Personal Finance Exam #3

You want to have $5 million in your retirement account at the end of your 45-year working career. Your account will earn an average rate of return of 7% annually. You currently have $0 invested for retirement. How much will you need to invest each MONTH to reach your retirement goal? Use Beginning of Period PMTs.

$1,310.71

For a home equity loan (or line of credit), what is the maximum that most lenders will allow you to borrow?

80-85% of the equity you have in your house

The main thing(s) that Doc White wants you to know about retirement planning is/are:

All of the above are good things to know!

Investing isn't really as complicated as most people think. The key is to understand your goals, know your time frame, understand your risk tolerance, and ask for help from qualified advisers as needed.

True

Another name for a single-payment loan is a(n):

balloon loan

Which of the following is NOT a form of open credit?

consumer loan

Through student loan ________, interest continues to accrue but you do not have to make payments.

forbearance

Federal student loans that are subsidized mean that the student does not have to:

pay loan interest while still in school

Filing for bankruptcy does not eliminate:

student loan debt

Payday loans are a predatory lending practice that commonly have APRs:

that are several hundred percent

Jana's home was recently appraised for $315,000 and she currently owes $161,000 on her mortgage. How much can Jana borrow using a home equity loan if the bank indicated they would loan up to 80% of the value of her equity?

$123,200

Jeremy (age 21) is a student (and US taxpayer) who works part-time during school breaks. In 2020 he earned $3,000 from all of his jobs. His parents gave him $6,000 as a gift in 2020. Jeremy wants to start investing for his retirement after listening to some old bald guy talk about the importance of starting to invest for retirement as early in life as possible. What is the maximum that Jeremy can invest in his Roth IRA for tax year 2020?

$3,000

Inflation will drive up the cost of living for you young folks. That means you will need to accumulate a lot of money in your retirement accounts by the time you retire. Approximately how much money will you need to have in your retirement account the day you retire (according to old Doc White)?

$3-5 million dollars

Terrel is considering buying a car for $20,500 that he can finance for 5 years at 6%. How much will Terrel's monthly payment be if he buys the car?

$396.32

D'von works for a company that matches his 401(k) retirement contributions at a rate of "0.50 per $1" of his contributions, up to 6% of his salary. D'von earns $60,000/year. Using Doc White's advice, what is the minimum amount of salary that D'von should contribute to his 401(k) plan each year?

$7,200

JJ has a Payday loan for $500. The Payday loan company is charging JJ 12% interest for a 1-month loan. JJ thinks he's getting a great deal - only 12%! What is the true APR of this payday loan? (Remember, APR = ANNUAL Percentage Rate)

144% (12% x 12 months/year)

A _________ is a tax-advantaged savings plan that encourages saving for future college costs.

529 plan

Which of these is a leading cause of bankruptcy?

A major illness

The interest rate that factors in true cost of a loan including most of the up-front fees is called the:

APR

__________ are loans that have an interest rate that is tied to some market rate of interest such as T-bill rates

Adjustable-interest-rate loans

The last day that you can make a Roth IRA contribution for tax year 2020 is:

April 15, 2021

The two main ways to earn money by investing in corporate stocks are:

Capital gains and dividends (cash or stock)

The type of bankruptcy that is known as a wage earner's plan is:

Chapter 13

You are having trouble making your credit card payments on time. Which of the following is a good is a good resource for helping you manage your credit card debt by negotiating lower interest rates or reduced payments?

Consumer Credit Counseling Service (CCCS)

Which of the following sources of consumer loans typically offers the lowest interest rates (APR) on consumer loans?

Credit Union

One of the easiest and most powerful investment strategies that ANYONE can use and EVERYONE should use involves investing the same dollar amount in your investment (ex. mutual fund) each period. The official name of this strategy is:

Dollar Cost Averaging

True or False. You cannot make contributions to your 401(k) plan and your Roth or traditional IRA in the same tax year

False

True or False. You should try to keep your investment in precious metals (gold, silver) greater than 10% of your investment portfolio.

False

You've just graduated and take a job with Al-Mart. Your benefits package includes a 401(k). You have no idea how to invest your funds in the 401(k), so you decide to use the "default investment". Which of the following mutual funds is most likely to the default investment for a 21-year old college graduate?

Fidelity 2060 Lifecycle Allocation fund

Which of the following works in a very similar manner to a credit card in that it has a stated credit limit and a flexible repayment plan?

Home Equity Line of Credit (HELOC)

As an investment category, bonds tend to be less risky than stocks. What are the two (2) primary ways to make money by investing in bonds?

Interest Income and Capital Gains (selling them at a price higher than you purchased them)

Dr.Keown gave you great advice about investing in mutual funds. What was his key point?

Invest in mutual funds that have low expense ratios

When we talked about asset allocation for your retirement investments Doc threw out some generally accepted guidelines on what percent of your funds should be invested in international funds, real estate funds, and precious metals. Which of the following reflects Doc's guidelines?

Maximum of 10% international. 10% real estate, and 3% precious metals

Which of the following is a great resource for doing research on individual stocks or mutual funds?

