Personal Finance: chapter 1

What is Inflation?

A rise in the general level of prices.

Common risks to consider include all of the following except: A. Character risk B. Interest rate risk C. Inflation risk D. Personal risk E. Liquidity risk

A. Character risk

What are Opportunity costs

What a person gives up by making a choice. Opportunity costs should be viewed in terms of both personal and financial resources.

Paul is planning to deposit $5,000 today for a vacation he plans to take to Asia after he graduates from Grad School. Which formula should he use to determine the amount of money he will have available for his vacation? A. Present value of a single amount B. Future value of a single amount C. Simple interest D. Present value of an annuity E. Future value of an annuity Feedback

B. Future value of a single amount

Personal financial planning involves all of the following except: A. develop financial goals B. Open a credit line C. Determine your current financial situation D. Review and revise the financial plan E. Identify alternative courses of action

B. Open a credit line

If a $10,000 investment earns a 9% annual return, what should its value be after one year? A. $9000 B. $9100 C. $10900 D. $10090 E. $10000

C. $10900

If inflation is expected to be 8 percent, how long will it take for prices to double (hint: rule of 72)? A. 6 years B. 8 years C. 9 years D. 12 years E. 18 years

C. 9 years

The main goal of personal financial planning is: A. Saving and investing for future needs B. Reducing a person's tax liability. C. Achieving personal economic satisfaction. D. Spending to achieve financial objectives E. . Saving, spending, and borrowing based on current needs.

C. Achieving personal economic satisfaction.

Which of the following is correct about inflation? A. If inflation is 7%, and your rate of return in your savings account is 4%, you will experience an overall gain in buying power B. As inflation rates increase, interest rates offered to savers decreases C. Inflation does not affect interest rates for savings accounts D. In order to increase buying power, you need to earn a rate higher than the rate of inflation E. If you earn 5% and inflation is 10%, your buying power will increase

D. In order to increase buying power, you need to earn a rate higher than the rate of inflation

Higher prices are likely to result from: A. Lower demand by consumers B. Increased production by business. C. Lower interest rates. D. Increased spending by consumers without increased production. E. An increase in the supply of a product.

D. Increased spending by consumers without increased production.

All of the following are examples of a person's life situation except: A. Age B. Income C. Health D. Household Size E. Gas Prices

E. gas prices

What is rate of return?

Percentage increase in value of savings. Increases with frequency of compounding.

Opportunity costs examples

Personal: Time used for studying, working, or shopping will not be available for other uses. Health: poor eating habits, lack of sleep, or avoiding exercise can result in illness, time away from school or work, increased health care costs, and reduced financial security. Personal resources take just as much planning as financial resources. Financial: Time value of money - investing in today for tomorrow.

What is future value of money?

The amount to which current savings will increase based on a certain interest rate and a certain time period; also referred to as compounding.

What is CPI?

The consumer price index, computed and published by the Bureau of Labor Statics, is a measure of the average change in the prices urban consumers pay for a fixed "basket" of goods and services.

What is present value of money?

The current value for a future amount based on a certain interest rate and a certain time period; also referred to as discounting.

How do you calculate a return?

This rate of return was determined by dividing the interest earned ($5) by the amount in the savings account ($100). The yield on your savings will be greater than the stated interest rate.

Quiz: Which of the following is an example of opportunity cost? a. Renting an apartment near school b. Saving money instead of taking a vacation c. Organizing income tax records d. Purchasing automobile insurance e. Using a personal computer for financial planning

b. saving money instead of taking a vaction