point is a percent of a percent) per year. This is a tenth or less of the cost of investing in most managed equity funds. While an investor does have to pay a brokerage commission to buy and sell an ETF, those who use an online broker can generally buy as many shares as they want for a flat fee of $5 to $10. Therefore, for those investors who want a diversified portfolio that will do as well as the overall market and who want to minimize the expenses of their portfolio, index ETFs may be worth looking into. Alima has invested $50,000 in an S&P 500 index ETF that charges a total expense ratio of 8 basis points per year. How much would she pay in dollars for management of her fund? A. $80 B. $8 C. $40 D. $4

C. $40 Alima's index ETF charges 8 basis points which is 8/100 of a percent (.008) for expenses. If we multiply $50,000 x .0008 we get $40 which is what it costs her per year.

No-load mutual funds are similar to load funds except that they can be purchased and sold without a fee. Since there are no commissioned salespersons, no-load funds must be purchased directly from the firms offering them, generally online or through a call to a toll-free telephone number. Information on no-load funds can be found in advertisements and in mutual fund guides (such as Morningstar) which are found in most libraries. Both load and no-load funds charge management fees for their services. Unlike load fees, which are paid only once, management fees must be paid every year as a percentage of the money that you have invested. Ranging from as little as a fifth of one percent to as much as one and a half or two percent (or more), these fees are taken out of the income generated by the funds before it is distributed to shareholders. In addition to management fees, so-called "no-load" funds may charge a separate fee to cover advertising and marketing costs. These annual fees, which may be as high as 1 ¼ percentage points, are authorized under Section 12b-1 of the 1940 Investment Company Act. Funds that charge these fees are known as 12b-1 funds. Since mutual fund fees can eat into the return on your investment, they must be disclosed to potential investors as part of the legally-required description of the fund, called a "prospectus", which is given to you, by law, before you sign up for the fund. Alyssa had an average of $15,000 invested in her no-load mutual fund this past year. The fund had a management fee of 1.5 percent and an additional 12b-1 fee of 1.25 percent. How much did mutual fund fees cost Alyssa last year? A. $330.00 B. $27.50 C. $412.50 D. $275.00

C. $412.50 Adding together the management fee of 1.5 percent and the 12b-1 fee of 1.25 percent gives us total fees of 2.75 percent. Multiplying $15,000 x .0275 gives us $412.50.

The table below provides historical information about the performance of different types of investments since 1926. As we can see, stocks have had higher returns than bonds and stock in small companies has had slightly higher returns than stocks in large-cap companies (typically represented in the Dow Jones Industrial Average or the S&P 500), because of their higher risk. Remember that investments with higher annual average returns also tend to have higher annual risk. This means that within any single year, their return can be very high or very low, even negative. However, by holding stocks for many years, the bad years are more than offset by good years, and you can be pretty sure that you will do better with stocks than with bonds. In fact, the longer you hold your stocks, the more certain you can be that you will outperform other common assets such as "cash", whose money market returns are just expected to keep up with inflation, and bonds. Given their unstable returns during a single year, stocks are not a good investment for short-term savings goals. However, if you are saving for a goal that is 10, 15 or 20 years away, you can be pretty confident that stocks will do better than the other, competing investments. https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod_24_q_3_2019%20%28Equities%29.jpg Paula has saved $8,000 for her college expenses by working part-time. She plans to start college next year and needs all of the money she saved. Which of the following is the safest place for her college money? A. Large company stocks B. Locked in her closet at home C. A bank savings account D. Small company stocks

C. A bank savings account While stocks tend to grow faster than other types of investments over longer periods of time, such as 15 years or more, they fluctuate so much in the short run that they are not reliable investments for short-term savings goals. If you need all of your savings in less than a year's time, you are better off putting it in an insured savings account. Even though it may not pay much in interest, you know it will be there when you need it.

High Risk of Failure. If it were easy and safe to be an entrepreneur, almost no one would work for somebody else. In fact, it is risky to start your own business. In spite of the hard work put in by most entrepreneurs, twenty percent of small businesses fail in their first year and an additional 10 percent of small businesses fail in their second year. After 5 five years, the survival rate of a small business is approximately 50 percent. Basically, most new entrepreneurs fail! Failing in business is more than just losing your job. It generally also means that you have lost all of the money you put into the business, which for many young people means all of the money they have. You might even end up owing money to others, which has to be repaid. Finally, when you fail in business, you lose a little part of yourself. You may feel that your idea wasn't good enough or that you weren't a good enough manager to succeed. It can take a long time to get over these feelings of failure. According to the Small Business Administration, what proportion of new small businesses are still around in 5 years? A. Three quarters B. A third C. Half D. A quarter

C. Half According to the SBA, only half of new small businesses will survive for at least 5 years.

And don't forget that the tax laws make it even more worthwhile to build wealth by owning a business. If you put $1 million into your own business over the years and sell it for $11 million, your capital gain profit of $10 million will be taxed at only 20 percent by the Federal government as opposed to the nearly double rate of 37 percent that must be paid on ordinary income (such as salary) of that amount. Jon made a million dollars last year as a major league pitcher. His friend Eric made a million dollars the same year by starting a computer game business, developing a best-selling game, drawing no salary, and selling the business for a million dollars more than he put into it a year later. What is the Federal tax rate that each will have to pay on most of their income? A. They will both have to pay 20% on most of their income. B. They will both have to pay 37% on most of their income. C. Jon will have to pay 37% on most of his income while Eric has to pay only 20% on all of his income. D. Eric will have to pay 37% on most of his income while John has to pay only 20% on all of his income.

C. Jon will have to pay 37% on most of his income while Eric has to pay only 20% on all of his income. Jon's income is from working for someone else and is ordinary income, on which he pays a maximum tax rate of 37 percent which would apply to most of his income. Eric is an entrepreneur whose million-dollar income came from selling a business for more than he put into it. His income is taxed as a long-term capital gain at just 20 percent.

In short, one of the most important characteristics of millionaires in America is that they are mostly those who have their own businesses. Why should this be so? First, when you work for yourself, you have three sources of income from that work, rather than just one. You get a salary (or an equivalent "draw") from the business to pay you for the opportunity cost of your labor, or what you could get working for someone else. You also get income in the form of "rent" for the buildings and other property that you own and let the business use. If you are a plumber with a truck and tools worth $40,000, you must get a return on that $40,000 investment; otherwise no one would become a plumber. Finally, if you run a profitable business, you get to keep the profit, which is income above the opportunity cost of your labor and the rent you get from your property. As the result of these sources of income, American entrepreneurs make two and a half times the (mean) money made by non-entrepreneurs. However, in addition to making that money, entrepreneurs tend to have to put much of it back into their businesses so they can grow. This is a type of forced savings that nearly all entrepreneurs have. Over the years, as the business grows, two other things grow as well, income and net worth. If an executive makes $200,000 per year, she can live a good life. However, when the executive retires at age 65, she gets a gold watch and a goodbye party from the company. If an entrepreneur makes $200,000 running her business, she can also live a good life. However, when she is ready to retire, if she doesn't have children who want to keep running her business, she can sell it. If it is a good business, she will probably be able to sell it for a lot of money, perhaps millions of dollars. That is one of the beauties of running your own business - it pays you income and then it can be sold. Alyssa and Sally are twin sisters who are equally bright. Both have received excellent business educations. Alyssa became the vice president of a large company and now, at the age of 60, makes $200,000 a year. Sally started her own successful company which makes a profit of $200,000. If both have equal savings and money put aside for retirement, who is likely to be wealthier? A. Alyssa B. They are likely to be equally wealthy C. Sally D. Neither is likely to have a positive net worth

C. Sally Even though their incomes and savings are the same, Sally has a profitable business to sell, which adds to her wealth.

You Can Never Get Away: In the last section, we said that an advantage of owning a business is that you can leave work whenever you want. What we didn't say is that most small business owners have trouble getting away at all. When you own a small business, you are the manager as well as the owner. If your business is a store, you may not have employees that you fully trust with the cash register and the inventory so you have to be there to close up every day. If you want to take a vacation, you may have to close the store entirely, which is not good for your image or for customer relations. Being an entrepreneur tends to be all consuming. Even when you're not at work, you tend to be thinking about work - an order that is not complete, a customer who hasn't paid you, a payroll that you have trouble meeting, or an employee who has to go. This is far different from being an employee who can turn off the job at the stroke of 5 and not think about it until 8:30 the next day. Finally, when you run a business and employ other people, your business is the livelihood for all of these families. This is a big responsibility that keeps many struggling entrepreneurs up at night. Your employees trust you to pay them and keep them employed if they do their job and work hard for you. Which of the following is NOT true of owners of small businesses? A. If they fail, they often lose much if not all of their assets. B. They often feel responsible for their employees and the families of the employees. C. Since they own the business, they don't have to think about it when they're not at work. D. They find it difficult to get away for long vacations.

C. Since they own the business, they don't have to think about it when they're not at work.C. Since they own the business, they don't have to think about it when they're not at work.

Aside from making more income and accumulating more wealth, there are other benefits of entrepreneurship that attract people to work for themselves. These include personal creativity, being your own boss and getting credit for what you have accomplished. Personal Creativity. If you work for yourself, you can express your creativity at work in ways that most employees can't. Many, if not most, of today's great corporations were started by creative people working for themselves. These people include Bill Gates of Microsoft, who dropped out of Harvard and created software for the PC that made him the richest man in the world and another Harvard dropout, Mark Zuckerberg who founded Facebook. Henry Ford came up with a new, cheaper way to make cars and created the Ford Motor Company. Mary Kay invented a way to distribute cosmetics to women in their homes and ended up very rich, indeed. If any of these people had been employed by others, chances are that their ideas would have been laughed at or just plain ignored. Most company managers are chosen for their ability to run a steady, predictable operation and tend to avoid taking on much risk. Few would tolerate a Bill Gates, a Henry Ford or a Mary Kay working for them because their creative ideas would appear to be both risky and disruptive. If you are highly creative and want to see your ideas become something, you almost have to work for yourself. Many creative people come upon their ideas while working for someone else but find that their own company has no interest in it. Some forget about their ideas and keep working. Others quit their jobs and try to make their dreams a reality. Be Your Own Boss. A great advantage of working for yourself is that you don't have to work for somebody else. Over the course of your lifetime, you will end up working for many different people. Some will be bright, considerate and wonderful bosses. Others will be idiots and tyrants. It is the latter that convince many people to work for themselves. Other advantages of being your own boss is that you determine what to wear, when to go to work, when to leave and what type of company car you will drive. If you need to leave a staff meeting because one of your kids is sick, you leave. It's your company! Take Credit for What You've Accomplished. A final advantage of being an entrepreneur is that you get to take credit for what you've accomplished. If you create a new product, build a profitable company and improve the lives of many people, nobody else gets to take the credit. Which of the following is NOT a benefit of being an entrepreneur? A. You don't have to work for a mean boss. B. You can be more creative in your work than those who work for others. C. You don't have to make tough decisions for yourself. D. You get credit for what you've accomplished.

C. You don't have to make tough decisions for yourself. Making tough decisions is not a benefit of being an entrepreneur since they do have to make tough decisions for themselves.

Closed-end mutual funds differ from open-end funds in that their shares are not bought and sold directly by the mutual fund company. Instead, the shares of closed-end funds are bought and sold through the stock market. This means that while you do not pay a load fee, you must pay brokerage commissions to buy closed-end shares and the price of the shares is not set to the net asset value of the fund. The price of the shares of closed-end funds may be higher than the firm's net asset value or it may be lower, depending on supply and demand for the fund's shares. Which of the following statements is true about closed-end mutual funds? A. Their price is always above their net asset value. B. Their price is always below their net asset value. C. You must pay brokerage fees when you buy or sell them. D. Their price is always equal to their net asset value.

C. You must pay brokerage fees when you buy or sell them. Since closed-end mutual funds are traded on stock exchanges like regular stocks, you must pay a brokerage fee to buy or sell them. Unlike open-end mutual funds, the price per share of a closed-end mutual fund is not necessarily equal to its net asset value, since price is determined solely by supply and demand. Therefore, the price may be above, below or (very occasionally) equal to its net asset value.

There are two ways in which people can make money on stocks that they own. They can be paid money by the company in the form of dividends, and they can make a profit by selling their stock for more than they paid for it. This type of profit is called a capital gain. Not all companies issue dividends (which are paid from company profits). Each quarter (every three months), a company's board of directors decides whether to issue a dividend to stockholders and how much that dividend should be. In recent years, dividends have not averaged much more than one or two percent of the value of the stocks. Therefore, on average, stockholders have earned a return from dividends that is often not much higher than they can get from an insured bank, such as a CD, which is very safe. It stands to reason, then, that investors buy stocks primarily because they expect them to increase in value and produce capital gains. Stocks tend to increase in value for two reasons. First, our economy has historically grown by about three percent per year (although closer to two percent in recent years), which means that a company's sales and profits should also be growing. If profits grow, the business is more valuable, and each share of stock becomes worth more money. A second reason why stocks tend to increase in value is that most of a company's profits, which are not given out as dividends, are reinvested in the company, allowing it to grow and earn even more money. This allows profits to grow even faster. If an investor buys a share of stock for $10 and sells it a year later for $11, the capital gain is $11 - $10 or $1. That is equal to $1/$10 = .1 = 10 percent of the investment. To find the total return for the year, we add any dividends to the capital gain and divide by the price of the stock at the beginning of the year. For example, if John buys 100 shares of Thallium Corporation for $20 per share and the next year, Thallium pays four quarterly dividends of 20 cents per share and the share price increases to $25, John's annual return is equal to 4 x .20 = 80 cents in annual dividends and $5 in capital gains for a total of $5.80 per share. Divided by John's initial investment of $20 per share, his annual return for that year is equal to $5.80/20 = 29%. Drew buys 100 shares of Balsamic Corporation for $23 per share. Over the next year, Balsamic pays four quarterly dividends of 35 cents per share and the share price increases to $25. What has Drew's annual return been on the stock? A. 22.2 percent B. 17.4 percent C. 12.2 percent D. 14.8 percent

D. 14.8 percent Each share earns 35 cents x 4 quarterly dividends = $1.40 plus a capital gain of $25 - $23 = $2. This is a total of $3.40 per share. If we divide $3.40 by the price at the beginning of the year of $23 we get 14.78, or 14.8 percent when rounded.

By law, mutual funds must distribute at least 90 percent of their income to their shareholders every year. Therefore, even if you don't sell any of your shares in a given year, you may well have to pay taxes on the dividend income and capital gains realized by the fund that year. Currently, the tax on dividends and long-term capital gains is tied to an investor's income. This tax rate does not apply to dividends that you receive from mutual funds that hold bonds, since interest on those bonds is still taxed at the ordinary tax rate of the mutual fund owner. Taxation of mutual fund capital gains is a little complex, but worth knowing. Owning mutual funds can generate two types of capital gains for you, one from capital gains generated by the mutual fund during a year and the other from capital gains generated by you when you sell fund shares for more than you paid for them. Mutual funds generate capital gains by selling stocks for more than they paid for them. If the fund companies have held these shares for at least a year, the gains are considered to be long term and the tax on these gains is, at most, 20 percent. If held for less than a year, the gains are short term and are taxed at the investor's ordinary tax rate, which can be as high as 37 percent. In either event, the long term and short-term gains are passed onto the owners of the funds and must be claimed on their income taxes. In addition, a mutual fund owner may also generate capital gains by selling fund shares for more than he or she paid for them. Again, if held for less than a year, the capital gains are short term and if held for a year or more, the gains are long term. Regardless of whether the capital gains were generated by the mutual fund or by the owner of the mutual fund, the tax rates are the same. Short-term capital gains are taxed like ordinary income, at the taxpayer's highest marginal tax rate, while long-term capital gains are generally taxed at a maximum of 20 percent. https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod_25_q_6_2019%20%28Investment%20Funds%29.jpg Angel is in the 32 percent marginal tax bracket for ordinary income. Last year, he bought mutual funds with a net asset value of $2,000 on January 15. He sold those shares on December 31 for $2,800. While he owned the shares, the mutual fund company distributed $100 in dividends, $100 in short term capital gains and $100 in long term capital gains to him. How much tax must he pay on all his earnings from owning those mutual fund shares? A. $352 B. $275 C. $165 D. $318

D. $318 Angel falls in the income range for having his dividends and long-term capital gains taxed at 15 percent. Last year his mutual fund distributed $100 in dividends and $100 in long-term capital gains to him for a total of $200 taxed at 15 percent, which equals $30. The short term capital gains of $100 distributed by the mutual fund is taxed at his regular marginal tax rate of 32 percent as is the short-term capital gains of $800 he made from selling shares for $2,800 that he bought for $2,000 in the same year (he needed to hold it for a full year to qualify for the reduced rate of a long-term capital gain). This total of $900 in short term capital gains, taxed at 32 percent, adds ($900 x .32 =) $288 to his taxes for a total of $288 + $30 = $318.

As we mentioned previously, a mutual fund company is legally required to specify the purpose of its fund in its prospectus and stick to that purpose. This law is designed to help investors pick the kind of fund they want and to be sure that the purpose doesn't change. Otherwise, your grandmother, who is saving for her retirement in a very conservative fund that invests only in stable, well-established companies, could be very surprised if her mutual fund suddenly began investing in Facebook and other social networking companies. Mutual funds may be divided into broad classes by purpose. Income funds are intended to provide high cash flow, in the form of dividends, with relatively low risk. These funds tend to invest in bonds and other high-yielding stocks such as utilities. They appeal to people who are somewhat older, in a lower-tax bracket (because the dividends generated by holding bonds are taxable as ordinary income), are nearing retirement and are more dependent on fixed income than folks in other funds. Growth funds invest in growth stocks that have low dividend yields and the potential for tax-deferred appreciation. These funds tend to attract younger investors with long investment horizons as well as those who are in higher tax brackets and try to avoid paying taxes on dividends. Balanced funds combine the features of income and growth funds but never have more than 60 percent of their assets in either category. There are many other types of funds as well. These include "aggressive growth" funds, "small capitalization" funds, "international funds," "emerging market funds" and "junk bond funds," to name a few examples. Which of the following types of mutual funds would be best suited to an older person in a relatively low tax bracket who will need her money for retirement? A. A balanced fund. B. A growth fund. C. A country fund. D. An income fund.

D. An income fund. The income fund provides relatively high amounts of income in the form of dividends while investing in stocks that are older, larger and considered more stable.

Investment companies are companies that invest our money for us into stocks, bonds or other types of investments. They do this through two primary types of investments: mutual funds and exchange-traded funds. Managing a fund, which is a diversified portfolio of individual securities, takes an investment of time and knowledge that some people are unwilling or unable to make. For these reasons, many consumers choose to pay an investment company to make their investments and keep track of them. Mutual funds and exchange-traded funds have many advantages. They offer professional management, record keeping, safekeeping of securities and a legal commitment to stick to specific investment objectives, such as investing only in growth companies, or high technology companies or income-producing companies, such as utilities. In addition, mutual funds offer diversification, which lets us reduce risk. We can definitely diversify our own portfolio-but if all we have to invest in stocks is $1,000 and we want to divide it into seven different stocks, we can only put about $143 into each stock. Even at a super-low online commission of $8 per trade, it will cost us $8 x 7 = $56 in commissions, or 5.6 percent of our portfolio, just to get the money invested. Most mutual funds and many exchange-traded funds charge less than this. Andrea has $500 in the bank that she wants to invest in the stock market. She also wants to add $35 per month into this account from her part-time job. Which is the best way for Andrea to build up a diversified portfolio of stocks? A. By putting her money into a single stock that was recommended to her. B. By staying away from stocks until she has at least $10,000 to invest. C. By dividing her money into seven pieces and buying a different stock from a broker with each piece. D. By investing her money in a stock mutual fund.

D. By investing her money in a stock mutual fund. Mutual funds and exchange-traded funds are a good way for smaller investors to achieve diversification and also build savings on a regular basis. Buying a number of stocks individually is too expensive in terms of commissions when you don't have a lot of money, and if you wait until you do have the money, you may have missed many of the growth opportunities that stocks offer.

Starting your own business (or buying a business from someone else) generally requires two types of investments. First, you tend to need money to rent a place, furnish it, purchase supplies, hire people and advertise, well before you make your first sale. Second, if you work for yourself, you have probably given up your paycheck working for someone else. Since you still have to live and (possibly) support your family, you will need up-front money for living expenses. Don't even think about borrowing money from a bank. Banks are not in the business of lending money to new businesses since such investments have a high failure rate. If you want to borrow money for a new business or even a small business that may be profitable, you generally have to pledge some personal assets that the bank can seize if you can't repay the loan. This may be your house or your car if you have sizable equity in them. Why are so many e-commerce businesses started in the entrepreneur's home? A. It is very prestigious to operate out of your home. B. Your employees generally prefer to work out of your home rather than in a business environment. C. There are fewer interruptions at home than in an office. D. Renting an office takes money from struggling new businesses.

D. Renting an office takes money from struggling new businesses. New businesses generally start with relatively little money, in part because it is difficult for a new business to get a loan. For that reason, many entrepreneurs start their business in the basement or study of their home or in the garage because the rent is free.

