Intro to Finance Exam 3

Differentiate between other types of coverages (e.g. collision, uninsured motorist or gap coverage)

1) collision insurance 2) comprehensive insurance 3) Uninsured/ underinsured motorist coverage 4) Gap coverage

Differentiate between the different types of brokerage accounts

1) full service brokerage firm 2) self-directed brokerage account

When searching for a financial advisor, what should you be mindful of?

1) relying on the advisor solely though word of mouth 2) unrealistic promises 3) the details in the investment proposal 4) having a well constructed and diversified portfolio

The different types of ways in which financial planners are paid (Ch8)

1) sales load 2) 12b-1 fee 3) commission based 4) fee only based

The different types of life insurance policies

1) term life insurance 2) cash value life insurance

When setting up a self-directed brokerage account, it may be required that an investor have a minimum deposit of ________

1,000

True/False: A certificate of deposit (CD) allows an individual to make contributions to the account after the initial lump-sum investment

False

True/False: A household's health savings account balance cannot be rolled over from one year to the next

False

True/False: Actively manager portfolios consistently yield higher returns than passively managed portfolios

False

True/False: All interest earned on corporate bonds is tax exempt interest at the federal level for tax purposes

False

True/False: Coinsurance is defined as the cost of having access to insurance

False

True/False: Companies choose to take on more debt when interest rates are low with the hope of receiving favorable tax treatment filing their taxes

False

True/False: I do not have to pay a deductible for medical expenses if I am paying my monthly premium

False

True/False: My monthly insurance premium is not impacted by the amount of my deductible

False

True/False: Owner are not entitled by law to share in the profits of the firms

False

True/False: Privately held stocks can be bought on the over the counter (OTC) exchange

False

True/False: Subjective risk can be measured using probabilities

False

True/False: The coupon payment for a bond is the interest rate that the bond issuer has agreed to pay the bondholder

False

True/False: The federal deposit insurance corporation (FDIC) protects investors against the loss of cash and securities held at a brokerage firm

False

True/False: The suitability standard means that a financial professional always places the interest of the client ahead of his or her own

False

True/False: Total risk is the combination of appreciation and income risk associated with an investment

False

True/False: You can withdraw the principal portion of your Traditional IRA at anytime for any purpose without penalty

False

True/False: Your nominal rate of return is the rate of return you receive from an investment after adjusting for inflation

False

FDIC insurance

Federal Deposit Insurance Corporation that protects the money in a bank account

True/False: Insurance companies provide the insured with a cap on the maximum out of pocket expense they can incur

True

True/False: Interest rates can reduce the value of an investment

True

True/False: It is good to have foreign stocks in one's portfolio because the prices of these stocks do not move in the same direction at the US stocks over time

True

True/False: Less regulatory oversight is a common risk of foreign investments

True

True/False: Minors has hold investments and real estate through custodial accounts

True

True/False: Not wearing a helmet is considered a medium risk with a medium severity on the risk matrix

True

True/False: Stocks can be categorized as growth, income, and growth/income stocks

True

True/False: The death benefit of a term-life insurance policy will equal the face value of the policy.

True

True/False: There is an inverse relationship between current interest rates an the fair market value of bonds

True

True/False: Vintage games, coins, and stamps can be categorized as collectibles

True

True/False: You should shred documents with sensitive information on the about you when disposing of them

True

Your financial goals should incorporate __________and ___________ to accumulate wealth

savings/ investments

The risk matrix assesses the _________ and the ________ of a risk event occurring

severity/ probability

Eric just sent you a text stating that he thinks a particular stock will grow to astronomical heights. It is currently selling at 25 a share. Eric stresses that you do not want to miss out on this opportunity. He listened to a Youtube ad the other day that confirms his assumptions about the company. Company XYZ has 12.5 million shares in the marketplace. How would you to categorize the capitalization of this company?

small capitalization

A _________ is an organized market where buyer and seller conduct stock transactions

stock exchange

Which type of risk best represents the pandemic?