Morningstar.com

You can easily diversify your investment portfolio by investing in which of the following assets?

Passively-managed stock and bond index mutual funds

What is Doc White's opinion on Payday Loans?

Payday loans are "legalized robbery" because they prey on low-income families

According to good old Doc White, what should you do as soon as you possibly can when you get a job?

Start participating in your company's 401(k) plan as soon as you are eligible

You are about to sign a loan to buy your first car. As you are reading the loan contract (as Uncle Al strongly recommends) you see the phrase, "all interest is calculated using a discount interest rate of 8%." What does this phrase mean to you?

You should run away, screaming "no, no, I'll never take out a discount interest loan!"

A(n) _________ clause states that the entire loan is due in full if you miss a payment.

acceleration

Income-based repayment plans set payments on a percentage of your discretionary income:

and not the amount owed

Your employer said that you have a 5-year graduated vesting plan for your employer's retirement plan. This means that if you leave your job after 3 years you will:

be able to take 60% of your employer's contribution and the earnings on those contributions with you to your new employer's retirement plan (or a rollover IRA)

If you find that you are having difficulty paying your bills your first step should be to:

contact your creditors and try to work out a different payment plan

The percentage of your take-home pay that is consumed by nonmortgage debt such as car payments and student loans is called your:

debt limit ratio

Employers who offer pension plans to their employees have a choice of 2 main types of pensions. One of these retirement plans involves the employer making a contribution each pay period into the employee's retirement account. The employee must decide how to invest the funds in this account. When the employee retires, the funds in this account represent the money he/she will have to meet his/her retirement living needs. This type of plan is called a:

defined contribution plan

Collateralized loans, or secured loans, will _________ interest rate relative to unsecured loans.

have a lower

A secured loan that uses the accumulated equity in your home as collateral is known as a:

home equity loan

Doc White's sure-fire rule for determining that you have too much risk in your investment portfolio says:

if you are waking up at night worrying about your stocks, you have too much risk

When you properly diversify your investments, you can expect:

less risk but probably lower returns

When choosing your investments you should always try to:

match the goal/purpose of that investment to your investing goal

Your employer said that you have a 3-year cliff vesting plan for your employer's retirement plan. This means that if you have your job after 2 years you will:

not be entitled to any of the employer's funds in your retirement plan

Rafael borrowed money using a home equity loan with an interest rate of 6.5%. What is the after-tax cost of this loan if he is in a 28% marginal tax bracket?

4.68%

Old Doc White gave you his advice for choosing the best loan for you. In general, when you have the choice of a 3-year loan or a 5-year loan, which loan does Doc recommend that you take?

5-year loan because the lower monthly payments are easier to make in bad financial times

Lashwana borrowed $5,000 for one year using a discount method single-payment loan with a state interest rate of 5%. What is the APR of her loan?

5.26%

Which of the following investment portfolios is not an example of proper (or good) diversification?

50 shares of Ford stock, 50 shares of General Motors stock, 50 shares of Toyota stock

Ashkan is 30 years old and he has a relatively low tolerance for risk in his investments. That is, he doesn't like to see his investments fluctuate wildly in value from week to week; he wants to earn a relatively consistent return from year to year. Using Doc White's advice (as in his "asset allocation flowchart"), which of the following asset allocations would you recommend for Ashkan's retirement plan?

60% stocks, 40% bonds

You've just graduated and taken a job with Al-Mart. Your benefits package includes a 401(k). You have no idea how to invest your funds in the 401(k), so you decide to use the "default investment." Which of the following mutual funds is most likely to be the default investment for a 22-year old college graduate?

A 2060 Lifecycle Allocation fund

The standard repayment period for student loans is 10 years. However, there are a lot of other options available to most students. Which of the following is a true statement about student loan repayment?

All of the above are true statements about student loans: - you need to participate in the Pay As You Earn plan or the income-based repayment plans to qualify for the Public Loan Forgiveness Plan - You must have some of your "grace period" remaining to qualify for the student loan consolidation program - the income-based repayment plans require to you have "financial hardship" to qualify, but they allow you to stretch your payments over a longer time period (over 20 years) - Graduated payments allow you to make lower payments when you first graduate but the amount of the payments will increase every 2 years over a 10-year period

Which of the following is a good reason to consolidate your student loans student loans before your grace period expires?

All of the above: - It can give you a lower monthly payment (due to a longer payback period) than you would have under the standard 10-year payback period - It allows you to stretch your repayment period from 10 years up to 20-25 years - It allows you to write one check/month instead of several checks for all of your individual student loans

Ernie is facing very hard financial times. He lost his job 8 months ago and he has not been able to make his monthly loan payments until now. He recently got a new job, but his lenders are demanding that he repay his loans. Ernie wants to repay all of his loans, but he doesn't have enough money to do so. He thinks that he will be able to repay his loans over a 3-year period, if his lenders will be patient with him. Which form of federal bankruptcy is best for Ernie?

Chapter 13 Wage-earner bankruptcy

Old Doc White advised you to do your homework before applying for a consumer loan. Which of the following is his main piece of advice on preparing to get a consumer loan?