An alternative long-term investment is investing in yourself. Tens of millions of Americans own their own businesses. These businesses range from one-person operations, such as a self-employed plumber, computer programmer, Uber car driver, Airbnb room renter or newspaper deliverer, to businesses employing thousands of people and generating billions of dollars. We call those who own and operate their own businesses entrepreneurs. An entrepreneur is: A. Someone who is willing to take on a lot of risk. B. Someone who is very rich. C. A person who owns a lot of stock in companies. D. Someone who works for him or herself.

D. Someone who works for him or herself. An entrepreneur is someone who works for him or herself. While entrepreneurs may own stock, be rich or take on risk, so may non-entrepreneurs.

As we will see in this module, working for yourself can be extremely rewarding, both financially and emotionally. However high returns bring with them high risk, and not everyone is willing to take on this risk. Financial risk is just one of the costs of being an entrepreneur. Other costs involve a huge time commitment and the willingness to take on responsibility for the livelihood of other people and their families, if you hire others. Perhaps you wonder if you're suited to be an entrepreneur. Think back to when you were younger. Did you ever set up a lemonade stand or willingly take on a paper route or form a baby-sitting group? If so, you may have the entrepreneurial spirit. Do you ever get ideas for new businesses and actually try to figure out how you could make money on your ideas? This is another indication that you may succeed as an entrepreneur. Are you willing to risk everything you have in order to pursue your business ideas? If you're not, perhaps you should consider working for someone else. Finally, do you sincerely want to be rich? Unless you have the one in a million talents of a professional athlete, singer or actor, a proven way to become rich is to be in business for yourself. Which of the following is NOT one of the risks that you, as an entrepreneur would take on? A. The risk of having to fire someone else B. The risk of having little time to spend with your family C. The risk of losing your investment D. The risk of getting fired from your job

D. The risk of getting fired from your job One risk that an entrepreneur does not take is the risk of being fired by someone else. When you work for yourself, no one can fire you, although you could lose your livelihood if your customers stop doing business with you.

Index funds are created to do just as well as the entire market or one particular segment of the market. They do this by using a computer to choose stocks that are identical or very similar to those that make up the most popular stock market indexes, such as the Dow Jones Industrial Average or the more-representative Standard and Poor's (S&P) 500 Index. Since these firms use computers rather than highly-paid analysts to pick the stocks, their management fees tend to be very low. In recent years, numerous studies have found that unmanaged index funds tend to do at least as well as the average managed fund. When you subtract the high fees of the managed funds, the index funds come out far better. This is why index funds have grown so rapidly in recent years. This does not mean that some managed funds do not do better than the index in any given year. It just means that it is very difficult to find managed funds that do better every year or even most years. These days, there are no-load index funds available that accomplish many of the purposes of the managed funds at a fraction of the cost. Which of the following is not true of index mutual funds? A. The stocks they buy and sell are generally chosen by a computer. B. They tend to perform about as well as the stock market average that they represent. C. They tend to be no-load funds. D. Their management fees are slightly higher than similar, managed funds.

D. Their management fees are slightly higher than similar, managed funds. Index funds tend to have much lower management fees than similar managed funds. Answers a, c and d are all true.

For these reasons, many new entrepreneurs try to minimize the startup costs of their businesses. A good way of doing this is to start the business in your home or garage. The famous Hewlett Packard Company, whose products launched Silicon Valley in California, was started in a small garage in Palo Alto. Apple Computer was also created in a California garage. Many entrepreneurs minimize investment needs by keeping their "day jobs" as long as they can. If you have a new product or invention, you can develop it at home on nights, weekends and vacations. In the meantime, you continue to draw your salary and enjoy the health benefits and other benefits of your day job. By putting off quitting your job as long as possible, you save the up-front investment you would need to support yourself and your family. Fred has a great new idea for a business but needs $25,000 to get it started. What would happen if he asked the bank for a loan? A. They wouldn't lend him the money under any circumstances. B. It is against the law for a bank to lend to a new entrepreneur. C. They would probably give it to him if the idea appeared to be good. D. They may lend him money if he pledges sufficient equity in a home or a car.

D. They may lend him money if he pledges sufficient equity in a home or a car. The bank may lend him the money, but only if it protects its loan by having Fred pledge his home or car so the bank can recover its investment if he can't repay the loan.

While some people who work for themselves do it to get rich, many others do so for other reasons including a desire to not work for someone else, a need to have flexible hours or their inability to find a rewarding job as an employee. The average (mean) earnings of small business owners (entrepreneurs) in 2019 was $72,072, which is greater than the $56,492 earned by those who worked for someone else. Put simply, most self-employed people do a little better than employees. The average net worth (assets minus liabilities) of entrepreneurs is many times that of employees. In their famous book The Millionaire Next Door, Drs. Stanley and Danko tell us who the millionaires are in this country and how they become rich. The results are surprising: "Who becomes wealthy? Usually the wealthy individual is a businessman who has lived in the same town for all of his adult life. This person owns a small factory, a chain of stores, or a service company. He has married once and remains married. He lives next door to people with a fraction of his wealth. He is a compulsive saver and investor. And he has made his money on his own. Eighty percent of America's millionaires are first-generation rich." Which of the following is true of most millionaires in America? A. They inherited their wealth. B. They are professional athletes. C. They are high-priced executives. D. They work for themselves.

D. They work for themselves. Most millionaires in America are self-made and own their own businesses, working for themselves.

To summarize, the following are reasonable estimates of the cost of home ownership. Each item is given as a percentage of the value of the house and we make the assumption that you pay an interest rate of 4 percent on the total value of the house (in our example it is a combination of the mortgage interest rate that is explicit and the value of equity, which is implicit). Therefore, if we use the example of a house worth $100,000, the annual cost of owning such a house is about $9,090 and the monthly cost is $757.50. To make this calculation simple, we have not included any amortization in the monthly mortgage payment. https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod15Q8.PNG Donna is thinking about buying a house that costs $100,000. If she puts down $20,000 and is able to get a 5 percent mortgage, she wants an estimate of her total monthly housing expenses. As we just learned, the average annual cost for owning a house is 4.09 percent of the value of the house. If we do not include the opportunity cost of the down payment, amortization on the loan or any tax benefits from home ownership, what will be her monthly cost the first month? A. $674.17 B. $767.80 C. $1,685.42 D. $838.54

A. $674.17 5 percent of her mortgage of $80,000 is $4,000 per year. 4.09 percent on the $100,000 value of the home is $4,090. Adding these together gives a total annual cost of $8,090. Dividing by 12 gives $674.17 per month.

Given the high price of today's new and used vehicles, few people are able to plunk down the cash to pay for it outright. Therefore, most are forced to pay for their vehicle over time, either by financing an outright purchase or by leasing it, which is equivalent to renting it for several years. Either way, the person acquiring the vehicle must agree to make regular monthly payments for it.Before you begin shopping for a vehicle, it is important to calculate the monthly payment you can afford to make to lease or purchase your vehicle. If you commit to making a larger payment than you can afford, you run the risk of not being able to make every payment, which can result in the loss of both your vehicle and your good credit rating.To calculate the maximum monthly vehicle payment you can make, you must:• Begin with your monthly take-home pay (after taxes and other withholdings).• Subtract all necessary monthly expenses such as housing, utilities, food, clothing, insurance, other loan repayments (including student loans and credit cards) and education. Monthly expenses such as entertainment are considered to be discretionary which means that you can decide to cut down on some of them in order to finance your vehicle. • The amount that is left over when your necessary expenses are subtracted from your take-home pay is the maximum amount that you can commit to monthly expenses for your vehicle. Remember that you must include as expenses those that will be connected to your new vehicle, such as insurance (which is high for young people), gas and repairs. • It is important to leave a safety margin in there as well, which means that you should not commit to making monthly vehicle payments that are as great as your monthly income minus expenses. Bad stuff can happen, in the form of a job loss, an unexpected repair, etc., so that a safety margin between your take-home pay and your total monthly expenses (including those related to the new vehicle) is really prudent. Jacob recently graduated from college and is starting a new job where he will have to commute to work by car. He shares an apartment with a roommate and his share of rent and utilities comes to $700 per month. His other necessary monthly expenses include $400 per month for food, $400 per month in student loan repayments and $200 per month in personal expenses. His take-home pay from work is $2,000 per month. If auto insurance and repairs for his new vehicle are expected to be $200 per month, what is the greatest amount he can commit for a monthly vehicle payment with no safety margin? A. $100 B. $200 C. $300 D. $150

A. $100 • Begin with monthly take-home pay (after taxes and other withholdings). $2,000• Subtract all necessary monthly expenses.o $2,000 Monthly take-home payo - $700 Rent & utilitieso - $400 Foodo - $400 Student loan paymento -$200 Personal expenseso -$200 Auto insurance & repairso = $100 which is the maximum amount that Jacob can commit to monthly expenses for his vehicle.

The benefits that the Morgans will gain from owning a washer and dryer are both quantifiable and nonquantifiable in monetary terms. Savings over alternative (laundromat). The only savings that Ashley Morgan can demonstrate to Saul is the money that she puts into the laundromat each week. If she spends $5 per week in the laundromat, her annual savings from owning a washer and dryer would be $260 (52 x $5) , which would be less than the estimated cost of ownership ($310). Therefore, it would appear that owning a washer and dryer would cost the Morgans an extra $50 per year ($310-$260). Gasoline money. Since the laundromat is only a few blocks away, there is little measurable savings in gasoline. Value of time. Of course Ashley may try to add fuel to her argument by pointing out that she would save two hours per week by not having to go to the laundromat. If Ashley is employed in the paid workforce on straight salary, it is most likely that she would do the laundry in early morning or evening hours, or on weekends (or perhaps Saul would do the laundry instead). So the monetary value of the time that Ashley saves by not having to go to the laundromat is probably close to zero. However, she could possibly use the extra time to engage in activities that could save the household money, such as painting or fixing the faucet or cooking meals if they eat out a lot. If Ashley worked for herself as a web designer and could get additional work that paid $22 per hour, how much would it be worth to her family (before taxes) each year, if she could free up 2 hours per week by having a washer and dryer at home? A. $2,238 B. $2,030 C. $990 D. $1,822

A. $2,238 If a washer and dryer freed up 2 hours a week that Ashley could sell as a web designer for $22 per hour, Ashley could earn an extra $2,288 per year (2 hours per week times $22/hour times 52 weeks in a year=$2,288). If she subtracted the extra cost (over the cost of using a laundromat) of owning a washer and dryer, the investment would be worth $2,238 ($2,288-$50) to the Morgan family.

Fixed-income assets are investments that promise to pay you a set return on your money. A certificate of deposit ("CD") is a fixed-income asset because it will pay you a stated rate of interest during the period of your deposit. If you invest $1,000 in a one-year CD that pays 2½ percent interest, you know that you will receive $25 in interest over that year ($1,000 x .025). Another type of fixed-income asset is a bond, which is nothing more than a debt issued by the government or a company. It basically states the amount of money that the issuer owes you (the face value), when it will pay that money back (the maturity) and the rate of interest that it will pay. If you buy a new bond when it is issued and hold it until it matures, you will get back the entire face value. You will also be paid the amount of interest that you were promised. Most corporate and government bonds pay interest semi-annually - every six months. If you own a $1,000 bond that has a rate of six percent, you will receive an interest payment of $30 every six months (half of the total $60). Heather bought a ten-year maturity corporate bond when it was issued for $1,000. The bond has an annual interest rate of six percent and pays interest semi-annually. How much does she receive every six months? A. $30 B. $40 C. $90 D. $35

A. $30 The annual interest rate is 6%. $1,000 x .06 = $60 so that the semi-annual interest payment is $60/2 = $30.

If you're a young driver, the cost of automobile insurance is likely to be high. Why is this true? Vehicles are big, heavy, fast and expensive. They are built to carry people and can do a lot of damage to both people and property if they crash. Driving is a skill that improves with experience. Since younger drivers have less experience than older drivers, they are more likely to be involved in accidents and tend to cause more total damages per year than more experienced drivers. Therefore, insurance companies charge younger drivers more per year to own an insurance policy that pays for damages they may cause. Since the owner of the vehicle is liable or responsible for damages to others caused by a vehicle accident, most vehicle owners have liability insurance to pay for that damage, if it happens. In fact, all states other than New Hampshire, require vehicle owners to carry liability insurance. Those states that don't require liability insurance allow owners instead to prove that they are able to pay for an accident that they might cause by posting a bond or through other means, but it is generally far easier to just get an insurance policy. States that require liability insurance require vehicle owners to have three types of minimum liability coverage to cover (1) an injury to a single person, (2) injuries to all persons from an accident and (3) damage to property. For example, a 25/50/25 policy covers each passenger who suffers damage for up to $25,000, limits payments to all injured persons to a total of $50,000, and limits property damage per accident to $25,000. Damages above this amount are the responsibility of the vehicle owner who may decide to purchase more than the minimum required amount of insurance to further protect him or herself from costly lawsuits. For example, a 25/50/25 policy covers each passenger who suffers damage for up to $25,000, limits payments to all injured persons to a total of $50,000, and limits property damage per accident to $25,000. Damages above this amount are the responsibility of the insured person. Theresa has only a basic 25/50/25 liability policy on her vehicle. Her son borrowed it and caused an accident where he and two passengers were injured. One passenger suffered $30,000 in damages and the other passenger and Theresa's son each suffered $10,000 in damages. Damage to the other car involved in the accident was $16,500. Theresa's vehicle, worth $7,500 was totaled. How much will the insurance company pay in total damages? A. $51,500 B. $48,000 C. $42,500 D. $50,000

A. $51,500 The insurance company will pay only $51,500. The insurance company will only pay the passenger who suffered $30,000 in damages $25,000 since a 25/50/25 policy pays a maximum of $25,000 to any single injured party. The second passenger will be paid $10,000. And the owner of the other car will be paid $16,500. Theresa's son will be paid nothing because the policy pays only for damages to others (outside the family) for which Theresa has liability, and Teresa's vehicle is not covered because liability insurance does not cover damage to the owner's car.

Most people who really want something, such as a vehicle, tend to want it now. However, achieving immediate gratification by getting something costly that you want now, adds to the amount that you must borrow which also raises the interest that you must pay and your monthly payment. Another alternative is to save part of the cost of your vehicle, thereby lowering its total cost and your monthly payment. Yes, you will have to wait longer before you can enjoy this vehicle, but if you can get along without it for a little longer, it can save you money in interest and lower the stress that larger monthly payments will put on your budget.Looking at our familiar monthly payment table, below, we see that the monthly payment for a 4-year loan at 10 percent interest will cost $25.36 per $1,000 borrowed per month. Therefore, a used car that costs $10,000 will have monthly payments of 10 times $25.36 or $253.60 per month.Suppose that Rachael waited a year to buy a $10,000 used car that she would finance over 4 years at 10 percent interest. If she saved the $253.60 per month for her down payment instead of paying $253.60 per month during that first year, what would her monthly payment become?• Subtract the down payment from the cost of the vehicle.o $10,000 cost of vehicleo -$3,043.20 down payment ($253.60/month x 12 months = $3,043.20)o =$6,956.80 amount financed• Divide the amount financed by $1,000 to find out the number of thousand dollars you must finance.o $6,956.80/$1,000 = 6.9568 which is the number of thousand dollars financed• Find the monthly payment per $1,000 borrowed by locating number of years of your loan obligation on the left hand side of the table and the interest rate that you will be charged across the top.o 4 years @ 10% = $25.36• Multiply the number you find from the table by the number of thousands of dollars of the balance you are borrowing. This will be your monthly paymento $25.30 x 6.9568 = $176 monthly payment.This is far lower than the $253.60 monthly payment that she would have to make with no down payment. The longer Rachael waits to buy her car, the more she can save for her down payment and the lower will be her monthly payment. This, of course, assumes that she can drive another car while she saves money.Brandon will be in school for another two years but feels that he needs a car to get to work at his job after graduation. He has found a used truck that he really likes but this truck costs $12,000. He currently has $2,000 that he can put down on his car and can get a loan at 12% for four years. If he buys the car now, he would borrow $10,000 ($12,000 minus the down payment of $2,000) and his monthly payment would be 10 times $26.33 or $263.30. https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod53Q5%2C6.PNG If Brandon waited for 2 years to buy his car and put aside that $289.63 each month to add to his down payment, what would be his monthly payment on a 4-year loan at 12% interest? A. $80.28 B. $263.30 C. $236.97 D. $96.92

A. $80.28 • Subtract the down payment from the cost of the vehicle.o $12,000 cost of vehicleo - $2,000 already saved for down paymento -$6,951.12 additional down payment ($289.63/month x 24 months)o =$3,048.88 amount financed• Divide the amount financed by $1,000 to find out the number of thousand dollars you must finance.o =$3,048.88 /$1,000 = 3.049 which is the number of thousand dollars financed• Find the monthly payment per $1,000 borrowed by locating the number of years of your loan obligation on the left hand side of the table and the interest rate that you will be charged across the top.o 4 years @ 12% = $26.33• Multiply the number you find from the table by the number of thousands of dollars of the balance you are borrowing. This will be your monthly payment.o $26.33 x 3.049 = $80.28 monthly paymentThis is much less than the $289.63 per month he must pay with just a $2,000 down payment.

Based on these estimates, the Morgans can expect a washer and dryer to cost them the following amounts per year: https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod20Q7.PNG Kevin and Claire have a house on several wooded acres. They heat their home largely by burning firewood that is delivered to them by the cord (a large quantity of wood). Kevin feels that, if they owned a wood splitter, he could cut up and split their own firewood and save the several hundred dollars per year they now spend on firewood. The cost of a good, gasoline-powered wood splitter is $4,000, which they would finance by adding to their mortgage, currently at six percent. They figure that the machine would last eight years and then would be worthless. They also calculate that fuel for the machine would cost $30 per year and that repairs would average $50 per year over the eight years that they would own it. On average, what would their annual cost be to own the wood splitter? A. $820 B. $80 C. $900 D. $860

A. $820 Depreciation would be $4,000/8 = $500 per year. Interest would be $4,000 x .06 = $240 per year. Operating expenses are $30 and repairs and maintenance are $50 per year for a total of $820 per year.

It may come as a surprise to learn that Americans are not "vacationing" people, particularly when they are compared to people in other developed countries. The small number of vacation days given to American workers is especially hard on younger workers, who are given the shortest vacations. In fact, there is no legal requirement in the U.S. that workers be paid for time not worked. According to the U.S. Bureau of Labor Statistics, workers with one year of experience average just 10 paid vacation days per year. This increases to 14 days for those with 5 years of experience and 17 days for those with 10 years of experience. This compares with a legal minimum of 25 vacation days in France. By Law, the minimum number of paid vacation days for workers in the U.S. is: A. 0 B. 10 C. 17 D. 14

A. 0 In the United States, employers are not legally required to give their employees any paid vacation days at all.

Most regular mortgages require your payments to be the same amount each month, whether it's the first payment on a 30-year mortgage or the last. Since your balance (the amount you owe), goes down with every payment, due to the amortization, the payments that you make the first few years will be mostly interest. As you get to the end of your mortgage, the balance has been largely repaid and the interest part of your payment gets smaller and smaller. Therefore, your last few payments have very little interest and are mostly amortization. In the U.S. a standard mortgage requires a down payment of: A. 20% B. 5 % C. Zero D. 10%

A. 20% A standard mortgage requires a 20 percent down payment. It may be possible to get a mortgage with a lower down payment, but this generally requires the buyer to purchase mortgage insurance at an additional monthly fee.

When you budget for clothing, you must also budget for clothing care, which can be a significant expense. This may not be a big budget item today, particularly if you or your mom does your laundry in the family washer and dryer, but it can amount to big bucks if you have a large wardrobe of clothes that need to be dry-cleaned. These days it can cost $8 or more to dry-clean a dress and $5 or more for a blouse. A week's worth of men's dress shirts can cost $20 to dry clean, not counting the $10 or more to dry clean a man's suit. Therefore, it is not unusual for working men and women to spend as much as $25 per week or more for laundry, particularly if they send out all their clothes to be cleaned. Alisha must wear a skirt and blouse to work every day. She can buy an all-cotton blouse for $35, but it needs to be sent to the dry cleaner to be washed and ironed for $5 after each use. She can buy a wash and wear blouse of the same quality for $50, which she can stick in her washing machine and hang up to dry. If we ignore the cost of using her washing machine (which is offset by the cost of driving to the dry cleaner), after how many cleanings will she break even on buying the more expensive blouse? A. 3 B. 7 C. 25 D. 10

A. 3 The wash-and-wear blouse costs $15 more than the cotton blouse which needs to go to the cleaner. Since the cost of the cleaner is $5, Alisha would break even after $15/5 = 3 cleanings.

