Personal Finance Test #1
DeMarcus wants to retire with $1 million in savings by the time he turns 60. He is currently 18 years old. How much will he need to save each year, assuming he can get a 12% annual return on his investments?
$1,036.96
Margo is in the 39.6% marginal tax bracket. What is her tax liability on dividend income of $6,000?
$1,200
Angela earns $2,170 per month before taxes in her full-time job and $900 before taxes in her part-time job. About $650 per month is needed to pay taxes. What is Angela's disposable income?
$2, 420
Mia has $3,020 in assets, a finance company loan for $589, and an outstanding credit card balance of $180. Mia's monthly cash inflows are $1,658, and she has monthly expenses of $1,296. What is Mia's networth?
$2,251
Sandra wants to deposit $120 each year for her son. If she places her deposits in a savings account that pays 7% per year, what amount will be in the account in 15 years?
$3,015.48
How much will you have in 36 months if you invest $75 a month at 10% annual interest?
$3,133.64
Estimating Savings. Julia brings home $2,100 per month after taxes. Julia's rent is $483 per month, her utilities are $133 per month, and her car payment is $312 per month. Julia is currently paying $242 per month to her orthodontist for her braces. If Julia's groceries cost $59 per week and she estimates her other expenses to be $219 per month, how much will she have left each month to put toward savings to reach her financial goals?
$475
Luis wants to know how much he will have available to spend on his trip to Belize in three years if he deposits $4,400 today at an interest rate of 7%. If he deposits $4,400 today at an annual interest rate of 7 percent, the amount Luis will have available to spend on his trip to Belize in three years is:
$5,390.19
Stacey would like to have $1 million available to her at retirement. Her investments have an average annual return of 11%.If she makes contributions of $300 per month, will she reach her goal when she retires in 30 years?
$841,355.92 Yes
What is a balance sheet?
-A statement of your financial position at one point in time (like a picture/snapshot) -Equation: Assets = liabilities - net worth
What is unemployment?
-It is measured by Bureau of Labor Statistics (BLS) -occurs during a recession
What do financial statements and budgets do for you?
-Link future goals and plans with actual results -Provide direction, control and feedback
What does a budget do for you?
-a short term financial planning report that helps you achieve your short term and long term goals -monitor and control finances -allocate income to reach goals -implement system of disciplined spending -reduce needless spending -achieve long term financial goals
What if inflation?
-the general rising in the level of prices -good in some cases ex. property -measured by CPI (consumer price index)
What are the six steps in developing a financial plan?
1. Establish your financial goals. 2. Consider your current financial condition. 3. Identify and evaluate alternative plans that could achieve your goal. 4. Select and implement the best plan for achieving your goals. 5. Evaluate your financial plan 6. Revise your financial plan
In determining the future value of an annuity to be invested monthly over a four-year period, what number of periods should you use?
48 months
What is a forecast of cash inflows and cash outflows developed to determine whether your anticipated cash inflows are sufficient to meet your cash outflows?
A budget
What is the tax rate imposed on any additional (marginal) income earned?
A marginal tax bracket. A progressive tax system means the higher an individuals income, the higher there percentage of income tax paid.
What is an annuity?
A sum of money paid annually or at some other regular interval. A stream of payments
A money market deposit account (MMDA) similar tosimilar to a NOW account because: A. both require a minimum balance B. neither are offered by banks C. MMDAs have no limit on the number of checks that can be written during a month D. MMDAs pay a higher interest rate
A. both require a minimum balance
The difference between using a debit card and writing a check is: A. when you use your debit card the funds are immediately withdrawn from your account. In contrast, when you write a check it typically takes a few days for the funds to be withdrawn. B. when you use your debit card it typically takes a few days for the funds to be withdrawn. In contrast, when you write a check the funds are immediately withdrawn from your account. C. when you use your debit card the funds are immediately withdrawn from your account. In contrast, when you write a check it typically takes a few days for the funds to be withdrawn and you are charged a service fee.
A. when you use your debit card the funds are immediately withdrawn from your account. In contrast, when you write a check it typically takes a few days for the funds to be withdrawn.
You should reconcile your account balance: A. to find your errors. The sooner you discover the errors, the easier it will be to have the bank refund your money. B. to find a bank error. The sooner you discover the error, the easier it will be to have it corrected. C. to verify only your debit card transactions. D. to verify all transactions, including debit card transactions. E. to find a bank error. The sooner you discover the error, the harder it will be to have it corrected. F. to track your spending to determine exactly where you should live and work. G. to track your spending to determine exactly where you spend your money.
B, D, G
Which of the following money market investments is probably the least liquid? A. NOW account B. CDs C. Money market funds D. Checking account
B. CDs
NOW stands for: A. negotiable offered withdrawal. B. negotiable order of withdrawal. C. negotiable order waiting. D. new order waiting.
B. negotiable order of withdrawal.
Since assets that are liquid may: A. not have a high return, it is best to avoid these types of assets. B. not have a high return, it is best to invest in multiple money market investments with varying returns, liquidity, and maturities. C. not have a high return, it is best to consult a financial manager. D. have a high return, it is best to invest in these types of assets.