systematic risk

A ____________ fund is a special type of assets allocation fund managed based on a individual's expected year of retirement

target date

nominal return

the return on an investment before the impacts of inflation and taxes are taken into account

coinsurance

the sharing of expenses by the policyholder and the insurance company

This subset of risk represents how wildly returns fluctuate over time

volatility

pawnshops

where people can buy/sell collectables and other property for cash

The average health care cost for an individual's in their twenties as well as leading the cause of bankruptcy

• About 25% of young adults visit the emergency room every year. • Almost 50% of young adults will visit a doctor one to three times in a year. • Around 10% will have more than 10 visits to a doctor or hospital during the year. -Hospital stay- 10,000 -ER visit- 2,000 -Dr. visit- 200 -Prescription drugs- 100

The FBI's recommendations for protecting yourself against identity theft

•Never throw away ATM receipts, credit statements, credit cards, or bank statements; always shred or destroy these documents. •Never (ever) give your credit card number over the telephone unless you made the call. •Never (ever) respond to a phishing scheme—an unsolicited e-mail asking you to provide personal information. •Always reconcile your bank accounts monthly and report any problems to your bank or creditor immediately. •Keep a list of all your credit cards, debit cards, and each account's contact information somewhere secure, such as a safe deposit box. •Obtain a copy of your credit report annually and report anything unusual right away.

What types of plans are available to health insurance seekers in the market place?

•Platinum: low out-of-pocket maximum amounts, high monthly premiums •Bronze: low monthly premiums, high out-of-pocket limits •Silver and Gold: in-between Bronze and Platinum for premiums out-of-pocket limits •Catastrophic: available with very high deductibles, but low monthly premiums for people younger than age 30

Identify investing alternatives

1) collectables 2) auctions 3) pawnshops

Regional funds

investing in specific areas (ex: Europe, Asia)

Country funds

investing in specific countries (ex: China)

A company you are considering investing in has a dividend of 0.60 per share. If you have a required rate of return of 12% and the dividend is expected to grow at 3% per year, the discounted dividend valuation model would value the stock at

$6.87

full service brokerage firm

(broker dealers) match you with a broker that provides advice in investments

riders insurane

(personal property floater) way to add extra coverage to your policy for anything with a value greater than $2,500

Stop Order

(stop loss order) to buy/sell when price fall below set point

rental insurance

(tenants insurance) similar to an HO policy except it is designed to provide property replacement and liability coverage rather than insurance to replace your residence. •Renter's insurance is inexpensive and is well worth its cost. •Policies cost between $150 and $300 per year for $25,000 of coverage. You might be able to get a policy for less if you buy the insurance from the company that sold you auto coverage, as you may qualify for a multi-policy discount

Differentiate between the different types of health insurance plans (pros/cons)

1) Preferred Provider organization (PPO) 2) Health maintenance organization (HMO) 3) Hybrid 4) Consumer driven plan

Be prepared to calculate the real rate of return on an investment

-[(1+ nominal return)/(1+ inflation rate)] -1

Know what factors increase personal automobile policy coverage

-being male -being younger than 25 -living in a city -owning a luxury car -using your car for commuting to school/work

Know what factors decrease personal automobile policy coverage

-good driving record -high credit score -taking a defensive driving course -purchasing PAP with same comapny that insures your home and other assets -being a good student

Be prepared to calculate disability annual premiums based on risk factors

-if healthy and low risk, multi insurance needs by 1% -if unhealthy and low risk, multi insurance needs by 2% - if healthy and high risk, multi insurance needs by 3% - if unhealthy and high risk, multi insurance needs by 4%

The liquidity risks of treasury notes

-maturity date of 1-10 years -semi annual coupon payments

The liquidity risks of treasury bonds

-maturity date of 10-30 years -semi annual coupon payments

The liquidity risks of treasury bills

-maturity date of less than 1 year -do not have coupon payments -discount from face value -zero coupon bonds- (holder does not receive interest directly)