Since the magic of compounding is so important to many of our financial decisions, a trick was devised to let us estimate just how fast our money will compound. This trick is called the "Rule of 72." Very simply, you divide the annual percent yield into the number 72 and it tells you approximately how many years it will take your money to double. For example, if the annual percent yield is eight percent, 8 divided into 72 is 9, so it will take approximately 9 years for our money to double. You can check this answer in the previous table that was calculated precisely with a computer. The answers are the same in this case, although the Rule of 72 may give approximations that are not exactly precise. An excellent Web site to find out the best available yields on savings and checking accounts is www.money-rates.com. Since it is relatively easy to open a bank account on line or by mail, you will find rates that may be twice what banks in your local area pay. Plus, the FDIC insures them all to the same amount. Using the "Rule of 72," if you invested $2,500 at eight percent interest, how many years would it take before your investment was worth $5,000? A. 9 B. 6 C. 12 D. 8

A. 9 The "Rule of 72" tells us to divide the annual percent yield into 72 to find out how long it takes our money to double. If we divide 72 by 8, we find that it takes 9 years for $2,500 to double to $5,000 through compound interest at a rate of eight percent.

Unless you are lucky enough to be given a vehicle for free, you must pay for it in some way. If you have saved enough money (or if the vehicle is cheap enough) you may be able to buy it for cash. Generally, this will be the least expensive way of buying a vehicle in the long run. For most of us, however, the choices come down to two: we can borrow the money to finance the purchase of a vehicle through an installment loan or we can lease the vehicle, which is similar, but not identical, to renting it. Either way, the monthly payments are fixed. The major difference between financing and leasing a vehicle is that, when you finish making all the required monthly payments, the financed vehicle is yours and the leased vehicle is still owned by the leasing company. Since you end up owning the vehicle outright at the end of your installment loan period, you must pay more than you would pay if you just leased the vehicle for the same period and did not own it when the payments ended. If Melisha can pay for her vehicle with a 4-year loan or with a lease with the same down payment and same interest rate, why will the loan have a higher monthly payment? A. Because Melisha will own her vehicle at the end of the loan. B. Because the lease is riskier to the financing company. C. Because the loan is riskier to the financing company. D. Because Melisha will own her vehicle at the end of the lease.

A. Because Melisha will own her vehicle at the end of the loan. Even if the interest rate is the same on both the loan and the lease, the loan allows Melisha to pay off the vehicle and own it at the end of the four years. With a lease she would not own the vehicle at the end of that time.

The Internet makes it possible to find terrific bargains on airfares. These days, all of the airlines use the Internet to sell tickets because it is fast, flexible and cheap. If you buy online, directly from the airline or through an Internet travel company such as Travelocity.com, you are not issued a paper ticket. Instead, with your electronic or "E-ticket" reservation, you print your boarding pass at home, pick it up at the airport or receive it on your smart phone. In the aftermath of the terrorist attack on the World Trade Center and the Pentagon, airports require passengers to have a boarding pass before going through security. This is in addition to the photo ID that was always required. As we said, passengers can print out their boarding passes at home or have them sent to their smart phones, but in some cases passengers prefer to get their boarding passes at the airport. Most airlines now issue boarding passes electronically by machines at the airport, but before entering security. By inserting a credit card, passport or frequent flier number for identification, you will be given a boarding pass that allows you to pass through security. If you purchase an E-ticket from an airline or travel service over the Internet, what do you generally need to get through airport security? A. A boarding pass and photo ID. B. An e-mail receipt or itinerary with your name on it with the flight number and date. C. A valid passport. D. A paper airline ticket.

A. A boarding pass and photo ID. You must have a boarding pass to get through airport security. You can get this at the ticket counter, from a machine near the ticket counter or, in many cases, print it out on your own computer the day of the flight or have it sent to your smart phone where a scanner reads it from the screen. A photo ID is always required.

In terms of risk, deposits in savings accounts are as risk-free as those held in checking accounts. Since balances are payable to depositors in the form of money, there is no risk that the value of one's account will decline. A $500 savings account balance cannot be lost or stolen. In fact, one of the basic functions of banks and other financial institutions is to safeguard the depositor's money. Virtually all checking and savings accounts are protected by federal deposit insurance. Banks and savings associations have their accounts insured by the Federal Deposit Insurance Corporation (FDIC) while credit unions are insured by the National Credit Union Share Insurance Fund. All federal bank insurance has a limit of $250,000 per individual account in a single bank. Joint accounts are insured for up to $250,000 for each person holding the joint account. Many savings programs are protected by the Federal government against loss. Which of the following is not? A. A bond issued by one of the 50 states. B. A U. S. savings bond. C. A certificate of deposit at the bank. D. A U.S. Treasury bond.

A. A bond issued by one of the 50 states. U.S. bonds, including savings bonds and treasury bonds are insured by the U. S. government by definition. A certificate of deposit at a bank, like all bank deposits of $250,000 or less is insured by federal deposit insurance. Bonds issued by individual states and cities, although generally pretty safe, are not guaranteed by the federal government. Recently, several cities, including Detroit, have been unable to repay their bondholders in full.

We have just seen that all bonds have some risk to an investor who might want to sell them before they mature. The fluctuation in the value of the bond, which is due to changes in overall rates of interest, is called interest rate risk. There is another type of risk that applies to all bonds except those issued by the United States Treasury. Default risk is the risk that the issuer of the bond will not be able to pay the interest or repay the face value of the bond when it matures. A company may run into financial difficulties and not be able to repay its debts. Enron Corporation was the seventh largest corporation in America at the beginning of 2001. By December of that year, the company had declared bankruptcy because it couldn't pay its debts, including its bonds. While most large corporations tend to pay their bills, you always take a chance when you buy a corporate bond. Bonds issued by states or cities are called municipal bonds. Most of these bonds are considered to be pretty safe, but every now and then, one of them will not be able to pay their bondholders and are forced to default or not pay on their bonds. This happened recently with the municipal bonds of Puerto Rico. Bonds issued by the U. S. Treasury are considered to have no default risk since the Treasury puts the full power of the U.S. Government and all its resources behind it. Therefore, the safest bonds, from the standpoint of getting your money back when they mature, are Treasury bonds. All other bonds are assigned a safety rating by bond analysts or specialists. The highest safety rating is AAA ("triple A") and the lowest is D, which means the bond is in default. Generally, a bond with at least a single A rating is considered to be a very safe investment. Which of the following bonds is considered to be safest in terms of default risk, which is the risk that it won't be able to make its promised payments? A. A bond issued by the U.S. Treasury. B. A bond issued by the City of Los Angeles. C. A bond issued by the City of Phoenix to pay for a new baseball stadium D. A bond issued by the State of New York.

A. A bond issued by the U.S. Treasury. A bond issued by the U. S. Treasury is considered the safest bond in terms of default risk.

From the earliest days of air travel, a large proportion of travelers used travel agents to make reservations for them. The standard fee for such services had been 10 percent of the ticket's price. In recent years, as most of the flying public became comfortable with computers, airlines began to encourage flyers to buy their tickets online, thereby saving the commission that would go to the travel agent. To reduce agent costs further, the airlines began to cut the fee paid to the travel agent from the standard 10 percent. Some travel agents have responded by charging an additional fee directly to their customers, thereby helping the airlines sell more tickets directly. These days, much of the sophisticated software for finding the lowest-price or most convenient tickets that used to be available only to travel agents is available to the general public online for free. While frequent air travelers who are comfortable with computers now tend to go around human travel agents for flight reservations, these agents can still provide useful services to those who travel infrequently or who don't know, like or trust the Internet. As a result, most travel agents now specialize in travel services other than domestic air flights, which are relatively easy for consumers to buy. Many specialize in cruises, tours or even safaris which consumers take infrequently and where the agent's knowledge and experience is greatly valued. Cynthia travels frequently by air for both business and pleasure. For which of her future trips would the services of a human travel agent be most useful? A. A two-week cruise in Europe. B. A business trip to Cincinnati. C. A weeklong business convention in Los Angeles. D. A weekend visit to her mom in Florida.

A. A two-week cruise in Europe. Since she flies regularly, domestic flights, hotels or even rental cars are things she knows enough about to book herself over the Internet. A two-week cruise to Europe is something she does infrequently, perhaps only once in a lifetime. It would be helpful to her to learn about the cruise from a knowledgeable human travel agent.

We have learned that leasing a vehicle is similar to financing a vehicle with an installment loan except that when you finish making your payments, you own the vehicle you bought with the installment loan and do not own the leased vehicle. Financially, this means that instead of paying for the entire cost of the vehicle (plus interest), the person leasing the vehicle basically pays for only two things: 1) The amount that the vehicle depreciates (loses value) over the lease period2) The interest on the money borrowed during the lease period When you lease a vehicle, the leasing company calculates the residual value of the vehicle at the end of the leasing period. Residual value is equal to what they think the vehicle will be worth if it isn't damaged or abused. Your lease contract may allow you to buy the vehicle for the residual value at the end of the lease, if you want. Even if the contract does not say that you may buy the vehicle at the end of the lease, some leasing companies may agree to sell you the vehicle after the lease ends because they don't want to have too many "off-lease" vehicles around that may be hard to sell. This means that you may be able to buy the vehicle for a favorable price. The difference between the price paid for the vehicle when it is purchased and the residual value is the expected depreciation. The lease payments are paying, in part, for the expected decrease in the value of the vehicle. In addition, the leasing company will also charge a fee to cover their interest cost on the total amount borrowed as well as the cost of administration. If you lease a vehicle for 4 years, the leasing company will tell you how much you will have to pay if you want to buy it at the end of the lease. This cost is much less than the price of the new vehicle. What accounts for the difference between the new vehicle price and the cost to buy it after 4 years? A. Depreciation B. Amortization C. Insurance D. Finance charges

A. Depreciation The difference between the price paid for the vehicle when it is purchased and the value at the end of the lease (the residual value) is the expected depreciation.

Vacation trips tend to be expensive, often more than people think. A 2018 report indicated that the average vacation costs $1,145 per person ($4,580 for a family of four). Vacations vary greatly by cost. A short automobile trip to stay with the grandparents will cost very little, particularly when compared to a trip to Hawaii or Europe. There may be certain economic advantages to using the family car on vacation as opposed to flying or going by train. First, the fixed costs of owning a car accounts for most of the cost of ownership, making the per mile cost of driving the car a small part of the vacation cost, even when gasoline prices are high. In addition, it costs no more to put two, three, four or five people into that car than it costs for just the driver, in terms of gas, oil, and tolls. In contrast, if the family traveled by airplane, a seat must be purchased for everyone over the age of two. Susanna and Pedro Rodriguez want to take their two children on a vacation in Los Angeles from their home in Phoenix, a trip of some 350 miles. Which of the following is NOT an advantage of driving in their own car rather than flying? A. It is faster. B. The transportation cost is the same regardless of the number of passengers. C. Since they own their car, the cost for gas and oil will be under $60 each way. D. They won't have to rent a car in Los Angeles

A. It is faster. The airplane would almost certainly be faster, but taking the car would be a lot cheaper for the reasons stated in the other possible answers.

To save money, we must spend less than we make. This is not easy for people to do in our society. In the first quarter of 2019, on average, Americans saved just 6.5 percent of their disposable (after-tax) personal income, according to the St. Louis Fed. This was high in comparison with the years before the financial crisis which began in 2008. The personal savings rate in the U.S. is about the lowest rate of any industrialized country. Some Americans do save, and, as you might expect, the percentage of income that families save increases with family income. The total savings of families who do save, however, is offset by the increased borrowing of those who don't. How would you describe the savings rate in America compared with other industrialized countries? A. Lower than most others. B. About the same as most others. C. Much higher than most others. D. Higher than most others.

A. Lower than most others. Americans have one of the lowest savings rates of any industrialized country in the world.

Given the twin disadvantages of holding money-little or no yield (earnings) and possible erosion by inflation, why do people hold it at all? Economists give three possible reasons: Transactions: People keep ready money to use between income payments. In our economy (and in nearly all others as well), workers get paid in fixed intervals, such as once a week, once every two weeks or once a month. They must spend money all through that period-for groceries, gasoline, restaurant meals and so on. The $296.66 that Joey gets to take home from his pay check every Friday must last until the following Friday. Precaution: Precautionary reasons for holding money relate to possible emergency needs such as a car repair, an injury or loss of income. A person may need funds for immediate use and money is the handiest form. Speculation: A third reason for holding money is that the value of other assets, such as stocks, bonds and real estate, may fall, enabling the person who has assets in the form of money to come in and buy at bargain basement prices. This is the meaning of the phrase "cash is king." Economists call this the speculative value of holding money since the motivation for holding it is based on the speculation or guess by the person holding it that other assets are about to decline in value. When stocks lost half their value following the financial crisis of 2008, investors who were lucky or smart enough to have sold before stock prices fell, and held their assets in cash, could buy them back for half of what they had cost less than two years earlier. By 2012, stock prices had returned to their pre-crisis values. Andrew is holding his money in a checking account because he thinks that the world will soon be in a recession and that stock prices will soon fall substantially. Which of the following motivations for holding money does Andrew have? A. Speculative B. Precautionary C. Transaction D. Manipulative

A. Speculative Andrew is holding his assets in the form of money for speculative reasons because he thinks stock prices are overvalued and about to fall. By holding his assets in the form of money rather than stocks, he can avoid losing money when stock prices go down. However, this is called speculative because Andrew is guessing or speculating which way the stock prices will go. If he is wrong and stock prices go up instead of falling, he will miss out on making some money.

On the other hand, if you borrow to pay for a vacation or use your credit card to pay for an expensive meal, you are not saving when you pay back the loan since you didn't buy an asset that will retain its value over time. Forced saving can also be done without using debt. For example, the Social Security that is taken from your paycheck is a type of forced saving that will result in payments to you when you are older. The same is true of pension payments that are taken from your paycheck to supplement your retirement. You may also volunteer to have money taken out of your paycheck and put into savings before you ever see (and can spend) the money. Many employers have voluntary retirement savings plans such as 401(k) plans. For these plans, you agree to have a certain percent of your salary deducted each pay period before you get your paycheck. You can also sign up to have money taken from every paycheck and invested in savings bonds, stocks or mutual funds. Finally, if you end up getting a tax refund each year because you paid too much in taxes the year before, you have also managed to accumulate money through forced savings. By moving the refund into a savings type of account rather than spending it, you can begin the process of building up long-term savings. The Internal Revenue Service helps you do this by providing a space on your tax return where you tell it to which account (or accounts) you want your refund to be automatically deposited. Which of the following is not a form of forced saving? A. Using your credit card to pay for a cruise that you took. B. Paying into Social Security. C. Making payments on a home mortgage. D. Paying in a required matching amount for your pension at work.

A. Using your credit card to pay for a cruise that you took. Paying off something that is pure consumption, such as a cruise, leaves you with no additional savings, so it is not a form of saving at all. The other types of forced saving will all build up to the total amount of savings that you have.

In this module, we look at long-term savings goals, which are defined as goals that we want to achieve in more than a year. These may include buying a car or a house, an overseas trip, college education or even retirement or getting rich. Some of these longer-term goals may be reached in a year or two. Others, like retirement, may not be realized for 50 more years. We call the period of time between now and when we want to achieve our goal the investment horizon. In general, the longer the investment horizon, the less certain we are about the amount of money we will need to realize our goal. As a simple example, suppose we have our eye on a house that is currently selling for $200,000. A standard down payment will require us to come up with 20 percent of that amount, or $40,000. If our investment horizon is five years, however, we don't know how large a down payment we will need at that time since inflation may push house prices up, or high interest rates and a weak economy may lower them. In addition, required down payment percentages also vary over time. Prior to the financial crisis in 2008, homebuyers could often get a regular mortgage with no down payment at all. In the years following the crisis, a minimum of 20 percent has been generally required and some lenders demand an even higher percentage. If our investment horizon is, say, 36 years until we plan to retire, our monetary goal becomes even less precise. If inflation averages just 4 percent a year over that time, the rule of 72 (divide 72 by the average annual percent increase) tells us that prices will double every 72/4 = 18 years. Since there are two 18 year periods in 36 years, prices will be doubled in 18 years, and be four times what they are now in 36 years. That means that if we can retire comfortably now on $50,000 per year, we will need nearly $200,000 per year in 36 years to enjoy just the same standard of living. This seems so ridiculous that many people are tempted to not save at all. If you don't save, however, you may not be able to retire. Sometimes we end up saving for a very long-term goal even though we have no good idea of just how much we will need. What tends to happen to the accuracy of our savings goals as our investment horizon becomes longer? A. We are less able to accurately estimate the amount we will need. B. We can estimate the amount we need more accurately. C. The accuracy of our savings goals doesn't change. D. It is not useful to have long-term savings goals.`

A. We are less able to accurately estimate the amount we will need. When we are many years away from our goal, we become less able to accurrately estimate the amount needed to meet that goal. Changing prices can make our goal easier to achieve or more difficult.

A Certificate of Deposit (CD) is a deposit offered for a fixed period of time at a stated rate. The time period can be as little as 30 days or as long as several years. An advantage of a CD is that its rate is fixed and cannot be changed during the period. The disadvantage is that you may not be able to get your money out of a CD until the time period is up, so it is not particularly liquid. Some banks may offer you early withdrawal with a certain penalty, such as 10 percent of the deposit plus accumulated interest. In most cases, however, the bank doesn't have to give you any of your money back until a CD has "matured" (its term is over). Because money in a CD is less liquid than money in a savings or checking account, it is less desirable to the consumer. Therefore, to attract funds, banks tend to offer a higher yield on a CD than on a liquid checking or savings account. Furthermore, it is generally true that the longer the CD period, the higher the yield paid on it. An excellent Web site to find out the best CD rates is www.Bankrate.com. Which of the following is NOT true about certificates of deposit offered by banks? A. You always have the legal right to withdraw your funds early if you are willing to pay a 10 percent penalty. B. Longer CDs tend to pay higher rates than shorter CDs. C. They are insured by the FDIC. D. The shortest CD is 30 days.

A. You always have the legal right to withdraw your funds early if you are willing to pay a 10 percent penalty. Some banks may let you withdraw your money from a CD with a penalty of 10 percent plus loss of accumulated interest, but this is not generally a right of the depositor. There have been times when banks have refused to allow CD holders to withdraw their money under any circumstances until the CD matured.

Leasing is popular with those who don't have much in savings and can't spare much for vehicle payments every month or with people who like the idea of getting a new vehicle every three or four years. People who lease a vehicle generally don't put down very much money in the beginning and have lower monthly payments. The downside of leasing, however, is that you have no vehicle when your lease ends. You must start paying immediately on another lease or come up with the cash (or a loan) to buy the vehicle you just finished leasing. The person who has an installment loan will own the vehicle when the loan period is over and can drive that vehicle for years without making additional vehicle payments. A potential downside of many leases is that it can be very expensive to end a lease agreement before the lease is up. In some cases, the lease agreement will demand that all of the remaining lease payments be made if a vehicle is turned in before the end of the lease even if it is in good condition. If you find a vehicle that you like and are trying to decide whether to lease it or buy it over four years, which of the following statements is true? A. Your monthly payments will be higher if you buy rather than lease. B. Your monthly payments will be less if you buy rather than lease. C. Your monthly payments will be the same if you buy or lease the vehicle. D. You will own the vehicle when you have made your last regular lease payment.

A. Your monthly payments will be higher if you buy rather than lease. Since you don't own the vehicle after you have made four years of lease payments, lease payments are lower than installment payments where you will own the vehicle when you have paid off the loan.

While the calculations for determining the monthly lease cost for a vehicle are complex, the following table may serve as a useful illustration. It is for a $10,000 vehicle, purchased or leased with no down payment for three years. We will assume that the vehicle is expected to depreciate by half over that period, which means that its residual value is half of the purchase price. Some vehicles have higher depreciation rates than other vehicles, but 50 percent is about average for three years. https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod54Q7.PNG Keith wants to buy his first vehicle for $10,000. The dealer will sell it to him over three years at 10 percent interest or lease it to him for the same rate over the same period. The vehicle has a residual value of $5,000 at the end of the lease. Using the table, which compares lease and purchase monthly payments, if Keith has no down payment, calculate how much less his monthly lease payments will be than his monthly purchase payments? A. $123.34 B. $119.67 C. $314.59 D. $125.22

B. $119.67 The table tells us that the monthly purchase cost on a 3-year loan at 10 percent is $322.67 while the monthly lease cost is $203.00. The difference is $119.67.

Andrew, Maria and Joey were sitting in a booth in Pat's Pizza one night, after seeing a movie. They were finishing a large pepperoni pizza and each of them had ordered a soft drink, since the pizza was so spicy. The bill, including tip, came to $20. Maria made comment that it was a lot of money for a pizza and a few Cokes, as she fished in her purse for her share of the tab. She told the guys, that they could've picked up a frozen pizza and a large bottle of Coke from the supermarket for $10 and had the meal at her house. Andrew nodded and said that his mom sometimes makes her own pizza from scratch and he figured that it doesn't cost her more than $3 for the ingredients. Joey thought about it and added that "his grandma hardly ever eats out at a restaurant and never buys frozen foods like pizza and microwave dinners. He bet that her weekly grocery bill was under $20, less than the three friends just spent for their late night snack. Andrew, Maria and Joey spent $21.50 for a large pepperoni pizza and 3 cokes at Pat's Pizza restaurant (including the tip). If, instead, they had bought a gourmet frozen pizza at the supermarket for $7.00 and a 2-liter bottle of Coke for 99 cents, how much would they have saved? A. $13.01 B. $13.51 C. $7.99 D. $12.01

B. $13.51 The frozen pizza and coke cost $7.99 together. The restaurant meal was $21.50 and the difference was $21.50 - $7.99 = $13.51.