B. not have a high return, it is best to invest in multiple money market investments with varying returns, liquidity, and maturities.
Which of the following is true? A. T-bill returns are slightly lower than the return on a CD but T-bills are less liquid because no secondary market exists for T-bills but it does for CDs. B. T-bill returns are slightly higher than the return on a CD but T-bills are more liquid because a secondary market exists for T-bills but not for CDs. C. T-bill returns are slightly lower than the return on a CD but T-bills are more liquid because a secondary market exists for T-bills but not for CDs. D. T-bill returns are slightly higher than the return on a CD but T-bills are less liquid because no secondary market exists for T-bills but it does for CDs.
C. T-bill returns are slightly lower than the return on a CD but T-bills are more liquid because a secondary market exists for T-bills but not for CDs.
Money management: A. involves long-term investment. B. is a series of decisions you make over a long dash term period regarding cash inflows and outflows C. focuses on short dash term investments to achieve liquidity and adequate return D. is most efficient when done by professionals.
C. focuses on short dash term investments to achieve liquidity and adequate return
If an individual had a cash flow deficiency, they would preferably: A. borrow funds for the short term from a bank. B. borrow funds for the short term from a family member. C. keep enough cash in liquid investments to cover deficiencies. D. rely on credit cards to cover cash shortfalls.
C. keep enough cash in liquid investments to cover deficiencies.
Maintaining more liquidity is costly because: A. liquid assets tend to require a large investment of money in order to maintain them. B. liquid assets tend to offer relatively high returns. C. liquid assets tend to offer relatively low returns. D. liquid assets tend to require a large investment of time in order to maintain them.
C. liquid assets tend to offer relatively low returns.
Each person has a different tolerance for risk and we should: A.invest in assets that are much more risky our risk tolerance. B. only invest in liquid assets that are suited to our risk tolerance. C. only invest in assets that are suited to our risk tolerance. D. invest in assets that are slightly riskier our risk tolerance.
C. only invest in assets that are suited to our risk tolerance.
Two of factors that affect the return on short-term investments are: A. the prevailing market rate and the investor's wealth. B. the investor's debt level and the length of matuirty of the investment. C. the prevailing risk-free rate and the investor's risk tolerance. D. the investor's wealth and the length of maturity of the investment.
C. the prevailing risk-free rate and the investor's risk tolerance.
The values of assets decline during a weak economy because:
Consumer demand is LOW under these conditions and this tends to result in LOWER prices. For example, the demand for homes DECLINES when demand is LOW, causing sellers of homes to REDUCE their prices in order to entice potential buyers.
You have $3,000 that you may need any day to replace the furnace in your house. Which of the following would be the best place to put the $3,000? A. A common stock mutual fund earning 9% B. Shares of stock in a high-tech company that could double in 6 months C. A one-year CD earning 4% D. A savings account earning 2%
D. A savings account earning 2%
NOW accounts: A. are the same as a savings account. B. are less liquid than a regular savings account are less liquid than a regular savings account. C. do not require a minimum balance do not require a minimum balance. D. require a minimum balance
D. require a minimum balance
What are money market mutual funds?
Higher rate of returns because money is invested into very short term investments with low risk
What is liquidity?
How easy it is to turn an item into cash without losing any money
What is the Rule of 72?
If you take 72 and divide it by the interest rate, that is approximately how long it will take your money to double. -Doesn't work with annuities
What does the IRS stand for?
Internal Revenue Service, a branch of the U.S. Treasury Department
Ryan and Nicole have the following assets: Fair Market Value Home $85,000 Cars $22,000 Furniture $14,000 Stocks $10,000 Savings account $5,000 Checking account $1,200 Bonds $15,000 Cash $150 Mutual funds $7,000 Land $19,000 What is the value of their liquid assets? What is the value of their household assets? What is the value of their investments?
Liquid assets: $6,350 Household assets: $121,000 Investments: $51,000
What can cause you to make impulse purchases and spend beyond your means. This in turn impacts your ability to save and invest for future needs.
Peer pressure
What is a tax deduction?
Reduces the income you pay tax on
What is a tax credit?
Reduces the taxes that you owe. This is better than a tax deduction.
What is included in an income statement?
Revenues, expenses, surplus/deficiency
Casey has $2,000 to invest in a certificate of deposit. Her local bank offers her 4.33% on a 12-month FDIC-insured CD. A nonfinancial institution offers her 5.62% on a 12-month CD. What is the risk premium? What else must Casey consider in choosing between the two CDs? Casey must also consider: (Select the best answer below.) A. the bank's risk tolerance. B. the government's risk tolerance. C. that if she needs access to the money in a short period of time, the nonfinancial institution's CD might be too risky. D. that if she only needs access to the money after a long period of time, the nonfinancial institution's CD might be too risky.
Risk premium is: 1.29% C. that if she needs access to the money in a short period of time, the nonfinancial institution's CD might be too risky.