An accredited investor is someone who as a net worth of _______ million

1

The stock prices of two companies that move perfectly together are considered to have a correlation of ________

1

Know the risks associated with international investments

1) Currency Exchange rates 2) Different market options 3) High trading costs 4) less regulatory oversight 5) Country risk

The types of international investments that can be made

1) Global funds 2) International funds 3) Regional funds 4) Country funds

Differentiate between the different types of market orders

1) Market order 2) Limit order 3) Stop order

The different types of Fraud

1) Ponzi schemes 2) Pyramid schemes 3) Telemarketing fraud

An _______ is a marketing expense passed on to shareholders by mutual funds

12b-1

The probability of a disability is _________ and ________ for death for individuals who are 55 years of age

13.30%/ 5.60%

Eric, a good friend of yours, is excited that one of his favorite companies reported gross earning of 20,000,000 this past quarter. The company had net profits of 5,000,000. Eric and Wall street are excited about this company's prospects. The company currently has 1 million shares outstanding. What is the company's earnings per share (EPS)?

15

There are _______ ways to make money owning stock

2

Short-term liability covers a portion of a person's income for _________

3 to 6 months

If I am unhealthy and working in a high risk environment, I should expect to multiply my insurance needs by what percent of my income?

4%

Based on a 2013 study looking at death and disability probabilities, the chance of a 20 year old female dying is

4.40%

The national association of insurance found that only ________ of US workers have any form of disability insurance coverage

44%

Eric's minimum expenses each month are $2,000; however he spends close to $3,500 a month to afford his life style. Eric has $10,000 in the bank. What is Eric's emergency fund ratio

5

Which tax advantaged college savings plans is a common ways for families to save for college costs?

529 plan

What percentage of US bankruptcy filings are due to medical debt?

65%

Hybrid plan

A popular hybrid plan, combining elements of fee-for-service and managed care, is called a point of service (POS) plan. •These will have lower out-of-pocket expenses if you use the services of network providers. To go outside the network, you must first receive a referral from a network provider to receive coverage

deductible

Amount you must pay before you begin receiving any benefits from your insurance company

traditional IRA

An IRA for which you can deduct your contribution each year from your taxable income

Eric wants to fund the best rates on the Money Market accounts. Which of the following entities can help Eric with his search?

Bankrate

Be prepared to calculate an individual's life insurance policy needs (multiplier calculation)

Current income multiplied by 10 and decreased by any current insurance

Know the potential for loss averages based on the amount of time an investment is held

Daily: P-54, N46 Quarterly: P-68, N-32 One Year: P-74, N-26 5 Years: P-86, N-14 10 Years: P-94, N-6 20 Years: P-100, N-0

Differentiate between an EE and Series I savings bond

EE: fixed interest rate I: variable interest rate

Know the difference between FDIC and SIPC insurance

FDIC: protects bank accounts SIPC: protects investments

Which economic measures are used to measure economic growth and inflation?

Gross domestic product and consumer pricing index

Which healthcare plan is associated with a health savings plan account?

High deductible plan

Which healthcare plan is the least expensive?

High deductible plan

Which medical scenario is most costly to households without insurance?

Hospital stay

The __________ process occurs when a company makes the choice to go from being privately held to being publicly traded

IPO

This type of order tells the brokerage firm to only buy/sell at a specific price or better

Limit order

Blakely and Marty have been dating for 3 years. Marty is interested in going skydiving. When discussing the activity. Marty tells Blakely that they will be in a secure plane and the the parachutes have been hand-packed and checked by three people. Blakely is not having it. The idea of flying alone causes Blakely some anxiety. In the end, Blakely decides not to jump. What would best describe Blakely's risk tolerance?

Low

Bonds are rated based on their ability to pay their debts. Which company provides rating information to consumers?