Owners of real estate in the United States pay an annual tax based on the value of their property. This tax is called property tax or real estate tax and is generally used to support the activities of local government, particularly to support local schools. The size of the tax is based on both the tax rate and the value of the house. Median property taxes as a percentage of home values ranged from 0.18% (Louisiana) to 1.89% (New Jersey) in 2018. Remember that the real estate taxes you pay generally depend on the current value of your house, not what you paid for it. Sometimes, people who paid very little for a home, years ago, are surprised to learn that their house has become far more valuable. When homes become more valuable, their owners must often pay a lot more in real estate taxes. Most home mortgage contracts demand that homeowners pay one-twelfth of the annual real estate taxes each month as part of their mortgage payment. The amount paid for real estate taxes is placed in a type of bank account called an escrow account and accumulated in that account over the year until the taxes are actually due. This is designed to protect the mortgage lender from having the house taken away by the city because the buyers did not pay their taxes. Homeowners insurance premiums are also held in an escrow account so the policy does not lapse. If the tax rate on homes in Topeka, Kansas is 2.4 percent of their value and Bonnie owns a $100,000 house, how much will the real estate taxes add to her monthly mortgage payment? A. $250 B. $200 C. $150 D. $100

B. $200 The tax rate of 2.4% on $100,000 is $2,400. Dividing this by 12 months gives us $200 per month.

The size of the monthly mortgage payment depends on three things: 1. The size of the mortgage (the amount borrowed).2. The length of the mortgage (how many years).3. The rate of interest on the mortgage. The following table will make it easy for you to estimate a monthly mortgage payment. If you know the interest rate and choose the length of the mortgage, it will tell you the monthly payment for every $1,000 that you borrow. To find your monthly mortgage payment, just multiply this by the number of thousand dollars you are borrowing. https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod15Q3.PNG If Joey purchased a $100,000 house with a 20 percent down payment and borrowed the rest on a 30-year mortgage at 4% interest, what would his monthly payment be? A. $511.60 B. $381.60 C. $405.60 D. $429.60

B. $381.60 First, we must subtract the down payment from the price of the house: 20 percent of $100,000 is $20,000, so his mortgage is the $100,000 price of the home, less the $20,000 down payment or $80,000. Then, the chart tells us that his monthly payment will be $4.77 per thousand dollars borrowed which equals $4.77 x 80 = $381.60 per month.

When we reviewed the advantages of renting rather than owning a home, we saw that it is generally more expensive to own than to rent. Just what makes up the costs of home ownership? These days, the average cost of a home is very high. In 2018, the median sales price of a new home and a pre-owned (existing) home were $324,800 and $254,700, respectively. First-time homebuyers have tended to buy less expensive homes, probably because they have lower incomes and also less money for the down payment. The standard down payment of 20 percent on the price of the average existing home would equal over $50,000, a huge amount of cash for most young people. They also do not have money from the sale of a previously owned home to help them out. Since few people have this much money saved, most end up borrowing from a lender to pay for the house. This borrowed money is called a mortgage loan. As mentioned above, a standard mortgage generally requires a down payment of 20 percent of the house's selling price. However, it may be possible to put down less by getting mortgage insurance. Although mortgage insurance allows you to come up with less of a down payment, you must pay for the insurance with an additional premium. This can increase your interest rate by as much as a full percentage point. On a $200,000 mortgage, this raises your cost by $2,000 a year. It should be noted that low down payments, which were common before the collapse of the U.S. housing market in 2008, are now far more difficult to obtain. Since many home buyers borrowed more than they could afford to pay and ultimately defaulted on their loans, companies that issue mortgages are now very concerned about the borrower's ability to repay the loan as well as the size of the down payment. When you make your monthly payment on a mortgage, you pay more than just the interest on the amount that you borrowed. You are also paying off the loan over a period of time. This extra money for principal payment is called "amortization." Therefore, if you have a 30-year, $100,000 mortgage at 4 percent interest, the annual interest on your loan would be $100,00 x .04 = $4,000. However, with the extra amount for amortization, your annual payments will total $5,729 or 43 percent more than just making the interest payment alone. Colinda has just purchased her first home for $125,000. She put down a 20 percent down payment of $25,000 and took out a 6 percent mortgage for the rest. Her mortgage payment is $599.55 per month. How much of her first monthly mortgage payment is amortization? A. $143.67 B. $243.67 C. $99.55 D. $325.33

C. $99.55 Her mortgage is $125,000 minus the down payment of $25,000 or $100,000. The annual interest on a $100,000 mortgage at 6 percent is $6,000. This is equal to $6,000/12 = $500 per month. Her first monthly payment of $599.55, minus $500 equals $99.55 which is the amortization or the amount she pays above the interest which adds to her equity.

If you finance the purchase of a vehicle, the size of your monthly payment depends on how much money you borrow, the interest rate you are charged, and the amount of time you will take to pay off the loan. The more you borrow, the higher the interest rate, or the shorter the loan period, the higher your monthly payment.Most vehicle loans require a down payment, which you pay from your own funds at the time you acquire a vehicle purchased on credit. According to Edmunds.com, the average size of a down payment in 2017 was 12 percent. The larger your down payment, relative to the cost of the vehicle, the smaller the amount that you must borrow.To find the monthly payment, do the following:• Subtract the down payment from the cost of the vehicle since you only finance the difference, which is called the "amount financed."• Divide the amount financed by $1000 to find out the number of thousand dollars you must finance.• Find the monthly payment per $1,000 borrowed by locating the number of years of your loan obligation on the left hand side of the Monthly Payment Per $1,000 Financed table and the interest rate that you will be charged across the top.• Multiply the number you find from the table by the number of thousands of dollars of the balance you are borrowing. This will be your monthly payment.Let's try an example. Maria wants to buy a $6,000 vehicle. If she puts $1,000 down, the bank will finance it for her over four years at an annual percentage rate of 8%. What will her monthly payments be?Solution: • Subtract the down payment from the cost of the vehicle.o $6,000 cost of vehicleo -$1,000 down paymento =$5,000 amount financed• Divide the amount financed by $1000 to find out the number of thousand dollars you must finance.o $5,000/$1,000 = 5 which is the number of thousand dollars financed• Find the monthly payment per $1,000 borrowed by locating number of years of your loan obligation on the left hand side of the Monthly Payment Per $1,000 Financed table and the interest rate that you will be charged across the top.o 4 years @ 8% = $24.41• Multiply the number you find from the table by the number of thousands of dollars of the balance you are borrowing. This will be your monthly paymento $24.41 x 5 = $122.05 monthly payment https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod53Q5%2C6.PNG Joey wants to buy a $3,000 vehicle with 20 percent down for three years at 12 percent interest. What will his monthly payment be? A. $72.82 B. $79.70 C. $119.56 D. $89.67

B. $79.70 • Subtract the down payment from the cost of the vehicle.o $3,000 cost of vehicleo -$600 down payment ($3,000 cost of vehicle x 20% = $600)o =$2,400 amount financed• Divide the amount financed by $1000 to find out the number of thousand dollars you must finance.o $2,400/$1,000 = 2.4 which is the number of thousand dollars financed• Find the monthly payment per $1,000 borrowed by locating number of years of your loan obligation on the left hand side of the table and the interest rate that you will be charged across the top.o 3 years @ 12% = $33.21• Multiply the number you find from the table by the number of thousands of dollars of the balance you are borrowing. This will be your monthly paymento $33.21 x 2.4 = $79.70 monthly payment

The basic cost of unprepared food is really, really cheap in America for a number of reasons. For one thing, modern agriculture is very efficient with large farms and automated production. It is also partly due to goods imported from other countries where warm, sunny weather and a lower cost of labor keep prices of goods, such as Brazilian orange juice, down. Finally, it is due to modern distribution systems, including huge supermarkets, where scanners and computers help keep the shelves stocked and reduce labor costs associated with checkout counters. When we complain about the high cost of food, we aren't complaining so much about the cost of the basic ingredients such as milk, chicken, sugar, flour and fresh fruits and vegetables (in season). Rather, we are complaining about the cost of food that we eat in restaurants or the ready-to-eat foods that we buy in stores. These highly prepared foods include pre-cooked fresh meals, frozen dinners, items from the bakery (cakes, cookies, pies and bread), snacks (candy, pretzels and potato chips) and soft drinks. Today, Americans spend nearly 44 percent of their food dollars eating meals away from home. In addition, we can now buy fully prepared meals from grocery stores to eat at home. Out of all the food we buy, only about 15 percent of what we spend goes to the farmers in 2016, according to the U.S. Department of Agriculture. Most of the cost reflects our increasing demand for convenience. Approximately what percentage of the total cost of food bought by Americans is for meals eaten away from the home? A. 60% B. 44% C. 10% D. 22%

B. 44% Americans spend more than 43 percent of their food dollars on food eaten away from home.

If you are saving to buy something that is coming at a certain time in the future, like a wedding or an overseas trip, you will want to keep your money in assets that are both liquid and secure from loss in value. If you are saving to buy something in the future that doesn't have a fixed purchase date, such as a new bike or car, you can keep your money in assets that are less liquid or perhaps even less secure. Mike has saved $6,000 for his college expenses by working part-time. He plans to start college next year and needs all of the money he saved. Which of the following is the safest place for his college money. A. Corporate bonds B. A bank savings account C. Stocks D. Locked in his closet at home

B. A bank savings account Keeping money in cash isn't safe because it can be lost or stolen. Stocks and corporate bonds can fluctuate in value, opening the possibility that his $6,000 may not be fully available to him when he needs it next year. Money placed in a bank savings account is both liquid and secure. Also, he will have more than $6,000 when he needs to take it out next year because of the interest earned.

Instead of owning debt such as bonds during periods of sudden inflation, you are far better off if you owe certain types of debt, particularly if the debt is both long-term and fixed-interest, such as a mortgage. If you are a homeowner with a fixed-rate mortgage, the value of what you owe will fall with inflation because you can repay the mortgage with less-valuable dollars. The value of the home is likely to increase with inflation, however, since homes become more expensive to build. Which of the following types of investment would most likely provide the BEST protection of the purchasing power of a family's savings in the event of a sudden increase in inflation? A. A certificate of deposit at a bank. B. A house financed with a fixed-rate mortgage. C. A 7 year Treasury note D. A twenty-five-year corporate bond.

B. A house financed with a fixed-rate mortgage. The dollar value of a regular savings bond and a CD will stay the same but the purchasing power will be eaten by sudden inflation. The dollar value of a 25- year bond will fall if you need to sell it before maturity while the interest rate and principal will lose purchasing power. However, a house financed with a fixed rate mortgage generally does well during sudden inflation since the amount you owe will decrease with inflation while the value of the house will increase.

People who find it difficult to save-but feel that they must do so-often use a type of forced saving to trick themselves into saving. One type of forced saving is borrowing to buy an asset that is likely to increase in value (or at least maintain its value) over time. The purchase of a home has often been a good way to use forced savings. A mortgage payment is part interest, which is consumption, and part amortization or loan repayment, which is saving. As you pay down the outstanding balance on your loan through amortization, the equity or ownership value of your house goes up. The same breakdown applies for other types of debt repayment. And, as we just saw, if you pay for a new car using a four-year loan (but not a lease), at the end of the loan period, you have "saved" the value of the four-year-old car. In this way, repaying a contractual car loan is both consumption saving and forced saving. However, since a car almost always loses value over a number of years, partly because it wears out and partly because it is no longer so stylish, it is generally an inferior method of forced saving than the purchase of a home which generally increases in value over time. Why is buying a house with a mortgage considered to be a form of "forced saving?" A. Because a house with a mortgage requires the homeowner to buy insurance. B. Because part of the mortgage payment is repayment of the loan or "amortization" which adds to the homeowners equity or ownership value. C. Because house prices always go up. D. Because a house is a poor investment.

B. Because part of the mortgage payment is repayment of the loan or "amortization" which adds to the homeowners equity or ownership value. Virtually all home mortgages require the homeowner to make monthly payments which include amortization or repayment of the loan as well as interest. Over time, as the mortgage is paid off, the value of the owner's equity increases, provided that the house doesn't decline in value (which doesn't happen very often).

Andrew calculated his food costs to be nearly $40 per week, of which half was spent on fully prepared foods at restaurants, etc., and another quarter on prepared foods eaten at home. As he considered this, he thought, that he was spending a lot of his money paying other people to prepare his food. But then he thought about the value of his time, the so-called "implicit cost" that he's saving by not preparing his own food. He can make $10 an hour mowing lawns and a Taco Bell meal costs him only $4.00. Since it would take him an hour to prepare that meal at home (e.g., chopping vegetables, frying meat, etc.) himself, isn't he saving $6.00 plus the cost of the ingredients by working and paying someone else to prepare his meal? Once he thought about the fact that he was also a lousy cook, he would really prefer to mow another lawn than have to spend an hour cooking and having to eat what he cooked. Andrew is home one winter day studying for an exam. It is lunchtime and he is hungry. Instead of making a sandwich from roast beef in the fridge, he drives to Taco Bell and spends $4 for 2 tacos, a burrito and a Dr. Pepper. He reasons that he can make $10 per hour cutting lawns so he really saves $6 by going to Taco Bell rather than preparing his own meal. What's wrong with Andrew's argument? A. The time he spends preparing his own meal has no value. B. Given the time of year, he probably can't sell this hour, on the spot, for $10. C. He might enjoy the food better at Taco Bell. D. He couldn't study if he stayed at home.

B. Given the time of year, he probably can't sell this hour, on the spot, for $10. It is winter, when lawns don't need cutting, and he would have a hard time selling an hour of his time, right now, for $10. Also, it won't take him one hour to prepare a sandwich. Therefore, the implicit cost of this hour is probably closer to zero, rather than $10.

Aside from lasting a long time and costing a lot of money, many consumer durables share another important trait-they either save money or help earn money for a family. In business, durable goods purchased for the purpose of earning (or saving) money are known as capital goods. For this reason, consumer durables are thought of as the capital goods (or assets) of the household. In the United States, an automobile is an important capital good for many households since they need it to get to work. Many people who use a car to get to their jobs have no other way to get there. Take away the car, and there goes their livelihood. If a person needs a car to get to a factory job that pays $40,000 per year, it is clear that the value of the service provided by the car can more than pay for its cost and is, therefore, a good investment. Other consumer durables also benefit the family in ways that may outweigh their cost. For example, a washing machine and dryer in a home saves the cost of having the clothes laundered. A big freezer may enable the consumer to buy foods more cheaply in bulk or on sale. Owning a riding lawn mower may be cheaper than paying a lawn service to cut your grass if you have a large lawn. When a business executive considers the purchase of a capital asset, he or she examines the additional revenue that the asset will produce and compares it to the total cost of owning and operating the asset. If the machine produces more revenue than it costs to buy and operate, the executive will buy it because it will produce a profit. On the other hand, if the cost exceeds the additional revenue produced by the machine, the prudent executive won't buy it. Under what circumstances would the purchase of a washer and dryer not be a good investment? A. If you had to buy the washer and dryer on credit. B. If a laundry service, which picked up and delivered your clothes, was less expensive than buying and operating the washer and dryer. C. If a laundry service, which picked up and delivered your clothes, was more expensive than buying and operating the washer and dryer. D. If you had a laundromat right around the corner.

B. If a laundry service, which picked up and delivered your clothes, was less expensive than buying and operating the washer and dryer. If it is less expensive to have your clothes picked up, cleaned and delivered than it is to wash them yourself in your washer and dryer, the purchase of a washer and dryer would save you neither time nor money and would not be a good investment.

For most new drivers, the lowest cost of insurance will be realized if you have yourself added to the policy already held by your parents. While the premium will jump when a driver under the age of 26 is added to the policy (particularly a young man under 26), it will generally jump by less than the cost of getting your own policy for your own vehicle. Which of the following factors will not help you qualify for a discount on your automobile insurance? A. If you have taken drivers education. B. If you are in an assigned risk pool. C. If your vehicle has anti-lock brakes. D. If you get your vehicle insurance and your homeowners insurance from the same company.

B. If you are in an assigned risk pool. Only the worst drivers who can't get regular insurance are placed in assigned risk pools, which tend to be very expensive.

Over our lifetimes, we will be tempted to buy and own expensive things that we use occasionally, but not every day. These might include a washer and dryer, a rug-cleaning machine, a vacation home, a motor home, a boat, or a big power tool such as a wood chipper, rototiller or trencher. In making this decision, we have to weigh the benefits of ownership, and the cost-savings from not having to rent it against the cost of buying and maintaining it. Buying a home is generally more expensive than renting, but it comes with many benefits, including freedom of use, tax savings, and not having to move if the lease isn't renewed. When it comes to owning a car, many people choose to lease rather than own for a variety of reasons. Some folks, who live in big cities such as New York or San Francisco where a parking space can cost more than $500 per month, choose to do neither. Instead, they rent cars for a few days whenever they want to get out of town or use a nearby Zip car for a few hours. Others use Uber or Lyft, which is another form of sharing a car among many users. Most Americans, however, still choose to own a car or lease it for years at a time because they need it every day. In this module, we will look at the decision to purchase a consumer durable, which is defined as a useful household item that lasts more than a year. Since consumer durables typically last for several years, economists prefer to think that we invest in durables rather than buy them. By making this an investment rather than a purchase, it means that we should take a long, hard look at our finances before we make our decision. In what way is the purchase of a washing machine an investment in a consumer durable rather than a consumption expense? A. You get paid interest for using a washing machine. B. It can wash your clothes for many years. C. It costs money for detergent for the washing machine. D. It may break down and need repairs.

B. It can wash your clothes for many years. A washing machine is an investment partly because it provides service for many years.

Sales taxes increase the cost of every product or service that they are charged on. They are considered a regressive tax because they take a higher percentage of a low-income taxpayer's income than a high-income taxpayer's income. To make sales taxes less harsh, many states exempt basic necessities such as food and prescription drugs. Which of the following is true about sales taxes? A. The national sales tax percentage rate is six percent. B. It makes things more expensive for you to buy. C. The federal government will deduct it from your paycheck. D. You don't have to pay the tax if your income is very low.

B. It makes things more expensive for you to buy. A sales tax increases the total cost of goods you buy that are subject to sales tax. The other answers are not true.

Some banks still offer "Holiday Club accounts" where you sign up to put a certain amount of money aside every month to have enough to pay holiday-related expenses at the end of the year. Although this is voluntary, it is a type of regular savings whose regularity is "enforced" by the rules of the program. Finally, in recent years a number of stores have reinstated the "layaway plan" where the customer has the store put aside or "lay away" the desired item, such as a flat screen TV or prom dress which can be purchased by making payments until the price is reached. This may also be considered to be a type of forced savings. What type of plan encourages customers to save for a specific item by putting it aside for them until it is fully paid for in advance? A. Christmas Club Account B. Layaway C. 401(k) D. Social Security

B. Layaway The layaway plan encourages customers to save for something they want to buy by putting it away for them until they save for it in advance.

Everyone has reasons for saving-or wanting to save. These reasons for saving help determine the best way savings should be held. Our savings goals may be divided into short-term and long-term goals. Short-term Goals. Among the reasons that people build up savings for use over the short run (say a few years) are to be prepared for emergencies and to buy expensive items. Meeting Emergencies. Examples of emergencies include accidents, illness, or periods of unemployment as well as property loss or car breakdown. With each type of emergency, you will need money to get through it. Savings set aside for emergencies should be in a fairly liquid form so they are available quickly. A liquid asset is one that can either be spent as it is (cash or bank accounts) or converted to cash quickly and inexpensively while retaining its value (short-term bank certificates of deposit). A 2018 survey from Bankrate.com found that one-quarter of Americans said they had nothing saved in an emergency fund. Joe has put aside $10,000 to live on if he is laid off from his job. Which of the following assets would be most liquid if he needed to use his funds right away? A. Money in a 2-year bank certificate of deposit B. Money in a checking account C. Money loaned to a friend D. Money invested in a house

B. Money in a checking account Money in a checking account is the most liquid in that he could pull out any amount that he wanted at any time at no cost and with no possibility that it would lose value.

In 2018, the American Automobile Association published a report that calculated that the average cost of owning and driving a small car 10,000 miles per year was 75.3 cents per mile driven. Included in that amount was gasoline, maintenance and repairs. In addition to operating expenses, there are other ownership costs including auto insurance, a driver's license, registration, taxes, depreciation (loss in value each year as the car gets older) and finance charges. According to the American Automobile Association, the average total cost of owning and driving a small car 10,000 miles was 75.3 cents per mile driven in 2018. They also reported that gas costs averaged just 10.98 cents per mile. Why is the difference so great? A. Gas prices have jumped since last year. B. Most of the annual cost of owning a vehicle is in fixed costs. C. Insurance cost is higher for smaller cars. D. The biggest cost is tolls.

B. Most of the annual cost of owning a vehicle is in fixed costs. In 2018, fixed ownership costs of depreciation, insurance, and finance charges amounted to nearly three quarters of total costs. Gasoline costs for driving 10,000 miles per year amounted to only 10.98 cents per mile or just 14.5 percent of the total cost of 75.3 cents per mile for owning and operating the car per year.