Check your credit history at least 3-6 months before applying for the loan

Annmarie's financial planner asked her if she wanted to invest in Class A, Class B, or Class C shares of her mutual funds. Which class of shares has the highest annual operating expenses, but has no "front-load" or "back-load" fees?

Class C

You have $5,000 that you want to invest, but you're not sure how to invest these funds. Which of the following is NOT one of the three main questions that Doc White (or any good financial planner) will ask you before helping you figure out what investments are best for you?

Do you want to minimize your income taxes?

You have $5,000 that you want to invest, but you're not sure how to invest these funds. Which of the following is NOT one of the three main questions that Uncle Al (or any good financial planner) will ask you before helping you figure out what investments are best for you?

Do you want your investments to maximize your annual income taxes?

How would you recommend that Ragnar (age 25) allocate his retirement investments in his 401(k) to match his risk tolerance, age, and retirement goal?

Fixed Income Assets (Bonds, bond mutual funds) = 25% International Investments = 10% Real Estate (REITS, rental properties) = 10% US Stock Market = 50% Precious Metals = 3%

The grossed-sounding piece of investment advice that Doc White has given you this semester is, "take advantage of DRIPs." How does a DRIP impact your investments?

It provides you with stock dividends in place of cash dividends

Aretha owns a 10-year corporate bond from Disney. It has a coupon rate (interest rate) of 6% APY. Interstate rates in the US are starting to decrease due to fears about the economy. What should happen to the value (price) of Aretha's bond?

It should increase as interest rates decrease

Stock prices tend to be much more variable than bond prices, but not all stocks are risky. Which of the following stocks (as classified by the Morningstar Box) will be the least risky to own?

Large Cap Value

What distinguishes a secured loan from an unsecured loan?

Lenders try to reduce they risk they face by requiring some type of collateral for a secured loan, whereas the lender has no collateral on an unsecured loan

The concept of "Power Payments" will help you repay your loans faster and reduce your total interest payments. Consider a situation where you have 3 loans: Loan A has a loan payment of $500/month and an interest rate of 5% APR; Loan B has a payment of $200/month and an interest rate of 3% APR; Loan C is a credit card with a payment of $300/month and interest rate of 18% APR. If you have an extra $100/month that you can pay towards your loans, to which loan would you first apply the extra $100/month payment so that you would save yourself the most interest?

Loan C

When you apply for a consumer loan (auto loan) you need to be prepared to meet with the lender. Ideally, which of the following items should you be able to provide to the lender to prove that you can repay the loan?

Proof of income (pay stubs), a balance sheet, and a monthly budget

Which of the following is a major benefit of investing in a Roth 401(k) account with your employer? (Note: Roth = post-tax, Traditional = pre-tax)

The earnings of the account are tax-free when you withdraw them after age 59 1/2

There are two (2) main types of IRAs: Traditional and Roth. Why does Doc White recommend that you invest in a Roth IRA at your age (age 20-35)?

The earnings on the Roth IRA will be tax free when you withdraw them during your retirement years, giving you roughly 40 years of tax-free growth

You want to get a variable rate loan that has an interest rate of "5% 2/7". Which of the following is true?

The highest the interest rate can be over the life of the loan is 12% APR

True or False. Doc White says that your age should be a good estimate of what percentage of your retirement investments you should have in "fixed income investments", such as bonds, CDs, and bond mutual funds instead of individual bonds so that they get better diversification and higher earnings.

True

True or False. Most of you young folks (including Doc White) should NOT plan on getting any retirement funds from Social Security when you retire. You should plan on funding your retirement through your employer's retirement plan, 401(k)-type plans, and individual retirement accounts (IRAs).

True

True or false. If you are uncertain about how you should invest the money in your retirement account, you should ALWAYS ask for help from someone who is qualified to help you. Do NOT rely on your HR (Human Resources) department for advice on how to invest your money.

True

There are 2 main types of student loans - subsidized and unsubsidized. What is the primary difference between subsidized and unsubsidized student loans?

You don't have to make interest payments on subsidized loans while you are at least a half-time student; if you don't make interest payments on your unsubsidized loans while you are in school the total interest that you incur will be added to the amount of your student loans once you graduate.

You can increase the probability of getting accepted for a new loan if you are willing to make a large down payment. Which of the following statements is the most correct?

You should NOT deplete your emergency savings when you make a down payment

Installment loans require periodic payments of principal and interest at equal intervals and are commonly used to finace:

large purchases such as cars and boats

The interest rate that banks charge their most creditworthy customers for loans is known as the:

prime rate

Doc White has preached about changing the percentage of stocks and bonds in your retirement account as you get older. You know, using that old "100 - Your Age" Rule as you get older. This strategy is called:

reallocating your portfolio

The "Price/Earnings" ratio is a common measure of whether the overall stock market is "undervalued" or "overvalued". The average Price/Earnings ratio tends to be in the 15-20 range historically. If the current Price/Earnings ratio is 5 you would say that the overall stock market is:

undervalued - for some reason stocks are trading for prices below average; now may be a good time to purchase stocks while they are "on sale"