Moody's

The _________ style box provides a visual representation of investment styles

Morningstar

Understand the commonalities of differences between a mutual fund and an ETF

Mutual fund: -can only buy/sell at end of trading day -only sell back to original company ETF: -can buy/sell throughout trade day -almost always lower fees

Differentiate between nominal return and the real rate of return

N: interest rates + rate of returns (earn) R: inflation- adjusted rate of return

Differentiate between peril and hazard home insurance coverage

Peril: cause of a loss Hazard: increases probability of a loss

Differentiate between a Traditional IRA and a Roth IRA

Roth: -pretax basis -tax deferred basis -qualifying distribution Traditional: -after tax basis -income tax reduction

Conceptually understand disability coverage - short and long-term

ST- 3-6 months LT- 6-12 months

Two of the most commonly known bond rating agencies are ________ and _______

Standard and Poor's/ Moody's

True/False: As the price of a product rises, given that it is not an inelastic good, the demand for the product decreases

True

True/False: Being a good student may decrease your personal automobile policy insurance premiums

True

SIPC insurance

The SIPC insures investors against losses arising from the failure of the brokerage firm.

Consumer-driven plan

The most popular consumer-driven plan is called a high deductible health plan (HDHP) and is designed to reduce premiums by providing an incentive to the insured to pay more upfront medical expense out of pocket. •Although premiums are much lower than fee-for-service plans, out-of-pocket expenses will always be much higher. •These have higher minimum annual deductibles: $1,350 in 2018 for an individual and $2,700 in 2018 for a family. •The annual out-of-pocket amount (including deductibles and copayments) cannot exceed $6,650 (individually) or $13,300 (family) in 2018.

Know the different split limit coverages and what they mean

The state of Georgia split limit requirements are 25/50/25 ($25,000/$50,000/$25,000). •$25,000 is the maximum the insurance company will pay in medical expenses for someone other than you or your family if you cause an accident. •$50,000 is the maximum the company will pay for all medical expenses for others involved in the accident. •$25,000 is the maximum the company will pay to repair someone else's property that you damage.

What do insurance companies do with premiums they receive from the insured?

They invest that money in real estate, bonds, and stocks

True/False: Exchange traded funds (ETFs) usually have lower fees than mutual funds

True

True/False: Identity theft was not considered a crime until 1988

True

Which IRA account allows you to invest in a tax advantaged investment vehicle with after tax dollars?

Traditional IRA

Which of the following bonds matures in 30 years after its purchase?

Treasury bond

True/False: An individual investor can invest in real estate without having to take on debt and become a landlord through a real estate investment trust

True

True/False: An individual mutual fund investor has no control over capital gain distributions

True

Know the difference between a UGMA and a UTMA

UGMA: for bank accounts, investments, and insurance policies UTMA: for property or real estate

UGMA

Uniform Gifts to Minors Act. Legislation that provides a tax-effective manner of transferring property to minors without the complications of trusts or guardianship restrictions. -for bank accounts, investments, and insurance policies

UTMA

Uniform Transfers to Minors Act. A law similar to the Uniform Gifts to Minors Act (UGMA) that extends the definition of gifts to include real estate, paintings, royalties, and patents.

Gross domestic product (GPD) is__________

a measure of how an economy is growing

I series

savings bond with variable interest rate -semiannually on inflation -inflation based on Consumer Price Index

Market Order

instructs brokerage firm to buy/sell at current ask/bid price -fastest way to transact trades

sales load

a fee charged when you invest in the mutual fund -one time commission paid to invest in salesperson when mutual fund is purchased/sold

Ponzi Schemes

a fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather from any actual profit earned -promises investors low risk and high rate of return of interest and dividends -Bernie Madoff --only falls apart either when no new investors are found or people demand all of their investment

Preferred Provider organization (PPO)

a popular fee-for-service plan - the most flexible and costly insurance. •Allows the insured to use the services of different hospitals, clinics, and doctors without prior permission. •Offers reduced deductibles, copayment, and coinsurance to visit a medical provider who belongs to an insurance network.