You can and should bargain for the best interest rate, just as you bargained for the price of the vehicle. As we have seen, a low APR can make a huge difference in your monthly payment. If you come prepared with an offer from a direct lender such as a bank or credit union, it will generally put you in a better position when negotiating with the dealer. Although it may involve some extra work, the savings make it worthwhile to at least explore some rates offered by direct lenders before learning about the best rate offered by the dealer at a time when you may be worn out from driving vehicles and negotiating their price. Andrew is offered an interest rate (APR) of 7.2 percent from the vehicle dealer where he is buying a vehicle. Is that the same interest rate that the vehicle dealer gets from the lender it is using? A. Yes, auto dealers make all their money from repairs. B. No, the vehicle dealer will generally charge the vehicle buyer a higher interest rate to make a profit from the "spread." C. No, the vehicle dealer will generally charge the vehicle buyer a lower interest rate. D. Yes, by law they must offer the same interest rate.

B. No, the vehicle dealer will generally charge the vehicle buyer a higher interest rate to make a profit from the "spread." Most dealerships make some profit on the financing of the vehicle by charging a higher rate to the customer than they are being charged by the bank or finance company, which is actually supplying the money for the financing.

For a loan of any given length, the size of your monthly payment depends upon the interest rate that you are charged. By law, all interest rates must be quoted in terms of their annual percent rate often abbreviated as APR. As you can see in the table, the higher the APR, the higher the monthly payment you must make for the amount borrowed. For example, if you are financing a six-year $10,000 loan for the purchase of a vehicle, and the APR is 6%, you would pay $16.57 per month for every $1,000 financed or a total of 10 times $16.57, which is $165.70 per month. If the APR was 12%, your monthly payment would be $19.55 x 10 = $195.50. So, as you can see, it is important to pay the smallest APR possible to reduce the size of your monthly payment.When you apply for a loan with any lender, you will be asked to fill out a form that lists, among other things, your current income, length of employment, and major expenses. The potential lender will add your credit rating to this information all of which will be entered into a computerized scoring program that determines if you will receive a loan and, if so, the interest rate that you will be charged.That APR depends in large part on your credit rating. Those with a high credit rating tend to have few debts and a record of paying all bills on time. Lenders of all types like to lend to such people because their risk of not being repaid on a timely basis is low. As a result, they tend to compete for such good "credits" by offering them lower APRs. Those who have lower credit ratings can usually get loans as well, but at a higher APR since they have a higher risk of not repaying their loans on time, if at all. Three major nationwide credit bureaus, Equifax, Experian and TransUnion, collect credit information on just about everyone in the U. S. Those who extend credit to consumers, including banks, credit unions, mortgage companies, auto financing companies and even cell phone providers, share the repayment history of their customers with the credit bureaus. Based upon this information, every consumer is given a credit score. The most widely used is your FICO score, which ranges from a low of 300 to a high of 850. In general, the higher your FICO score, the lower the APR you are likely to be offered, thereby lowering your monthly payments, often substantially. Borrowers with a credit score of 740 or above are considered to be super prime and are offered the best loan terms. Those with credit scores of 500 or less pay considerably more because they are viewed as risky borrowers with a greater likelihood of not paying back what they borrowed. APRs on new vehicles are generally lower than those on used vehicles for several reasons. First, the condition of new vehicles is almost always higher than that of used vehicles, making the new vehicles better collateral for the loan in the event that the vehicle must be taken back if too many payments are missed. Older vehicles are more likely to fall into disrepair, partly because they are generally no longer under warranty where repairs are free. Finally, manufacturers will often offer low interest rates as a means of selling more new vehicles, particularly if they still have many unsold vehicles at the end of a model year. https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod54Q3%2C4%2C5.PNG Which of the following new vehicle borrowers is likely to be offered the lowest APR? A. Daniel who is buying a used vehicle and has a FICO score of 600 B. Stephanie who is buying a new vehicle and has a FICO score of 700 C. Emily who is buying a new vehicle and has a FICO score of 600 D. Tyler who is buying a used vehicle and has a FICO score of 700

B. Stephanie who is buying a new vehicle and has a FICO score of 700 Those with better credit ratings (higher FICO scores) are likely to be offered lower APRs. In addition, those buying new vehicles tend to be offered lower APRs than those buying used vehicles. Therefore, Stephanie, who has a high FICO score of 700 and who is buying a new vehicle will likely be offered the best APR.

Most mortgages allow the borrower to prepay the loan, which allows them to pay more than they owe each month. This is not only an excellent means of saving, it also reduces the length of the mortgage. For example, a 3.75 percent, 30-year mortgage of $100,000 requires monthly payments of $463.12. An additional payment of $36.88 saves $6,788 in interest and shortens the mortgage by two years. When you take out a mortgage, you can generally choose one with a fixed rate, which means that your monthly mortgage payment never changes, or one with a variable rate, often called adjustable rate, where your monthly mortgage payment can go up or down every year as interest rates change. Variable rate mortgages often have a lower starting interest rate than fixed rate mortgages and therefore have a lower monthly payment, which is more attractive for many younger homebuyers. If interest rates increase, however, the monthly payments can increase rapidly, possibly beyond the level that a homebuyer can afford. Thus, variable rate mortgages are generally best for homebuyers who expect a relatively short stay in a house. While variable rate mortgages generally will not allow rates to increase by more than two percent per year or six percent overall during the life of the mortgage, a mortgage rate can still double from 4 percent to 10 percent over a three-year period (although this is unlikely to happen). Therefore, many people prefer to pay a little more in the beginning to lock in a fixed rate and fixed monthly payment rather than taking a chance on a variable rate mortgage. What is the advantage of a fixed rate mortgage over a variable rate mortgage? A. The interest on a fixed rate mortgages can't fall. B. The interest on a fixed rate mortgage can't rise. C. Fixed rate mortgages require lower down payments than variable rate mortgages. D. Fixed rate mortgages generally have lower rates than variable rate mortgages.

B. The interest on a fixed rate mortgage can't rise. The interest on a fixed rate mortgage can't go up, which means that the monthly mortgage payment on a fixed rate mortgage can't suddenly jump, as it can on a variable rate mortgage.

A money market account is a type of account offered by banks, savings institutions and brokerage firms. Interest rates for these accounts vary from day to day to reflect what they earn in investments. If banks and savings institutions offer them, they are typically insured by the FDIC. Money market accounts offered by brokerage firms may or may not be insured by the FDIC so it pays to be careful. Most brokerage firms offer a money market account on which you can write checks and for which you can generally get a debit card, so they look pretty identical to FDIC insured bank checking accounts. However, whether or not they are FDIC insured depends on where they put your money. In most cases, the brokerage firms will hold the money themselves or invest your deposit in a money market mutual fund that tends to pay more interest than an FDIC insured bank account. In either case, unfortunately, the FDIC will not insure your deposit. If, however, your money is deposited in an FDIC-insured bank by the brokerage firm, it will be insured. Be sure to check! If the money market account is offered directly by the brokerage firm, your money, instead of being insured by the FDIC, may be insured by a special insurance company for brokerage firms, the SIPC. This type of insurance is not directly backed by the Federal Government and is not as good as FDIC insurance. It is also possible that the account is not insured at all, which is why it is good to ask. Bank money market accounts are liquid, and they also tend to pay better rates than regular bank checking or savings accounts. However, they tend to have a large minimum balance requirement and only allow a limited number of withdrawals per month. Which of the following statements is NOT true about money market accounts offered directly by brokerage firms to their own customers? A. They tend to pay rates that are higher than those paid by banks for similar accounts. B. The money in these accounts is as safe as or safer than money in a bank. C. Many have large minimum balances. D. Interest rates may change frequently to reflect what the fund earns on its investments.

B. The money in these accounts is as safe as or safer than money in a bank. Money market accounts offered directly by brokerage firms are not insured by the FDIC and are, thus, not as safe as accounts offered by banks which are members of the FDIC.

Hotels: A second major expense connected with most longer vacation trips is the cost of a hotel. These costs vary significantly, depending upon the destination and the quality of the hotel or motel. A decent hotel room in Manhattan (New York City) might start at more than $300 per night while a similar room in Buffalo (in upstate New York) could go for less than half that. Travelers can benefit themselves by realizing that the economics of hotels is very similar to that of airlines. Both have fixed capacity, in terms of the number of rooms or seats, and both have fixed costs (per night or per flight), which vary little in terms of the number of customers they have. Therefore, hotels as well as airlines operate most profitably when they are at capacity. In which of the following ways is the cost of running a hotel similar to the cost of running an airline? A. Their highest costs are for energy. B. Their costs are basically the same whether half full or running at capacity. C. They both prefer to take auction bids from companies such as Priceline or Kayak to accepting their regular price. D. The additional cost for an additional customer (below capacity) is very high.

B. Their costs are basically the same whether half full or running at capacity. The cost of an airline flight is essentially the same regardless of the number of passengers. Similarly, the daily cost of operating a hotel doesn't change much with the number of guests.

When we spoke of taxes earlier, we focused primarily on federal and state income taxes since they can take a large chunk out of our paychecks. We also learned that we have to pay real estate taxes if we own a home. If that weren't enough, most state governments also charge sales tax on the things we buy. The few states that do not charge a general sales tax at the state level are Alaska, Delaware, Montana, New Hampshire and Oregon. While sales tax laws are different in each state, most states tend to charge sales tax on restaurant meals and clothing as well as most other items you buy. Over half of all states exempt most food purchased for meals eaten at home. Prescription drugs are almost always exempt from sales tax.The highest state sales tax rate in the country is in California which charges 7.25 percent. However, in some states, you can pay 10 percent or more in total sales taxes, including local surtaxes charged by cities and counties. At the current time, there is no national sales tax. Lisa lives in a state that has a state sales tax of six percent. Her county charges an additional sales tax of one percent. If she buys a dress that costs $100.00, what is the total cost, including sales tax? A. $106.00 B. $108.00 C. $107.00 D. $100.00

C. $107.00 The total sales tax is seven percent, six percent for the state and one percent for the county. The total cost to Lisa is $107.00 ($100 x .07 = $7 sales tax plus the $100 cost of the dress).

Many vehicles that are traded in still have an outstanding balance on the loans used to purchase them. In some cases, the wholesale value of the vehicle is worth less than the amount still owed on it, which means that the owners have negative equity in their old vehicle.This situation is commonly referred to as being "upside down."Negative equity may arise for several reasons. First, new cars in particular depreciate or lose value very quickly once they are driven out of the showroom. A new car instantly loses about 10 percent of its value when it is driven off by the new owner and is not, itself, new anymore. Thereafter, new cars continue to lose 15 to 25 percent of their value each year for four or more years, losing some 60 percent of their value in the first five years.Second, as mentioned above, vehicle dealers will pay at most the wholesale value of the vehicle on a trade-in, an amount lower than its retail value, so those who trade a car in must accept an additional discount.Third, the length of vehicle loans is getting longer and longer which means that many people trade in their vehicles before they have paid them off. According to Experian the average length of a new vehicle loan in the first quarter of 2018 was 69 months, which is 5 ¾ years!As a result of these factors, Edmunds reported that almost 33 percent of trade-ins on new car deals were underwater with negative equity averaging $5,130. One problem that may result from having negative equity on a vehicle is that your insurance will not cover your entire debt if the vehicle is totaled or stolen. This deficit can be covered (at an additional cost) through guaranteed asset protection (a.ka. GAP insurance) that is generally offered by dealers at the time of purchase.A far more important problem with a negative equity trade-in is that the negative equity is added to the price of the new car in determining the amount that must be financed. This can greatly increase the size of the monthly payment.For example, if Brittany trades in a car worth $5,000 (wholesale) on a new $20,000 car, but still owes $10,000 on her old car, how much would she have to borrow to buy her new car?• Negative equity = Outstanding debt minus value of trade-ino $10,000 outstanding debto -$5,000 value of trade-ino = $5,000 negative equity• New debt = Cost of new car + negative equity from old trade-ino $20,000 new caro + $5,000 negative equityo = $25,000 debt on new car Tyler trades in a car worth $5,000 (wholesale) on a new $15,000 car, but still owes $6,000 on his old car. How much must he borrow to buy the new car? A. $19,000 B. $18,000 C. $16,000 D. $17,000

C. $16,000 • Negative equity = Outstanding debt minus value of trade-ino $6,000 outstanding debto -$5,000 value of trade-ino = $1,000 negative equity• New debt = Cost of new car + negative equity from old trade-ino $15,000 new caro + $1,000 negative equityo = $16,000 debt on new car

In general, if a state has a sales tax, it must be paid on goods purchased in that state even if the purchase is made online. In 2018, a Supreme Court decision ruled that states can make online businesses collect sales taxes even if they don't have a physical presence in that state. Suppose Jamal purchases a pair of running shoes online for $60. If his state has a sales tax on clothing of 6 percent, how much is he required to pay in state sales tax? A. $5.00 B. Nothing, because he bought it online. C. $3.60 D. $6.00

C. $3.60 Jamal is legally required to pay $60 x .06 = $3.60 in state sales tax, whether or not it is collected by the online vendor.

When Joey took $10,000 from his savings account to put a down payment on his house, he could no longer earn any interest on that money. Therefore, his lost interest on that money is really a cost of buying a house. This is called implicit interest because it is interest that he could have had, rather than interest that he must actually pay. Suppose that Joey has a savings account at his credit union, which pays him 2 percent interest per year. Before he buys his house, he earns $10,000 x .02 = $200 per year. After he buys the house, he will no longer earn that $200 per year in interest income so we say that the implicit interest cost of the house is $200. Note also that as Joey pays off or amortizes his mortgage, the balance of his mortgage loan goes down and the equity or ownership value that he has in his house goes up. Since he receives no interest on this equity in his home, the size of his implicit interest expense will increase as he pays off his mortgage. People who own their homes outright and have no mortgage have no actual interest expense, but they do have a large implicit interest expense. The money is in their homes, not earning a return for them aside from any increase in the value of their home over time. Paul's mom, Gina, owns her home outright, without a mortgage. It is currently worth $100,000. If she could get five percent interest by investing her money in a secure government bond, what is the implicit annual interest cost of her home? A. $6,000 B. $3,000 C. $5,000 D. $4,000

C. $5,000 If she sold her house for $100,000 and put it in the bank, she could earn interest equal to $100,000 x .05 = $5,000 per year. Of course she would then have to rent a home that could cost more than $5,000 per year for one that is comparable to her old home.

When your savings earns compound interest, it means that the savings grow even more rapidly because you are earning interest on the interest that you have accumulated. For example, if you put $2,000 in an investment that has an APY of 8 percent when you are 18 years old, this will be worth $109,412.08 when you are 70 years old, even if you don't add a cent to the initial amount. The table tells you how much $1 will be worth in a given number of years if you have an annual percent yield ranging from 1 percent to 12 percent. As an example, $1 invested for 50 years at an annual yield of 12 percent would be worth $289. That's why they call this the "magic of compounding." https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod22Q7.PNG Kent bought a $2,000, 20-year U.S. Treasury bond that paid six percent annual yield when he was 22. How much would that bond be worth 20 years later when it matured? A. $3,210 B. $1,605 C. $6,420 D. $1,210

C. $6,420 According to the table, $1 compounded for 20 years at six percent would be worth $3.21. If we multiply this by $2,000, we get $6,420.

Interest. A second annual cost of owning a washer and dryer is the interest on the purchase price. This happens when a consumer makes a purchase on credit and borrows all or part of the cost from a bank, credit union, finance company or the store making the sale. Consumers buying on credit must pay interest that could be as high as 18 percent or more. What many people do not realize, however, is that even when the consumer pays with cash, the cost of interest must still be calculated. In this instance, the interest is implicit and is equivalent to what could have been made on the money by not buying the washer and dryer (and leaving it, say, in the bank). If the $1,000 needed by the Morgans was left in the bank at 2.5 percent interest, $25 interest would be earned in a year. So consumers have an interest cost whether they finance the machines themselves (implicit interest) or through outside credit (explicit interest). In the Morgans' case, we will assume that the total interest cost (explicit and implicit) will average 14 percent per year for a total annual cost of $1,000 x .14 = $140. Bonnie wants to buy a top-of-the-line sewing machine that does embroidering and fancy stitching for $1,000. She can buy it on her credit card and pay interest of 12 percent on it for a year or she can cash in a bond that she has had for many years and earns six percent interest and pay cash for the machine. How much does she save in net interest cost (explicit minus implicit) for the year if she sells the bond and pays cash? A. $50 B. $70 C. $60 D. $120

C. $60 If she finances it with her credit card at 12 percent, she pays $120 in explicit interest. If she sells her 6 percent bond to pay cash, she pays $60 in implicit interest because she loses the 6 percent she would have gotten from the bond. The difference is $60 which she saves by cashing in her bond.

Insurance companies charge those who buy coverage an annual fee called a premium. The amount of the premium for automobile liability insurance is basically determined by the risk of the driver. Insurance companies have people working for them called "actuaries" who collect information showing which drivers are more likely to have accidents. Over the years, they have found that younger drivers, under about age 26, tend to have far more automobile accidents than older drivers. They also have found that young men tend to have more accidents than young women. As a result, the cost of automobile liability insurance tends to be higher for young people and the highest for young men. Quotes for teenagers are three times as expensive than quotes for a driver in their mid-thirties. Since accidents are more likely and more expensive in cities than in rural areas, young men living in cities pay the highest premiums. As an example, annual premiums for basic coverage for drivers of all ages average $3,877 for one part of Brooklyn, NY and are much higher for younger drivers. If a young driver is involved in an accident, the premiums go higher yet. In general, all persons mentioned in the policy are covered for liability, collision or other coverage if they drive the vehicle. In addition, most policies cover other family members and other persons to whom you lend your vehicle. Many policies also provide coverage for vehicles that you rent. Most U.S. car insurance coverage does NOT cover accidents in Mexico. Some U.S. insurers offer a limited endorsement to cover you up to 25 miles from the U.S. border and for less than 10 days but it does not cover damages to others. Most auto insurance companies will advise you to buy Mexican car insurance if you wish to drive in Mexico. U.S. auto insurance normally covers accidents in the U.S., U.S. territories and possessions, and Canada. Which of the following drivers is likely to be charged the highest insurance premiums for driving a vehicle? A. A 23-year-old woman living in a rural area. B. A 27-year-old man living in a suburban area. C. A 19-year-old man living in a large city. D. A 27-year-old woman living in a large city.

C. A 19-year-old man living in a large city. The highest premiums are charged to men under the age of 26 and those living in large cities pay higher rates than those living in suburban or rural areas.

Like airlines, hotels try to charge more to business travelers who have to book a room on short notice. Therefore, the longer in advance a leisure traveler can book a hotel room, the better the deal he or she can find. Hotels in various regions also experience differences in demand, which affects prices they can charge. A hotel in Miami's posh South Beach will cost a fortune during the winter months, particularly during winter school vacation, and will cost a fraction of that amount in July. Which of the following hotel rooms in South Beach, Miami Florida, is likely to be the least expensive? A. A room booked in the summer on short notice B. A room booked in the winter on short notice C. A room booked in the summer on two month's notice D. A room booked in the winter on two months' notice

C. A room booked in the summer on two month's notice The cheapest hotel rooms in Florida can be found off-season (in the summer when it is really hot) and with advance booking which means that you are not likely to be a business traveler who is not price sensitive.

Savings accounts at banks and the so-called thrift institutions (savings and loan associations, mutual savings banks and credit unions) are generally as safe as money (or even safer than cash), but they may have slightly less liquidity. Unless you have an ATM card, you can't get your money out of the bank except during banking hours. Nor can you make a direct payment with your savings account balances. In general, savings accounts are limited by a law called "Regulation D" to just 6 "third party" withdrawals per month which means that you could only use a savings account debit card with merchants (such as a Starbucks coffee, gas or a meal at Burger King) 6 times in a month and then it would be "locked." For this reason, few if any banks will issue a debit card that can be used with merchants at the "point of sale" to savings account customers. Samantha keeps $1,000 in her checking account. A friend has suggested that she move that money into a savings account which pays interest and that she apply for a debit card on that savings account so that she can spend money in her account directly with merchants without having to write a check. What's wrong with this idea? A. Checks are more widely accepted than debit cards everywhere in the United States. B. Money kept in a savings account isn't as safe as money kept in a checking account. C. Few banks will issue debit cards for savings accounts since the law limits the use of a debit card with merchants to 6 times per month. D. In general, checking accounts pay more interest than savings accounts.

C. Few banks will issue debit cards for savings accounts since the law limits the use of a debit card with merchants to 6 times per month. Regulation D limits savings account customers to only 6 "third party withdrawals" per month which means that a debit card could not be used to pay merchants more frequently than that. For this reason, few if any banks issue debit cards to savings account customers that can be used to pay for things at stores.