Health maintenance organization (HMO)

a popular form of managed care. •Provides medical care through a network of physicians and hospitals located in a specified geographic area. •Charges relatively small copayments per visit. •Intended to coordinate healthcare services in a way that prevents, rather than treats, illness.

hazard

a situation that increases the probability of a peril occurring. -ex: Living in coastal areas in the southeastern U.S

copayment

a small fixed fee paid by the patient at the time of an office visit

HSA

a tax-advantaged savings account that can be set up to pay for out-of-pocket eligible healthcare expenses. •Can be used anytime to pay medical expenses tax-free •Money can remain in the account and grow tax-deferred •You may contribute a limited amount each year •Deductibles, copays, and prescriptions can be paid using the funds •You may establish an HSA if your only health insurance coverage is through a high-deductible health plan

This type of fund manager seeks to deliver value to his client by crafting investment portfolios designed to beat the stock market

active fund manager

variable life insurance

allows you to invest in mutual funds with your savings.

self-directed brokerage account

allows you to make your own investment decisions -ex: Charles Schwab, Fidelity, TD, Ameritrade, E Trade -online brokerage firms, discount brokers

FSA

allows you to put money aside on a pretax basis each year. Unlike an HSA, you must use your yearly contributions within the plan year. Allowed expenses are: •Medical and dental for yourself, spouse, and dependents •Deductibles and copayments (not insurance premiums) •Prescription medications •Insulin reimbursements without a prescription •Medical equipment, such as crutches, bandages, and diagnostic devices •Prescription eyeglasses and contact lenses

Identify the types of professional marks that signify a financial planner is a fiduciary

always places interests of clients first when providing advice -fee only advisor -people who hold Certified financial planner credentials

12b-1 fee

an annual fee that's supposed to be used to offset the promotion and selling expenses -annual fund marketing expense that is passed onto shareholders in mutual fund

Pyramid Schemes

an illicit business model where profits are based on the investor's ability to recruit other individuals who are enrolled to make payments to their recruiters. Generally, neither a product or service is delivered. -promises high commissions or sizable share of money paid by new members

Comprehensive insurance

an optional coverage that helps pay for damage to your vehicle caused by a non accident event such as: •Hail storms •Broken windshields •Vandalism

telemarketing fraud

any scheme, including cramming and slamming, using the telephone to commit a fraudulent act -product/service misrepresented in unsolicited phone call, email, or text message

peril

anything that causes you to experience a loss -ex: hurricane

collectables

assets that includes jewelry, art, stamps, coins, cards, teddy bears, vintage games, antiques -"hard assets"

When an individual considers the consequences of certain actions, he or she can ________ their risk

avoid, transfer, and/or manage

Gap coverage

insures you for the "gap" between what you owe on your car and what the car is worth. •When an insurance company considers your car "totaled," you only get paid the current market value, not what you owe. Gap insurance covers the difference.

What are the types of international investments?

international, regional, country, and global funds

In order to invest, a person must first setup a ________ account

brokerage

Eric, a good friend of yours, invested his life savings in Quibi. Quibi, a short-form video streaming platform, closed its business 6 months after going public. What type of risk did your friend, Eric, expose himself to?

business risk

variable universal life insurance

combines the best of variable and universal policies.

What kind of investment is considered a high risk?

commodities

The federal reserve utilizes this measure to determine if inflation is occuring

consumer pricing index

Global funds

investing in foreign companies and US firms

What is not an example of financial fraud?

debt collections

Be prepared to calculate out of pocket expenses based on insurance policy premiums, deductibles, copays and coinsurance

deductible + copay + portion of coinsurance provision

The inability to perform a task that you were able to perform before an accident or illness is characterized as an __________

disability

Robinhood, Fidelity, and E Trade are ______ brokers

discount

whole life insurance

earn a fixed guaranteed rate of return.