Drivers with poor records in the form of tickets or accidents frequently find it hard to buy the liability insurance required by most states. Since many Americans need their vehicles to get to work, the governments of states that require liability insurance have found a way to get insurance for bad drivers, although at a high cost. States that require liability insurance also require automobile insurance companies that sell insurance in their states to share the risk of covering drivers who can't get regular insurance. These high-risk drivers are placed in assigned risk pools with premiums that are much higher than those paid by drivers with good records. In time, if drivers in assigned risk pools avoid accidents and traffic tickets, they may eventually be able to buy reasonably priced insurance policies on their own. Finally, you must always ask about the discounts for which you may qualify. Most companies give a 10 to 15 percent break for insuring both your house and your vehicles with them. Driver's education can trim premiums for new drivers and seniors by 5 to 15 percent. Some companies even give good students and nonsmokers discounts in large part because these drivers are seen as being more trustworthy and taking fewer risks. Unfortunately, it is difficult, if not impossible, for a young driver to get an auto insurance quote online. Several insurers and insurance brokers do offer online application forms that will be evaluated by company underwriters and responded to by phone. Which of the following driver characteristics is least likely to get a young applicant a discount on automobile insurance? A. Being a non-smoker B. Having taken and passed a driver's education course C. Having played on a high school sports team D. Having been an excellent student

C. Having played on a high school sports team Many auto insurance companies offer discounts to young drivers who appear to be reliable and take few risks. Some characteristics they look for are taking and passing a driver's education course, being a good student and not smoking. Being an athlete and playing on a sports team is not likely to earn a discount on auto insurance.

Automobiles are complex machines that tend to be used hard. Therefore, they need regular maintenance throughout their lives, and repairs are expected, particularly as they get older. One advantage of buying or leasing a new vehicle is that repairs are covered by the vehicle's factory warranty. The warranty period is generally stated in both miles and years, whichever is smaller. For example, a vehicle may be under full warranty for four years or 48,000 miles, whichever comes first. Generally, the remaining warranty is transferable to the new owner if the vehicle is sold. Matthew buys a vehicle that is under a three-year, 36,000-mile factory warranty from Kim after she has owned it for two years and has put 37,000 miles on it. For how long will Matthew be able to take the vehicle to the dealer to get free repairs? A. Another 12,000 miles. B. Just once. C. He's not entitled to any free repairs. D. One more year.

C. He's not entitled to any free repairs. Matthew is not entitled to any remaining warranty since the vehicle is already over the 36,000 mile limit.

A second type of vehicle insurance is called collision insurance. This pays for damage done to the vehicle itself in an accident. While there is no law that requires vehicle owners to have collision insurance, companies that finance the purchase or leasing of automobiles do require that you have collision insurance to protect their investments. When you buy collision insurance, you generally get to choose the amount of deductible -- the amount of the damages that you pay before the insurance company begins to pay for damage to your vehicle. For example, if you have a $50 deductible and you do $1,000 worth of damage to your vehicle in an accident, you will receive only $950 from the insurance company. If you had a $500 deductible, you would receive only $500 from the insurance company for the $1,000 in damages. While it may seem smart to take a lower deductible, there is a catch. The lower the deductible, the higher is the annual premium that you must pay. Since collision insurance is not needed if you own your vehicle outright, many people who own fully paid older vehicles choose not to carry collision insurance. This can be a wise decision if a car is very old and isn't worth too much, but the premium for collision insurance is still high. The downside is that if you are the cause of an accident, you could lose your means of transportation unless you have collision insurance or enough cash to buy another car without it. Which of the following statements is true about collision insurance? A. It is always best to go with the lowest possible deductible. B. If you have collision insurance, you shouldn't also have liability insurance. C. It is generally required if you lease or finance the purchase of your vehicle. D. It is required by most states.

C. It is generally required if you lease or finance the purchase of your vehicle. Collision insurance is almost always required by companies that lease or finance vehicles to protect their investment if your vehicle suffers damage.

Operating costs. Buying the washer and dryer is only the first outlay of money. To operate them, the consumer must pay for water, electricity and sometimes gas (depending upon the type of dryer). These amounts vary with the usage of the machines as well as with local costs for utilities. Assume that these costs set the Morgans back $50 per year. If the cost of electricity doubles in the area where the Morgans live, which of the following is most likely to be true? A. It would make it more advantageous for them to wash clothes at home and dry them at the laundromat. B. It would make it even more advantageous for them to use the laundromat rather than have a washer and dryer at home. C. It would probably make no difference because the laundromat is likely to increase its prices to cover the increased cost of electricity. D. It would make it more advantageous for them to buy a washer and dryer.

C. It would probably make no difference because the laundromat is likely to increase its prices to cover the increased cost of electricity. As a business, the laundromat cannot afford to allow one of its significant costs (electricity) to increase without raising prices to cover this increase or it could no longer earn a profit and stay in business.

Most bonds may be sold before they mature if you need the money. Even though the issuer promises to pay you their face value (generally $1,000) when they mature, they generally will not pay you for the bonds before they mature. Therefore, if you want to sell them, you must sell them to another investor on what is called the secondary market. The price that an investor in the secondary market will pay for your corporate or government bond will vary with the overall level of interest rates. If you paid $1,000 for a ten-year bond that has a seven percent rate of interest and you need to sell it soon after you bought it, the price you will receive depends on what has happened to the interest rate on all other bonds with a ten-year maturity. If overall interest rates have gone down, your bond becomes more valuable. If rates on other ten-year bonds of similar risk have fallen to five percent, investors will pay more than $1,000 to get a bond such as yours that is still paying $70 per year. If overall interest rates have gone up, your bond becomes less valuable, however. For example, if rates on other ten-year bonds have risen to nine percent, nobody will pay you $1,000 for a bond that still only pays $70 or seven percent of its original value since they can buy other, similar, bonds that pay much better for the same investment. Therefore, you will lose money on your investment. Because bonds fluctuate in value before they mature, they are not seen as a very good investment to meet liquidity needs since they may be worth less than what you paid for them if you must sell them suddenly. If you hold bonds until they mature, however, they can be a safe way to be sure that you will get your investment back with the promised rate of interest. And, in most cases, the longer the maturity of the bond, the higher the interest rate that it pays. Alicia purchased a $1,000 bond with a maturity of 20 years. Since she bought it, the rate of interest paid by other, similar bonds with the maturity of her bond have gone up substantially. How much could Alicia get for her bond if she sells it now, before it matures? A. More than $1,000. B. No bonds may be sold before maturity. C. Less than $1,000. D. $1,000

C. Less than $1,000. When interest rates of similar bonds go up, the value of an existing bond will fall on the secondary market because investors can get a better return for the $1,000 by buying a new, higher-paying bond.

Long Term Goals: Some savings goals are for events or purchases that will not occur for many years, often involving sums of money that take a long time to accumulate. College, for example, may cost more than $200,000 for four years, an amount that few people can spare from current income. Other long-term goals may include saving for a secure retirement or buying a house or vacation home. Savings held for long-term goals need not be put into liquid assets. Liquid assets generally yield lower returns over time than less liquid assets and are also often more susceptible to losing purchasing power to inflation. Why is it NOT recommended that young people put their retirement savings into liquid assets? A. Liquid assets aren't safe and you can lose money. B. The purchasing power of liquid assets holds up well during inflation. C. Liquid assets generally yield lower returns over time than less liquid assets and are often more likely to lose purchasing power to inflation. D. Liquid assets have better returns over a long period of time than less liquid assets.

C. Liquid assets generally yield lower returns over time than less liquid assets and are often more likely to lose purchasing power to inflation. Liquid assets generally yield lower returns over time than less liquid assets and are also often more likely to lose purchasing power to inflation.

It is not easy for most people to save, which is why Americans save so little. Younger Americans typically find it hardest to save because they have lower incomes and have not yet had a chance to buy many of the things that they will need during their lives. They also tend to be active and social, meaning that they need money to do things and present themselves well. Finally, many young American adults have large student loan balances that must be repaid. Since almost everybody feels that it is necessary to save something, if only for emergencies, they can use a number of different strategies. Regular Voluntary Saving. Some people have enough discipline to put money aside from every paycheck on a pretty regular basis. While a few young people can do this, it is most difficult during a period of your life when you are under constant pressure from your friends to spend. Consumption Saving. Saving technically occurs when you use income to buy a durable good that will yield consumption services for more than a year. This is called "consumption saving." If you pay $500 in cash for a TV set, you are actually considered by economists to be saving money since the TV set will last you more than a year. Consumption saving, however, doesn't help you build up money for emergencies and all you're really doing by buying a better TV is spreading additional consumption over several years. Which of the following is an example of consumption saving? A. Putting $25 per week in a savings account. B. Buying your food at a discount club. C. Making monthly payments to finance the purchase of a car. D. Using a coupon book to get 2 for 1 meals.

C. Making monthly payments to finance the purchase of a car. When you purchase a car on the installment plan, part of every payment is saving because you will own the car when the loan is paid off. At the same time, you get to enjoy the use of the car, which is a form of consumption.

Emergency funds also should be invested in assets whose value does not change greatly from one day to the next. For that reason, it is not recommended that people invest their emergency funds in the stock market. Even though stocks are pretty liquid, in that you can get your money out of them in a few days, they can fluctuate in value. If you have emergency funds of $1,000 invested in Microsoft, it could be worth as much as $2,000 or only $500 on the day you need it. Many people put aside money to take care of unexpected expenses. If Pedro and Susanna have money to put aside for emergencies, in which of the following forms would it be of LEAST benefit to them if they needed it right away? A. Savings account B. Checking account C. Money invested in a down payment on the house D. Stocks

C. Money invested in a down payment on the house The best form of savings for an emergency is a checking or saving account since you can get the money quickly and it can't lose value. Stocks are the next best since you can get your money quickly, but the disadvantage is that they can lose value just before you need cash. Money invested in the down payment on a house is of least value in an emergency since you must either sell your house to get the money or negotiate a loan against your down payment, which may take several days at least.

One of the most important principles of personal finance is that the return we can expect on our investment tends to get larger as the risk of the investment increases. Investments that have no risk at all, such as a savings account at a federally-insured bank, tend to pay very little interest. If you have $1,000 in a one-year bank certificate of deposit that pays one percent interest, at the end of a year you are guaranteed to have $1,010. If, however, you invest your $1,000 in high-tech stocks, it's possible that your money could double in a year's time. It's also possible that it could be worth nothing! Most people are risk-averse, which means they prefer less risk for their important saving goals. Therefore, risky investments must offer a higher average rate of return to attract investors' money. What exactly does this mean? While the return on a risky investment may range from very high to very negative (meaning that you lose money) during a single year, the return on riskier investments over many years must be higher on average than the return on less risky investments. Otherwise, most investors, who are risk-averse, would never buy risky assets, such as stocks. This means that if your holding period is very short - if you need the money in just a year or so - you probably don't want to invest in risky assets, even though their average return is high over many years. If your holding period is long, however, say 15 or 20 years, there is a very good chance that you will do much better with a riskier investment since there are many more years in which great returns will offset years of terrible returns. If someone tells you about an investment that had a return that averaged 25 percent per year, how risky is this investment likely to be? A. About as risky as a savings account. B. About as risky as the average stock. C. Much riskier than most stocks. D. Not very risky at all.

C. Much riskier than most stocks. Since historical stock returns have averaged about 10 percent per year, an investment that returns an average of 25 percent per year is likely to be very risky.

It is a great idea to compare quotes from a number of different companies whenever you need to buy automobile insurance. This will ensure that no matter what type of driver you are, you will have a choice among a wide range of prices and coverages. Surveys have found that prices in some metropolitan areas differ by $1,000 or more per year, particularly for drivers under the age of 26. The cost of automobile insurance varies by many factors in addition to the amount of coverage. First, costs depend upon the riskiness of the driver. Those who have been involved in previous accidents and those who have moving vehicle violations such as tickets for speeding may find their premiums increased or their policies canceled. This can happen even if all of the accidents are not the fault of the driver. Some drivers are felt by insurance companies to be "accident prone," or not defensive enough. Rates also vary by geographic area. In urban areas where accidents (or theft) are more frequent, rates must be higher to offset the additional exposure for the insurance company. Rates are particularly high in areas where people tend to sue each other. Elisa was involved in three auto accidents this year. Even though none was her fault, her insurance company increased her rates. Why would this happen? A. She drives after having alcohol. B. She drives too fast. C. She is seen to be accident-prone. D. She has bad luck.

C. She is seen to be accident-prone. Drivers who are involved in an unusually large number of accidents that are not directly their faults are seen by some insurance companies as being accident-prone. This often means that they are not as defensive as the insurance company would like and may, for example, speed up through yellow lights, which is legal, but dangerous.

Repairs. Over the ten-year life of the washer and dryer, certain repairs must be expected. Often, the machines will be on warranty and will be repaired for free during the first year. In later years, repairs become more frequent and more costly. Many stores sell an extended service contract that, for a one-time annual fee, guarantees repairs at no extra cost. However, the price of these contracts is based on the expected repair costs for the average appliance, plus a huge markup for the store, which is why stores push them so hard and why they are generally not a wise purchase. Either way, the owner must calculate repair costs. For the washer and dryer, we will assume that $200 over ten years ($20 per year) should cover repairs. When you buy a consumer durable good, such as a new refrigerator, and the person making the sale keeps trying to sell you an extended warranty on the product, what does that tell you? A. The salesperson is always looking out for the benefit of the customer. B. It is always a good idea to buy an extended warranty. C. The store is probably making a big profit on the extended warranty because it costs much more than the estimated costs of repairs. D. It is never a good idea to buy an extended warranty.

C. The store is probably making a big profit on the extended warranty because it costs much more than the estimated costs of repairs. When a salesperson keeps trying to sell you an extended warranty for an appliance, it probably means that the store will earn a large profit on selling that warranty and that it is likely that the salesperson will get a bonus for making that sale.

For most drivers, the biggest costs of owning a vehicle are fixed costs, which are the same from month to month and are not changed by the number of miles you drive. Fixed costs include insurance, vehicle registration, parking, and the monthly payment for leasing the vehicle or the finance charge that you must pay if you buy it over time. Another fixed cost, for those who buy a car for cash or buy it using installment payments over time, is the opportunity cost of the money you have invested in it which cannot earn money for you in another investment. The other, non-fixed costs vary by the amount the vehicle is driven and include gas, oil and tolls. These non-fixed costs are called variable costs.Your vehicle becomes less valuable every year as it becomes older. The decrease in value is a cost called depreciation, which is partly a fixed cost, based on age, and partly a variable cost, based on the amount the vehicle has been driven. Which of the following is a fixed cost of owning a vehicle? A. Money spent on oil (aside from scheduled oil changes). B. Money spent on gasoline. C. Vehicle registration. D. Money spent on tolls.

C. Vehicle registration. Any cost that is incurred as the result of driving your vehicle is a variable cost. This includes the cost of gasoline, oil that is added from time to time and tolls for highways, bridges and tunnels. Vehicle registration fees are fixed costs because they are paid annually and don't vary by the number of miles driven.

Many buyers of new or used vehicles trade in their existing vehicle whose value can serve as their down payment. If, for example, you would like to buy a $20,000 car and currently have a car worth $7,000 to trade in, you would have to finance just ($20,000 minus $7,000) $13,000 with your loan.Trade-ins only work, of course, for those who already own a vehicle. If you are a first-time vehicle buyer, you must save for the down payment. This makes it tougher for younger people to pay for their first car, but once they manage to do so, it is very likely that subsequent vehicle purchases will have their down payments financed by the vehicle that it is replacing.One great advantage of trading in your vehicle is that it's easy to do. You can drive your existing vehicle to the car dealer, sign some papers and drive off in a (hopefully) better vehicle, leaving your old vehicle behind. According to Consumer Reports (July 20, 2017), there may be a sales tax advantage in trading in your vehicle since most states tax only the difference between the cost of your new vehicle and the value of your trade-in rather than the full price of the new vehicle. This tax benefit does not work if you sell your existing vehicle yourself.A major disadvantage of purchasing a vehicle with a trade-in is that the dealer will tend to offer you, at best, the wholesale value of your existing vehicle. The wholesale value is what another dealer is willing to pay so that they can mark up the price to sell it to a customer at the higher, retail price. It costs time and money for a vehicle dealer to get your old car ready to sell to someone else and to advertise and show it for days, weeks or even months. Therefore, you can generally do better, financially, by selling your old vehicle yourself, through classified ads in the local paper or on Craig's List even though it's a hassle to clean it up, pay for the advertising and show it to potential buyers. What is an advantage of selling your old vehicle yourself rather than trading it in on a newer vehicle? A. The dealer will offer you a lower rate of interest if you don't trade in a vehicle. B. You save money on sales taxes in most states. C. You can probably get more money for it if you sell it yourself. D. It is more convenient than trading it in.

C. You can probably get more money for it if you sell it yourself. In order to cover its costs and make a profit on taking your used vehicle on a trade-in, the dealer will tend to offer you, at best, its wholesale value. If you sell it yourself, you can generally get a price closer to the car's retail value, which can be a thousand dollars or more higher.

Special purchases: People also save in the short-term to buy something too expensive to purchase out of current income. These purchases may include tickets or clothing for a big night such as the prom or a piece of sporting equipment or something bigger, such as a car. While it may be possible to borrow money to pay for short-term spending goals, some people don't want to go into debt and pay interest for everything they buy. Others may not be able to borrow even if they want to. And if you are willing to borrow to buy a house or a car, you still have to save enough for a down payment. There are many advantages to saving to buy something that you want rather than borrowing money that must be paid back. Which of the following is an advantage of borrowing money rather than saving to buy something? A. You can't get turned down B. You can earn interest as you save C. You get it right away D. You don't have to pay interest

C. You get it right away The only advantage of borrowing to buy something that you want is that you can get it right away rather than save for it over time. However, if you borrow you will have to pay interest rather than receive it and there is a chance you will be turned down for the loan if that is the route you decide to take.

The first home that many young people buy is a condominium, often called a "condo." This is kind of a cross between an apartment and a stand-alone, single-family home in that families own their own housing unit within a complex that has many housing units, often joined together, with some shared common area. All of the families who own housing units in the condominium have the use of and pay for the common areas, which may include a swimming pool and other recreational spaces. Condominiums offer many of the advantages of both owning and renting a home. Like owners of regular, single family homes, owners of condominiums have a hedge against inflation, tax benefits, forced savings and a guarantee that they can't be forced to move as long as they make their payments. Like renters, they enjoy shared facilities and have someone to take care of maintenance of the outside of their property, including the lawn and swimming pool. Condominium owners are generally responsible for maintenance inside of their units such as plumbing or electrical repairs. There are some disadvantages to condominium living as well. While you may be allowed to make changes within your own housing unit, rules generally prohibit you from making changes to the outside of your unit, such as painting it a different color or (in some cases) putting up a flagpole or a birdhouse. If you are handy and enjoy fixing things, you are generally limited to only those things inside your unit. Finally, you must pay a condominium fee in addition to your monthly mortgage payment to cover the services provided by the condominium. Condominiums are often less expensive than detached, single family homes for a number of reasons. First, because most have common walls, construction cost tends to be lower, as does heating cost. Second, because many condominium owners don't have large families, spaces are smaller, often no more than 1,000 to 1,200 square feet. Third, the use of common facilities means that a number of homeowners share the cost of maintaining a lawn, a pool and a maintenance staff. If all you need is a small kitchen and living room, a couple of small bedrooms and no lawn, a condominium may be ideal. Which of the following is true of a condominium? A. It is cheaper to own and maintain your own swimming pool than to share one in a condominium. B. The size of the average condominium in terms of square feet of living space is generally much larger than those of nearby detached single family homes. C. You must pay a monthly condominium fee in addition to your mortgage cost and cost of utilities. D. The owner is responsible for all repairs inside and outside of the condominium.

C. You must pay a monthly condominium fee in addition to your mortgage cost and cost of utilities. Condominium owners must pay a monthly condominium fee to pay for exterior repairs to the units and for the shared amenities such as swimming pool and clothes washers and dryers.

Convenience. In the end, convenience is generally the most important factor in owning one's own washer and dryer. Therefore, it is useful to find out how much consumers pay for convenience. The cost of convenience may be found by subtracting the monetary benefits (savings) from the annual cost. We have seen that a washer and dryer will cost the Morgans $310 per year to own and operate. What is the greatest amount that they should spend per week at the laundromat (in a 52-week year) before it becomes worthwhile for them to buy the appliances, not counting convenience? A. $5.00 B. $4.00 C. $3.42 D. $5.96

D. $5.96 If we divide the total cost of $310 for owning a washer and dryer by 52 weeks, we see that the breakeven amount is $5.96. If the cost is higher than $5.96 (which it is), it will be less expensive for them to own a washer and dryer without even accounting for the value of time or convenience.