This is the type of financial advisor does not collect commission and only receives payment for the services rendered

fee-only advisor

fee only based fee

financial advisor charges client directly for services and receives no commission

commission based fee

financial advisor receives some of all of compensation from commissions generated when client buys/sells from product

Which investment feature is typically associated with exchange traded funds but not mutual funds?

funds can be traded throughout the day

When investing, ________________

greater financial risks are associated with higher expected returns

Which of the following options represents the most costly emergency fund related expense?

hospital stays

umbrella insurance

increases coverage to 300,000 in amount of at least one million

International funds

investing in only outside of US

Early during the pandemic, Annie tried to sell her home. Unfortunately, she was unable to do so because buyers were concerned about the economy. Annie's inablility to sell her home due to a weak market is considered an ______________

liquidity risk

Your sister wants to make a lot of money, but she does not want to take any financial risk. She believes that parking her money in a savings account at her bank is a great investment strategy. Your sister is assuming _____________ liquidity risk and ____________ returns by keeping her money in the bank

low/ low

The 50 in a 50/100/25 split limit refers to the maximum amount the policy will pay in:

medical coverage for one person in the other car

When figuring out your emergency fund, you need to calculate the __________ amount your need each month to survive a financial emergency

minimum

Be prepared to calculate an emergency fund ratio

monetary assets/ monthly living expenses

Investment risk is reduced when a collection of investments are __________

not highly correlated with one another

Cash value life insurance

one that blends pure term insurance with a savings option. •The cash value grows on a tax-deferred basis. •You may borrow from the account without a credit check. •More expensive than term policies. •If you cancel the policy before death, you may pay a substantial penalty on any cash taken from the account. 1) whole life insurance 2) universal life insurance 3) variable life insurance 4) variable universal life insurance

Limit Order

only to buy/sell at specific price or better

A company's investors, through __________, appoint managers of the company.

open elections

When a person is considering the benefits of two options, he or she is weighing the ___________ cost of their decision

opportunity

To protect individuals from potential catastrophic financial outcomes, the total amount of deductibles and coinsurance a person must pay is typically capped. This cap is referred to as an ___________

out of pocket maximum

___________ funds are also known as index funds

passively managed mutual funds

universal life insurance

pays a higher return than whole life insurance on the cash value portion of your policy.

Collision insurance

pays for your car's repairs: •Insures you, your family, passengers, and others who drive your car with permission. •If claimed, you will receive the actual cash value of the repair or value of the car minus the deductible.

Uninsured/underinsured motorist coverage

pays medical and property damage expenses above what someone else's policy pays. •If someone drives without automobile insurance and causes you to be in an accident, you will then be responsible for paying your own expenses.

The following scheme involves an unsolicited email asking you to provide personal information such as birth date, social security number, and banking information

phising

A __________ scheme promises investors low risk and high rates of return on their investments. The scheme holds as long as money paid out to investors is funded by new investors

ponzi

Which health insurance plan usually has the highest monthly premium?

preferred provider organizaiton

Angel investors and venture capitalist purchase equity stakes in companies on the _________ market

primary

Roth IRA

private retirement plan that taxes income before it is saved, but which does not tax interest on that income when funds are used upon retirement

Term life insurance

provides a death benefit if the insured person dies before a predetermined age. •The death benefit will equal the face value of the policy (the dollar amount of insurance selected) to be paid to the beneficiary upon the insured's death. •The beneficiary only gets paid if the insured dies within the "term" of the policy. •Term insurance tends to be inexpensive. •With age, the cost of term insurance increases.

Conceptually understand the benefits and purpose of a REIT

provides way to add real estate to investment portfolio at a low cost -similar to mutual fund in pulling money together from several people •Borrow additional money from banks to maximize the number of properties •Solve the real estate investment dilemma - allows those with limited capital the chance to own real estate without having to take on debt or become a landlord •Pay their investors dividends

auctions

public sales in which property is sold to the person who offers the most money for it

An emergency fund is used to cover _________ risk

pure

real rate of return

return on an investment after subtracting the effects of inflation and income taxes

What kinds of investment is considered a low risk?

savings accounts, individual stocks, and mutual funds

EE series

savings bond with fixed interest up to 30 years