Many buyers choose to pay off their vehicles over a longer period of time in order to lower monthly payments. While this can make a big difference in the size of the monthly payment, it also increases the total number of payments that the buyer must make and ultimately, the total amount of finance charges that must be paid. To calculate total finance charges for a loan, follow the following steps: (If there is a down payment) subtract the down payment from the cost of the vehicle to find the amount borrowed. Divide the amount financed by $1,000 to find out the number of thousand dollars you must finance. Using the table showing the monthly payment per $1,000 financed, find the monthly payment for the number of years and interest rate of the loan. Multiply the number you find from the table by the number of thousands of dollars of the amount financed. Multiply by the number of months of the loan to find the total sum of the payments. Subtract the amount borrowed to find the total finance charges. To find the total finance charges for a 2-year loan of $1,000: (If there is a down payment) subtract the down payment from the cost of the vehicle to find the amount borrowed.There is no down payment so $1,000 is borrowed. Divide the amount financed by $1,000 to find out the number of thousand dollars you must finance.$1,000/$1,000 = 1 Using the table showing the monthly payment per $1,000 financed, find the monthly payment for the number of years and interest rate of the loan.A 2-year loan @12% = $47.07/month Multiply the monthly payment per $1,000 by the number of thousands of dollars of the amount financed.$47.07 x 1 = $47.07 Multiply by the number of months of the loan to find the total sum of the payments$47.07 x 24 months = $1,129.68. Subtract the amount borrowed to find the total finance charges.$1,129.68 sum of payments-$1,000.00 amount borrowed= $129.68 total finance charges Let's compare this loan to an identical loan of 6 years (72 months). Using the table showing the monthly payment per $1,000 financed, find the monthly payment for the number of years and interest rate of the loan.A 6-year loan @12% = $19.55/month Multiply by the number of months of the loan to find the total sum of the payments.$19.55 x 72 months = $1,407.60. Subtract the amount borrowed to find the total finance charges.$1,407.60 sum of payments-$1,000.00 amount borrowed= $407.60 total finance charges This is more than three times the total finance charge for the 2-year loan of the same amount and APR. https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod54Q3%2C4%2C5.PNG Tim wants to buy a new Honda, which costs $20,000. He will pay a down payment of 10 percent and finance the rest at 12 percent. If he finances the vehicle over 5 years, how much will his total finance charge be? A. $4,509.10 B. $5,508.90 C. $957.62 D. $6,019.20

D. $6,019.20 (If there is a down payment) subtract the down payment from the cost of the vehicle to find the amount financed. $20,000 cost of vehicle- $2,000 down payment ($20,000 x 10%)= $18,000 amount financed Divide the amount financed by $1,000 to find out the number of thousand dollars you must finance.$18,000/$1,000 = 18 Using the table showing the monthly payment per $1,000 financed, find the monthly payment for the number of years and interest rate of the loan.A 5-year loan @12% = $22.24/month per $1,000 financed Multiply the monthly payment per $1,000 financed by the number of thousands of dollars of the amount financed.$22.24 x 18 = $400.32 Multiply by the number of months of the loan to find the total sum of the payments.$400.32 x 5 years x 12 months/year = $24,019.20. Subtract the amount borrowed to find the total finance charges.$24,019.20 sum of payments-$18,000.00 amount financed = $6,019.20 total finance charges

The U.S. Treasury issues a number of different kinds of bonds, all of which are free of default risk. The shortest bonds, which are issued with maturities from 30 days to one year, are called Treasury bills. These can be purchased directly from the Treasury, but the minimum investment of $1,000 tends to keep out smaller and younger investors. The federal government also offers Treasury notes ranging from two years to ten years in maturity and Treasury Bonds with maturities beginning with ten years. All Treasury bills, notes and bonds are available with a minimum investment of $1,000 and can be purchased directly from the Treasury with no commission cost online at www.TreasuryDirect.gov. There is a Treasury Bond that is very useful for people who are saving for a future goal, such as education or retirement, and who don't want to see their chances ruined by inflation. It is called the Treasury Inflation-Protected Security ("TIPS"). This bond adjusts the amount that you have invested, for inflation, every six months and also pays the stated interest on that ever-increasing amount. In this way, both your original investment and the interest that you get are adjusted upward to compensate for inflation. Josh pays $2,000 for a Treasury Inflation-Protected Security that has an annual interest rate of three percent. By the end of the first year that he owns the bond, consumer prices have increased by 10 percent. After this adjustment, how much interest is he paid per year? A. $30.00 B. $33.00 C. $16.50 D. $66.00

D. $66.00 The value of Josh's bond increases by 10% to $2,200. 3% of $2,200 is $66.00.

The size of your monthly payment depends on how much money you borrow, the interest rate you are charged, and the amount of time you will take to pay off the loan. The more you borrow, the higher the interest rate, or the shorter the loan period, the higher your monthly payment. To find the monthly payment, do the following: Subtract the down payment from the cost of the vehicle since you only finance the difference, which is called the amount financed. Divide the amount financed by $1000 to find out the number of thousand dollars you must finance. Find the number of years of your loan obligation on the left hand side of the table and the interest rate that you will be charged across the top. Multiply the number you find from the table by the number of thousands of dollars of the balance you are borrowing. This will be your monthly payment. Let's try an example. Maria wants to buy a $6,000 vehicle. If she puts $1,000 down, the bank will finance it for her over four years at an annual percentage rate of 8%. What will her monthly payment be? Solution: Subtract the down payment from the cost of the vehicle. $6,000 cost of vehicle-$1,000 down payment=$5,000 the amount financed. Divide the amount financed by $1000 to find out the number of thousand dollars you must finance. $5,000/$1,000 = 5. Find the monthly payment per $1,000 borrowed by locating number of years of your loan obligation on the left hand side of the Monthly Payment per $1,000 Financed table and the interest rate that you will be charged across the top.4 years @ 8% = $24.41Multiply the number you find from the table by the number of thousands of dollars of the balance you are borrowing.$24.41 x 5 = $122.05 which is her monthly payment https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod54Q3%2C4%2C5.PNG Joey wants to buy a $3,000 vehicle with 20 percent down for three years at 12 percent interest. What will his monthly payment be? A. $119.56 B. $89.67 C. $72.82 D. $79.70

D. $79.70 Subtract the down payment from the cost of the vehicle. $3,000 cost of vehicle-$600 down payment ($3,000 x 20%)=$2,400 the amount financed. Divide the amount financed by $1000 to find out the number of thousand dollars you must finance. $2,400/$1,000 = 2.4. Find the monthly payment per $1,000 borrowed by locating number of years of your loan obligation on the left hand side of the table and the interest rate that you will be charged across the top.3 years @ 12% = $33.21 Multiply the number you find from the table by the number of thousands of dollars of the balance you are borrowing.$33.21 x 2.4 = $79.70 which is Joey's monthly payment.

When you hold savings for short-term goals, you generally want to hold it in a form that is both "liquid" (easily converted into cash) and safe from risk of loss. Savings held for longer-term goals generally doesn't need as high a degree of liquidity, and you may choose to take on more risk in exchange for a higher rate of return. If you absolutely need to have a certain amount of money at a certain date, you don't want to invest in things that can fluctuate in value such as stocks. The most liquid form of savings is money, which is directly spendable without having to be converted from another form. This obviously includes cash but also funds that we have in checking accounts. Each form of money has its own advantages and disadvantages, however. Cash can be used everywhere although holding cash is risky because it can be lost or stolen. On the other hand, while money deposited in a checking account is safer than that held in cash, it may be more difficult to spend since checks may not always be accepted. These days, however, if you have a debit card for your checking account you can use it to spend money from your checking account with any merchant who accepts credit or debit cards, making those funds both safe and acceptable almost everywhere. Aside from these differences, both cash and checking accounts share major advantages and disadvantages as a method of holding savings. The major advantages are in liquidity and (with safety precautions for cash) low risk of loss in value. Since money is instantly usable, it is the most liquid type of savings. Money is also protected against loss of value since, unlike a share of stock that can go up or down, the value of a dollar bill (its nominal value) can never go below a dollar. A second disadvantage of holding money is that its purchasing power can diminish through inflation. This isn't a big deal when inflation is generally under three percent, but when it was more than 12 percent in 1980, those who held their savings in a checking account saw their money lose that much purchasing power in a single year. A good protection or hedge against inflation is to own something real, traditionally a house or a closet full of (non-perishable) food since their value tends to increase as prices go up. If you own a house that has a fixed-rate mortgage, you are generally even better off in a period of high inflation since you can pay back the loan with less valuable dollars. Johanna's grandmother gives her $9,000 to pay for the entire first year's tuition at a state college, a year from now. Johanna puts the money into her checking account, but during the next year, inflation is 10% and the tuition of her college increases with inflation. How much additional money must Johanna come up with to pay her tuition? A. $1,000 B. $800 C. $10,000 D. $900

D. $900 If inflation is 10 percent, her tuition goes up by 10 percent of $9,000, which is $900. Note that the 10 percent inflation rate was used for hypothetical purposes only. The average annual U.S. inflation rate since 1926 is about 3 percent.

In a wealthy economy, such as that of the United States, personal needs are determined more by pressure from society rather than necessity. We probably don't need to spend more than $100 or so per year on clothing, if we are willing to wear the same sturdy clothes, year after year, repairing what is worn or frayed and replacing only what has become unusable. Most of us are, in one way or another, however, slaves to "fashion," which makes us spend a lot more than the minimum on clothing. Fashion is a big business in the United States. It involves a number of textile industries, including manufacturers, importers, retailers, designers and consumers who purchase the finished garments. Clothing has a unique place in the family budget, with nearly all families influenced in one way or another by fashion. The amount of money that people spend on clothing is based on a number of factors. For example, the colder the climate and the more extreme its changes, the greater the need for clothing. People who live in New England, which has four distinct seasons, need a lot more clothing than do those who live in San Diego, California, where temperatures change little throughout the year. Expenditures on clothing also tend to vary with age. Growing children need new clothes constantly. As children become older, their rate of growth may slow down but social demands from classmates and peer groups as well as influence from the advertising media may increase their demand for clothing. Young adults often tend to spend the most on clothing for two reasons. First, their work may force them to acquire an entire "work wardrobe" in addition to their leisure wardrobe. Second, the active social lives of those who are young and unmarried tends to influence them to have a good assortment of fashionable clothing, which can be expensive. In our society, women tend to spend a lot more on clothing than men. While some men have become more fashion conscious in recent years, it is still possible for them to wear the same traditional suits to work, year after year, without attracting attention. Which of the following people is likely to spend the most on clothing? A. A 55-year-old woman living in Miami, Florida. B. A 25-year-old man living in San Diego, California. C. A 65-year-old man living in Texas. D. A 25-year-old woman living in Boston, Massachusetts.

D. A 25-year-old woman living in Boston, Massachusetts. A young woman living in a cold climate probably spends more on clothing than the other people listed. Women tend to spend more than men on clothing and cold climates with changing seasons demand a wider assortment of clothes than is needed in warmer climates.

Most bonds do not do well during periods of sudden inflation. If consumer prices suddenly jump, a bond, which is a fixed income investment, is going to lose purchasing power for both the interest that it pays and the principal or face value that you get when it matures. In addition, sudden inflation will push up market interest rates, thereby lowering the value of your bond if you need to sell it before it matures. The longer the time to maturity, the worse the value of your bond will suffer from sudden inflation. Which of the following investments of $1,000 would probably lose the most value in the event that inflation suddenly went from 2 percent to 8 percent per year? A. A 3 month Treasury bill B. A 20 year Treasury bond C. A 5 year Treasury note D. A 30 year Treasury bond

D. A 30 year Treasury bond The longer the maturity of the bond, the greater will be its loss in value as the result of a sudden increase in inflation. This is because an increase in inflation will push up the rates that the government must pay to sell new bonds, making the rates paid on existing bonds much lower and making those bonds much less valuable. Since short-maturity bonds, such as the 3-month Treasury bill will pay off its face value ($1,000) in just 3 months, investors will not lose much opportunity cost by holding them for that short time. At the other extreme, however, a 30 year Treasury bond will pay much lower interest for 30 more years and will lose much more of its $1,000 value if interest rates suddenly shoot up.

Better service. A possible argument in favor of owning a washer and dryer is that one's own equipment treats the clothes better and saves money on clothes replacement. If Ashley buys a bottom-of-the-line washer and dryer to save money, what is likely to be true of the service and quality of her machines compared to those at the laundromat? A. The machines at the public laundromat will last longer than Ashley's machines. B. Ashley's machines will be better than those offered at a public laundromat because hers will be better maintained. C. Ashley's machines will be better than those offered at a public laundromat because hers will have more features. D. Ashley's machines will not be as good as those offered at a public laundromat because the business is likely to buy a more sturdy machine with more features to attract customers.

D. Ashley's machines will not be as good as those offered at a public laundromat because the business is likely to buy a more sturdy machine with more features to attract customers. Since washers and dryers owned by a laundromat are used every day for many hours per day, they have to be very rugged to hold up under that usage. Also, since laundromats are competitive with each other and also compete for the business of those who could buy their own appliances, they tend to offer features found only on the best machines. However, in spite of being more sturdy, machines at public laundromats tend not to last very long because of their heavy usage.

Comprehensive insurance gets its name from the fact that it covers the owner of a vehicle for a variety of losses other than liability or collision. These include losses due to theft, fire, glass breakage, vandalism and other such things. Generally, there is a deductible of $250 or $500 each time you suffer a loss. While comprehensive insurance is not legally required by any of the states, companies who lease or finance the purchase of vehicles generally require it. Like collision insurance, comprehensive insurance protects financing and leasing companies from losing their money if your vehicle is stolen or burned and you can't afford to repay the loan. If you have caused an accident, which type of automobile insurance would cover damage to your vehicle? A. Comprehensive. B. Liability. C. Term. D. Collision.

D. Collision. Collision insurance is for damage done to the vehicle itself in an accident. Since states do not require vehicle owners to have collision insurance, which can be expensive, many owners are not covered for damages to their own vehicle from accidents that they have caused.

A cooperative is similar to a condominium except that the cooperative association owns the entire property and people who own the apartments are shareholders of the association. Cooperatives, or "co-ops" as they are called, are found largely in a few large cities such as New York. You can't just buy a co-op from a seller, as you can with a condominium or a regular house. Since the association owns each unit, you must be voted in as a member of the association. This may make it difficult to buy into a cooperative and may make it difficult to sell your "share" when you want to leave. Which of the following types of housing allows owners to own their individual units but have everything outside the unit jointly owned? A. Cooperative B. Rental C. Detached, single family D. Condominium

D. Condominium When you own a condominium, you own your own housing unit, but everything else on the property is owned by the condominium association.

The importance of leisure has grown relatively recently in the United States. When middle-income people first began to take vacations after the Civil War, they often used them for work of a different kind, including religious, charitable or educational obligations. Since Americans are given relatively little time for vacations, we tend to enjoy much of our leisure time close to home. This has been helped by government investment in parks, golf courses, museums and sports stadiums in many cities as well as technology that puts entertainment into our homes and cars in the form of cable, satellite and streaming TV, DVDs, smart phones, sophisticated gaming systems and, particularly, the Internet. Which of the following has NOT helped people enjoy leisure time closer to their homes? A. Parks B. Video games C. Internet D. Discount airlines

D. Discount airlines Discount airlines encourage Americans to take vacations away from their homes.

It is possible to travel long distances by air for relatively little money, if you plan carefully. Three factors play into the hands of the wise traveler: competition among the airlines, the two-tier pricing system and Internet air bargains. Airline deregulation, which began more than 35 years ago, allowed airlines to charge whatever they want for any flight or any seat on the flight. It also allowed new airlines to start up and compete with existing airlines by offering lower fares. Discount airlines such as Southwest and Jet Blue began providing service to many cities at prices that were often much less than those charged by the more established airlines. This forced the older airlines to respond by competing on the basis of price. Reduced service resulted from this price competition. Airlines discovered that most passengers cared more about finding the lowest price than the other services that the airlines offered. As a result, airlines stopped giving free meals to all but (some) overseas passengers and most began charging to check bags, or to sit in a better seat and some even charge to watch a movie on board. A few now charge even for carry-on bags. Two-tier pricing, in which airlines charge less for flights booked far in advance and more for flights booked near the departure date, was another outcome of airline deregulation. The airlines felt that business travelers, who often had little advance notice of when they needed to travel, were both willing and able to pay more for their seats than leisure travelers who could plan their trips weeks or months in advance. To help differentiate between the two types of travelers, airlines often give discount fares for tickets that are booked at least two or three weeks before travel starts. These days, airlines use sophisticated computer programs to fill every seat and realize the greatest revenue per flight. If the airline's computers find that a lot of people want to travel on the same flight, they will automatically raise the price. A passenger booking a trip online may find that prices for a given trip change drastically within a few hours. To get the lowest price, fares must be paid in advance and cannot be canceled. Most airlines offer passengers the ability to reschedule a flight that they cannot make, but with a substantial penalty that can run from $50 to several hundred dollars. Full-fare passengers, such as business passengers who pay much higher prices, are given the ability to pay for the flight only on the day that they fly and cancel or reschedule a flight with no penalty. Typically, airlines hold out a certain number of seats to sell to business travelers at high prices close to the date of the flight. This means that it is generally a good idea for the leisure or vacation traveler to book a flight as far in advance as possible, particularly if it is during a holiday period such as Christmas or Thanksgiving, because the allotment of discount seats will go quickly. If the date of the flight approaches, however, and the airline finds that it has too many unfilled seats, it may open up additional seats at discounted fares. Why do airlines tend to give you a much lower price when you book several weeks in advance? A. They want to attract more leisure travelers and fewer business travelers. B. They like people who are well organized and plan in advance. C. They want their travelers to relax and enjoy themselves and not rush back to work. D. If you book far in advance, you are unlikely to be a business customer who can afford to pay more.

D. If you book far in advance, you are unlikely to be a business customer who can afford to pay more. People who travel a lot for business often do not know their schedules several weeks in advance and need flexibility to make last minute changes. Therefore, business travelers are willing to pay much more for this flexibility.

There are many other costs of owning a home. Maintenance costs tend to be fairly regular, such as painting, cleaning the furnace and air conditioner and perhaps plowing the driveway in colder climates or taking care of the lawn. Some homeowners do the maintenance jobs themselves; others pay to have them done. Repair costs are less regular, and are often unexpected and expensive. These include plumbing emergencies, a leaky roof or storm damage. Some experts advise homeowners to put aside about one percent of the value of the home for maintenance and repairs. Homeowner's insurance is required by mortgage lenders to protect the value of their loans. If your house burns down and you have a mortgage but do not have insurance, both you and the mortgage lender lose money. In addition to fire insurance (which represents the greatest cost) homeowner's insurance also will insure against loss due to personal injury (someone falling down your steps and suing you), and theft. You can also pay extra to insure valuable items such as jewelry against theft or loss even if you carry them away from home. Homeowner's insurance tends to cost between one quarter and one half of one percent of the value of the home. In 2019, the average annual cost for homeowner's insurance was $1,083. Florida, with its hurricanes, has the highest average premium of $2,052 while Oregon had the lowest at just $576 according to ValuePenquin. Utilities include electricity and may include gas and oil used for heat, water, sewer and garbage collection. Some areas may include water, sewer or garbage collection as part of the services covered by your property taxes, but some charge separately for one or more of them. Monthly electricity costs vary widely by state. Which of the following is true about homeowner's insurance? A. It pays for liability you have when you drive your car. B. It is generally more expensive than utilities for the home. C. It will keep your house from burning down. D. If you have a mortgage, you are required to have it.

D. If you have a mortgage, you are required to have it. Virtually all mortgage lenders will require a homeowner to carry homeowner's insurance before they will lend money to them.

The Annual Percentage Yield (APY) is the annual rate of return including compounding of interest. In our example above, the total interest of $4.0604 is divided by the amount of the deposit, $100, to get an APY of 4.0604 percent. While the additional interest may seem trivial, it becomes less so when more money is invested, when rates are higher and when the money is compounded and credited even more times per year. For this reason, always look for the APY, which is the most reliable indicator of what you will get. Remember that interest paid on all types of bank accounts is taxable as regular income by both the federal government and state and local governments that have a personal income tax. If you had a savings account at a bank, which of the following would be correct concerning the interest that you would earn on this account? A. Earnings from savings account interest may not be taxed. B. Sales tax may be charged on the interest that you earn. C. You cannot earn interest until you pass your 18th birthday. D. Income tax may be charged on the interest if your income is high enough.

D. Income tax may be charged on the interest if your income is high enough. Interest earned on a savings account is part of ordinary income, which is taxable. If your income is high enough to be taxed, you must pay tax on your savings account income in the same way that you pay tax on your income from a job.

There are also a number of auction programs for hotels including Priceline.com and Kayak.com, which allow you to offer a price for a class of hotel in a specific city for a certain date. For example, you might offer $150 for a 3 star hotel in Manhattan on April 3. Your bid is shown to participating hotels that might be willing to take your offer to fill a room that they project would otherwise be empty that night, at a price which is half or less than advertised. However, if you try this in the busy season between Thanksgiving and Christmas, you may not find many takers. Why would a 3 star hotel in Manhattan be willing to accept a Kayak.com bid on a hotel room for half its advertised price? A. All of its rooms are filled for the date in question. B. It has one empty room for the date in question. C. It is desperate and going out of business. D. It forecasts that it will have lots of empty rooms for the date in question.

D. It forecasts that it will have lots of empty rooms for the date in question. A hotel's costs are largely fixed whether it is at capacity or it has many empty rooms. Therefore, if it forecasts a number of empty rooms for the night of the bid, it is better off getting some money for that room than none at all. If it has only one available room, it will probably not let it go at a large discount because it is probable that a full-paying guest will need it on short notice.

To be comparable, all the costs and benefits of a capital asset must be stated in common terms such as dollars per year. Consider the problem faced by the Morgans. In the Morgan household, Ashley is stuck with doing the wash. After three years of married life, she is sick and tired of dragging the dirty clothes to the laundromat every Thursday. Since her husband Saul prides himself on being a practical-minded individual, however, Ashley pitches her campaign for a washer and dryer on the basis of saving the family money. One morning over breakfast, Ashley mentions to Saul that there is a terrific sale on washers and dryers at a local store. She continues that they could get both for $1,000 and save all the money that they've been pouring into the machines at the Laundromat. Saul was not convinced, saying that once you consider the price of owning the machine, the electricity, gas, hot water and repairs, the laundromat is still the greatest bargain since the 10-cent soda. Without further eavesdropping on the Morgan family argument, we can add up the figures to see who is right. First, what are the likely costs of buying and operating the washer and dryer? Costs Depreciation. The initial cost of $1,000 buys a washer and dryer that will last, say, ten years. Assume (for simplicity's sake) that the machines are worthless at the end of that period. Therefore, the depreciation (or lessening of value) of the machines averages $1,000/10 = $100 per year. This method of dividing the cost of a good by its expected or useful life is called "straight-line depreciation." It is important for the consumer to realize that at the end of the first year, the machines cannot be resold for $900 ($1,000 price minus $100 for one year's depreciation). Most goods, particularly those used by consumers, actually depreciate much more in early years than they do later. This is partly because most consumers like to buy things new. If the consumer intends to use the washer and dryer over a longer period, however, it is best to use average or straight-line depreciation to figure cost per year. Joe is thinking about buying a very good lawn tractor to save the money that he now pays to a lawn service. It will cost $3,000 and Joe expects it to last 10 years, with an average depreciation cost of $300 per year. Joe's wife, who opposes this purchase, feels that Joe will get bored with his tractor in a year. Joe counters by telling her that if he does, he will be able to sell it for about $2,700, which is the purchase price minus first-year depreciation. What do you think about Joe's argument? A. Joe is likely to get more than he paid for the lawn tractor. B. Joe is right, he can get $2,700 after one year. C. Joe should be able to get more than $2,700 if the tractor is good. D. Joe will get much less than $2,700 because first-year depreciation is large.

D. Joe will get much less than $2,700 because first-year depreciation is large. While depreciation may average $300 per year over the life of the tractor, Joe won't be able to get anywhere near $2,700 for a one-year-old tractor since buyers would much prefer a new tractor for an additional $300 dollars.

Joey observed that the same argument could be made about clothing and that you really don't need to spend very much on clothing, if all you want to do is look decent and stay warm. He thought that once you stop growing, you could wear pretty much the same clothes, year after year. Maria objected, telling him that clothes were a necessity in our society, at least to her. She explained that if she didn't dress well, that she'd never get a good job, probably couldn't get into a decent college, and that she might never get a date. Andrew asked her how much money she spent per year on clothes and she told him that she was budgeting $57 per month, or $684 per year. She also expected that this figure would increase a little when she went to college and a lot when she started working and may have to wear dress clothes every day. Why does Maria figure that her annual clothing costs will jump when she is no longer a student and is working full time? A. When she is young, she doesn't have to pay sales tax on her clothes. B. Even basic clothes such as jeans cost a lot more when you are an adult. C. She will be spending less on other things than when she was a student. D. Many working professionals need work clothes in addition to leisure clothes.

D. Many working professionals need work clothes in addition to leisure clothes. Most working professionals need work clothes in addition to leisure time clothes. The work clothes (suits, dresses, ties, etc.) tend to be more expensive than leisure clothes. Since your job performance and future raises may be related to your appearance, it generally pays to have a variety of clothes that are neat, clean and well pressed.

Vehicles are expensive and today's new vehicles are particularly costly. According to an authoritative source on car purchases, Kelley Blue Book, the average cost of a new vehicle sold in the U.S. in 2019 was $36,590, a $993 increase (2.8%) from the previous year. Part of the high price is due to the fact that over two thirds (69%) of vehicles sold were actually light trucks, such as sport utility vehicles, crossovers and pickups, which tend to be more expensive than the traditional sedan.One result of the high cost of new vehicles has been an increase in demand for used cars, driving up their cost as well. According to another car pricing source, Edmunds, the average price of a used vehicle in early 2019 was $24,499. Whether you buy your vehicle new or used, it is likely to be the most expensive thing you will buy in your lifetime, after the cost of a home, and, perhaps, a college education. Therefore, it is important to shop carefully for both your vehicle and the cost of financing it. Which of the following is a reason why new vehicles are so expensive these days? A. Interest rates in general are now higher than the historical average B. Most people lease cars which runs up the cost C. Gasoline costs have gone up a great deal D. Most new vehicles are actually light trucks

D. Most new vehicles are actually light trucks New cars have become particularly expensive in recent years since 69 percent of vehicles sold have been light trucks, such as SUVs, crossovers and pickups which cost more than traditional non-truck (sedans) vehicles.

If an uninsured motorist hits you, you may be out of luck. While liability insurance (or proof of financial responsibility) is legally required in almost all states, a 2015 study by the Insurance Research Council estimated that more than 13 percent of all drivers are uninsured. Uninsured motorist's protection, which is another optional feature of an automobile insurance policy, will cover the cost of injuries to you and to your passengers if a driver who does not have liability insurance hits you. If you don't pay extra for uninsured motorist's protection and are hit by an uninsured vehicle, you may have to pay for the damages yourself. Twelve US states have some type of no-fault insurance in place. This provides that a person's insurance company pays for damages regardless of who is at fault. Since so many accidents do not have a clear party at fault, the intention of no-fault insurance is to reduce legal expenses connected with determining the guilty party. Pure no fault insurance rules out lawsuits against the other party in any circumstances. "Modified no fault" prohibits lawsuits until damages exceed a certain amount. Greta has liability and collision insurance, but no comprehensive insurance on her 2009 Honda Accord. One night, it is stolen from the parking space outside her condo and never recovered by the police. Which of these policies pays her for the value of her vehicle so she can get another one? A. No fault. B. Liability. C. Collision. D. None.

D. None. Unless she has comprehensive insurance, she is not insured for the theft of her vehicle.

For many decades, the first bond that many young people owned was a U.S. Government Savings Bond that was often given to them as a gift. It was easy to buy from almost any bank and some of the bonds doubled in value over a number of years, dramatically illustrating the "magic" of compound interest. However, since January 1, 2012, banks can no longer sell paper savings bonds, and the bonds are much more difficult to get. In fact, in order to buy one for yourself or as a gift, you must open a Treasury Direct account online and buy the bonds through electronic transfer from your bank. For this reason, savings bonds are no longer used as long-term savings vehicles by many people. How can you buy a U.S. Treasury Savings Bond? A. From a credit union B. From a bank C. From any department store D. Online, through a Treasury Direct account

D. Online, through a Treasury Direct account As of January 1, 2012, paper Savings Bonds can no longer be sold by banks and other depository institutions. To buy one, you must open a Treasury Direct account.

Some bonds offer tax breaks to investors. Through a weird fluke in the Constitution of the United States, the Federal Government cannot tax the interest that you earn on municipal bonds that are issued by states, counties and cities. This means that investors in high tax brackets favor municipal bonds. As an example, if your tax bracket is 12 percent and you own a Connecticut Housing Authority bond that has a face value of $1,000 and pays six percent annual interest, you would receive $60 per year in interest. If you made $60 in interest from a bank account or a corporate bond, you would have to pay 12 percent of that or $60 x .12 = $7.20 in federal income taxes, leaving you with just $52.80 for yourself. If that interest is from a municipal bond, however, it is not taxable by the federal government and you get to keep the entire $60. States that have their own income tax are allowed to charge state income tax on the interest from municipal bonds. Most states will not charge state income tax on municipal bonds that are issued within their states, however. If a Connecticut taxpayer owned the Connecticut Housing Authority bond just described, she would not have to pay either federal or Connecticut state income tax on the interest from that bond, making it that much more attractive. Because municipal bonds can save investors both federal and state taxes, they tend to pay rates that are below other bonds with similar safety and maturity. For this reason, they tend to be a good deal primarily for investors who are in at least the 24 percent tax bracket, and they tend not to be that good for students and younger workers who are not yet in a high tax bracket. Finally, the interest from bonds issued by the U. S. government is subject to federal income taxes but not subject to state income taxes. This makes U. S. government bonds attractive to investors who live in states with high state income taxes. If you live in New York State and buy a municipal bond issued in the State of Ohio, which income taxes must you pay on the interest of that bond? A. State of Ohio. B. None. C. Federal. D. State of New York.

D. State of New York. Since it is a municipal bond, you don't pay federal income tax on it. Since you live in New York and it is an Ohio bond, however, you must pay New York State income tax on the interest from that bond.

We Americans are very mobile, we travel a lot, and that mobility tends to be expensive. The average American family spends more on transportation than on any other expense except housing. The U.S. Bureau of Labor Statistics tells us that all Americans spent 17.4 percent of their money on transportation in 2017. That's in spite of the fact that gasoline is a lot cheaper in the U.S. than in most of the other developed countries of the world. Most Americans depend upon their vehicles. In 2016, according to the latest Census data available, 85.4 percent of Americans commuted to work by personal vehicle. The vast majority drove alone. Aside from those who live in or around large populated cities where public transportation such as buses or trains may be readily available, most people are dependent on their vehicles. In 2016, only 5.1 percent of the U.S. population used public transportation to get to work. Which of the following statements about transportation in the United States is NOT true? A. Most Americans who commute to work drive alone. B. Most Americans commute to work by vehicle. C. Americans spend more of their income on transportation than anything else except housing. D. The cost of gasoline is higher in the U.S. than anywhere else in the world.

D. The cost of gasoline is higher in the U.S. than anywhere else in the world. The cost of gasoline is not higher in the U.S. than anywhere else in the world. In fact, the cost of gasoline in the U.S. is much lower than in Europe and many other developed parts of the world.

While online travel services such as Orbitz, Expedia, or Travelocity.com will help you find the lowest fares for a particular trip, there are a couple of other services which can save even more money. Auction companies such as Priceline.com allow you to bid whatever you like for an airline flight, provided that you are willing to take it if your bid is accepted. The bids are sent to the airline, which has the option of flying with empty seats that produce no revenue, or taking a low bid that would provide some additional revenue. Some online travel services charge a commission to the airlines for their services. Frequent Flier Programs: Most airlines love business travelers because they tend to pay much higher prices for tickets. For example, a round-trip flight might cost 5 to 6 times as much in business class as in coach class. True, business class passengers get a larger seat that might even convert into a bed on an overseas flight and tend to get a better meal than those in the back of the plane, but at a price that could be $5,000 more. On long flights to Asia and the Middle East, some airlines now offer first class passengers a cabin of their own with a full size bed (and a bathrobe) for a price that could be 15 to 20 times that of a coach seat. To obtain the loyalty of business travelers, nearly all airlines spend money to operate frequent flier programs that award free tickets for meeting certain requirements such as miles flown or dollars spent. Frequent flier programs are open to all passengers, including those who travel just for leisure, but since it takes a minimum of 12,500 to 25,000 miles to earn a free round-trip economy class ticket (four round trips from New York to California equal about 25,000 miles), it takes a long time before most leisure travelers can earn one. One downside of using frequent flier miles is that airlines are not stupid enough to give away free tickets when they can sell them. Therefore, it is often impossible to get tickets during prime time, such as Thanksgiving, Christmas and spring vacation. By giving free tickets for unsold seats, airlines can keep passenger loyalty without sacrificing revenues. That's because the airline's cost of filling an otherwise empty seat is not much more than the cost of its frequent flyer service and the soda and (small) bag of pretzels that are given to you. Some airlines now even charge for the snack. It is always worthwhile to sign up for a frequent flier plan the first time you use an airline, because it is free. While it may take time to earn your first ticket, miles on some airlines do not expire and your balance may become useful when you start to travel more frequently for business or pleasure. What is the cost to an airline for a frequent flier ticket or a ticket obtained through a low bid to an auction company such as Priceline.com? A. The fare they would have obtained from an advance-purchase passenger. B. Nothing. C. The fare that they would have obtained from a full-fare business passenger. D. The cost of operating the frequent flier service or the commission paid to Priceline.

D. The cost of operating the frequent flier service or the commission paid to Priceline. It costs the airline something to operate a frequent flier service and both Orbitz and Priceline charge the airline a commission for their services. The airline is filling seats, however, that would have probably been empty. Thus, the costs for issuing a frequent flier or Priceline ticket aren't very much.

Many people come prepared when they are buying a vehicle. They have looked up the average actual selling price for the vehicle they want in the library or on the Internet and may even know how much the dealer paid the manufacturer for the vehicle. This allows them to bargain hard for the best price. Once they have locked in the price of the vehicle, however, many don't realize that it is time to bargain again for the best (APR) interest rate. This can add up to big savings. For example, a four-year vehicle loan for $10,000 is $24.70 per month cheaper if we get an interest rate of 10 percent than if our interest rate is 15 percent. This savings amounts to $296.40 per year or $1,185.60 over the life of the loan. There are two basic ways in which you can get financing to buy (or lease) your vehicle. You can get direct financing from a bank, a credit union or a finance company without going through the dealer, or you can get indirect financing through your vehicle dealer. Most vehicle buyers use dealer-originated financing because it is more convenient, one-stop shopping. The wise consumer, however, will shop around for the best interest rate before signing up for any type of vehicle financing. This can be done before or after you shop for the vehicle. Jamie just decided to buy a vehicle for $4,500 from a dealer. He needs to finance $4,000 of that amount. What is the primary advantage and disadvantage of borrowing the money through the vehicle dealer? A. The primary advantage is that the dealer is sure to offer the lowest rate. The primary disadvantage is that the dealer may be a long way from your home. B. The primary advantage is that the dealer is sure to offer the lowest rate. The primary disadvantage is that it is inconvenient. C. The primary advantage is that the dealer is the only lender you can borrow from. The primary disadvantage is that it is inconvenient. D. The primary advantage is that financing through the dealer is that it is convenient. The primary disadvantage is that other lenders may charge lower interest rates.

D. The primary advantage is that financing through the dealer is that it is convenient. The primary disadvantage is that other lenders may charge lower interest rates. While financing through the dealer offers the convenience of one-stop shopping, other lenders, such as banks and credit unions, may save you money on financing by offering lower interest rates.

The sales tax is considered to be regressive because people with lower incomes pay a higher proportion of their incomes in sales taxes than do those with higher incomes. This is partly because higher-income people save more of their income than people with lower incomes, and sales tax is not collected on money you don't spend. In addition, higher-income people also spend a higher proportion of their money on services such as house cleaners, and some of those expenses do not include sales tax. Most states still have sales taxes, even though they fall disproportionately on those with lower incomes, because they are cheap and easy for states to collect. Cash registers in most stores are programmed to add the sales tax, and it is hard for people to avoid paying. Since the merchants collect the money for the state and it is difficult for merchants to cheat the state on a regular basis, the sales tax is a very attractive source of revenue for the states. It is also simple to determine who owes what amount since it is a fixed percentage of what you pay. In contrast, income taxes are very complex and it is much easier for people to avoid paying income tax than sales tax. The Meyer family and the Abbott family both consist of a married couple with two children, age eight and six. They both spend $20,000 per year on items that are subject to the state sales tax rate of six percent. The Meyers, however, make $60,000 per year while the Abbotts make only $40,000 per year. Which of the following statements is true? A. The sales tax is progressive. B. The sales tax is regressive because the Abbotts' pay a smaller percentage of their (higher) income in sales tax than do the Meyers. C. The sales tax is not regressive because the Abbots and the Meyers each pay the same proportion of their income in sales tax. D. The sales tax is regressive because the Meyers pay a smaller percentage of their income in sales tax than do the Abbotts.

D. The sales tax is regressive because the Meyers pay a smaller percentage of their income in sales tax than do the Abbotts. Both families pay six percent of $20,000 = $1,800 per year in sales tax. However, this is 4.5 percent of the Abbott family income and only three percent of the Meyer family income. Since the Meyers make more money and pay a smaller percentage of their income in sales tax than do the Abbotts, who make less money, the sales tax is considered regressive.

Most dealerships have a Finance and Insurance (F&I) Department to help buyers who need it, get financing for their vehicles. They also sell a variety of other products and services that can add to the monthly payment for the vehicle being purchased as well as to the profitability of the dealership. Whether you pay cash for your vehicle or need to finance the purchase or lease, chances are that you will have to go to the F&I Department to have the sales contract drawn up and signed, at the very least. When you apply for financing through the dealer, you will be asked to complete a credit application. The F&I Department will then submit your application, generally by computer, to one or more banks or finance companies to see whether they will provide the financing and at what interest rate. The interest rate (APR) offered to the dealer by outside lenders (generally including the "captive" finance company owned by the manufacturer of the vehicle you are planning to buy) is the wholesale or buy rate. The F&I department then adds an additional markup to the wholesale or buy rate to come up with the rate that they will charge you. Even if you tell them that you have financing lined up with a bank or credit union, they will probably ask if they can try to offer you a better rate. Sometimes you will see an offer of "zero percent financing" for a particular new vehicle. That offer generally is an incentive offered by the vehicle's manufacturer through their captive financing company to help sell slow-moving vehicles, often year-old models when the new models come out, and is offered only to those with excellent credit ratings (generally FICO scores of 700 or higher). Buyers with high credit ratings tend to be offered very low interest rates because their risk to the manufacturer is so low. Occasionally, manufacturers offer buyers with excellent credit ratings the choice between zero percent financing or "bonus cash," often of several thousand dollars. The F&I department is also likely to try to sell you a variety of ancillary products which are products that are not necessary to complete your purchase but which some buyers may want. These include extended warranties, maintenance plans, anti-theft products, wheel warranties, fabric and paint protection, excess wear protection, credit insurance which will pay off your loan if you die or lose your job and guaranteed asset protection which will pay off your entire debt on the vehicle if it is totally destroyed or stolen, even if the loan is greater than the insured value of the vehicle. The profit margins are high on these items so you can and probably should bargain on any that you truly need. Customers paid, on average, $1,500 in 2018 for F&I products. Which of the following is true of dealer F&I departments? A. They are purely a service of the dealer designed to benefit the customer and do not generate profits. B. If you have lined up outside financing you don't need to go there. C. Customers who pay cash don't have to go there. D. They will probably try to sell you additional products such as extended warranties, maintenance plans and credit insurance.

D. They will probably try to sell you additional products such as extended warranties, maintenance plans and credit insurance. While vehicle buyers or leasers must go to the F&I department to sign their purchase contracts, the department is a major profit generator for the dealership by selling financing at a markup on the rate given to them and by selling a variety of high-margin aftermarket products.

There are a number of advantages to buying a new vehicle as compared to one that is used. The first is reliability - when a vehicle is new, there is no wear and tear on it from previous owners. In addition, new vehicles come with warranties which means that any defects that you discover during the warranty period of at least 3 years will be repaired by the dealer without charge.A second major advantage is better technology, which keeps improving in many ways with vehicles. Each year, due in part to government requirements, fuel efficiency gets better which means that you can drive the same number of miles with less fuel. In addition, safety features such as emergency braking and lane departure warning keep improving. Also, the vehicle's electronics, such as GPS guidance and Bluetooth smartphone connectivity make driving both safer and more enjoyable.Finally, buying a new vehicle from a dealer is more convenient than buying a vehicle from a previous owner. The dealer will have many different models and colors to choose from and can generally get precisely what you want if you don't find it on the lot the day you visit. In addition, dealers will offer to set up the financing, if needed, and take your old vehicle as a trade-in so that you can drive to the dealer in your old car and drive home an hour or so later in a brand new vehicle. Furthermore, you can generally get a lower rate of interest on a new vehicle.The primary downside of buying a new versus a used vehicle is that of price. Because new vehicles depreciate (decline in value) so rapidly during their first few years, used cars are much less expensive. And because of its lower cost, sales tax and insurance will be considerably lower on a used car.There are other advantages to buying a used vehicle, besides cost. When a new model first comes out, its reliability has not yet been established. If you wait a few years and check used vehicle reliability in trusted publications such as Consumer Reports, you can find out which used cars are likely to need the fewest and least expensive repairs. And, if you want to be very safe, you can buy a used vehicle that still has time remaining on its warranty so that any factory defects can be repaired at no cost to you. Alternatively, if you are willing to pay some more to get a dependable used car, you can buy a Certified Pre-owned vehicle from a dealer that comes with an extended manufacturer's warranty. Which of the following is NOT true of buying new versus used vehicles? A. Insurance is generally cheaper for a used vehicle than for a similar new vehicle. B. The used vehicle will be cheaper than the new vehicle of the same make and model. C. Sales tax is cheaper for a used vehicle than for a similar new vehicle. D. Used vehicles tend to be more reliable than similar new vehicles.

D. Used vehicles tend to be more reliable than similar new vehicles. C is not true. In general, used vehicles tend to be less reliable than new vehicles, which have no wear and tear from previous owners. In addition, new vehicles come with manufacturer's warranties, which will fix any defects for free.