Alys makes $360 per week. How much will be withheld from her weekly check for Social Securitytaxes? Medicare taxes? Total FICA taxes? (Hint: The Social Security tax rate is 6.20% and the Medicare tax rate is1.45%.)
Social Security: $22.32 Medicare: $5.22 FICA: $27.54
SMART format:
Specific, Measurable, Attainable, Realistic, Timely
What does a W-4 do?
Tells your employer how to tax you
Lakesha recently found out that her credit card balance was compounded daily rather than monthly. How will this compounding frequency impact the outstanding debt she owes on her credit card As a result of this compounding frequency:
The amount she owes will INCREASE more as the compounding frequency INCREASES. This is due to the fact that the interest due at the end of each day is added to the amount she owes and the next day's interest will be computed on that larger amount.
What is the Time Value of Money?
The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. -putting a dollar value on financial goals
What is a 1040?
What do I actually owe? (refund)
What does a W-2 show?
What you paid the IRS over the year
What is the business cycle?
a cycle or series of cycles of economic expansion and contraction. inflation is a problem when the economy goes up
The two portions of Fica are: a. Social Security taxes, which are used to make payments to retirees and Medicare taxes, which are used to provide payments to health care providers in the case of illness b.Life insurance taxes, which are used to make payments to surviving family upon death, and Medicare taxes, which are used to provide payments to health care providers in the case of illness
a. Social Security taxes, which are used to make payments to retirees and Medicare taxes, which are used to provide payments to health care providers in the case of illness
The difference between a tax deduction and a tax credit is: a. a tax deduction reduces the amount of taxable income, while a tax credit directly reduces the amount of tax owed b. a tax deduction increases the amount of taxable income, while a tax credit directly reduces the amount of tax owed
a. a tax deduction reduces the amount of taxable income, while a tax credit directly reduces the amount of tax owed
Commercial banks: a. accept deposits in checking and savings accounts and make loans to both personal and commercial clients. b. accept deposits but focus on providing mortgage and personal loans to individuals rather than commercial clients. c. focus on making loans to institutions.
a. accept deposits in checking and savings accounts and make loans to both personal and commercial clients.
You will find that you typically have unexpected expenses every year. Knowing that fact you should: a. build an emergency reserve that is liquid enough for you to cover your unexpected expenses b. pay your bills on time so that you do not have any unexpected expenses c. build and emergency reserve using long-term stocks or bonds to cover your unexpected expenses
a. build an emergency reserve that is liquid enough to cover your unexpected expenses
An exemption is permitted for: a. each person who is supported by the income listed on a tax return b. the dependents of the person filing the tax return if those dependents have income c. the person filing the tax return
a. each person who is supported by the income listed on a tax return
Determining the present value of an amount is useful when you want to: a. have $20,000 for a down payment on a house in three years b. lend someone money c. pay off your loan d. know how much of your income you can save
a. have $20,000 for a down payment on a house in three years
The time value of money: a. is a measure of the opportunity cost of spending a dollar b. decreases as the interest rate increases because it costs more to borrow c. is inversely related to the opportunity cost of money
a. is a measure of the opportunity cost of spending a dollar
A tax deduction: a. is less valuable than a credit b. is based on income c. directly reduces the amount of tax owed
a. is less valuable than a credit
According to the IRS, gross income is all reportable income from any source including: a. salaries, tips, and prizes and awards b. salaries, child support payments received, and prizes and awards c. salaries, tips, and health and casualty insurance reimbursements
a. salaries, tips, and prizes and awards
Some types of payments that you might receive that would not be included in gross income are: a. welfare benefits, child support payments received, and health and casualty insurance reimbursements b. salaries, tips, and prizes and awards c. salaries, tips, and health and casualty insurance reimbursements
a. welfare benefits, child support payments received, and health and casualty insurance reimbursements
An opportunity cost is: a. what you forgo as the result of a decision b.what you would have spent on another choice c. what you spend when making a choice d.what you gain be making a choice
a. what you forgo as the result of a decision
Anna has just received a gift of $460 for her graduation, which increased her net worth by $460. If she uses the money to purchase a tablet computer, how will her net worth be affected? a. Anna's net worth will decrease when she spends the money to purchase the tablet computer b. Buying a tablet computer would not change Anna's net worth as she would be exchanging one asset for another. If she invests the $460 at 4 percent interest per year, what will it be worth in one year?
b. Buying a tablet computer would not change Anna's net worth as she would be exchanging one asset for another $478
What does FICA stand for and who pays FICA? a. Federal Information Coverage Act and these taxes are paid by the employer b. Federal Insurance Contributions Act and these taxes are paid equally by the employer and the employee c. Family Insurance Coverage Act and these taxes are paid by the employee
b. Federal Insurance Contributions and these taxes are paid equally by the employer and the employee
Savings institutions: a. are nonprofit organizations that accept deposits and provide personal and mortgage loans only to their members. b. accept deposits but focus on providing mortgage and personal loans to individuals rather than commercial clients. c.focus on making loans to institutions.
b. accept deposits but focus on providing mortgage and personal loans to individuals rather than commercial clients.
Financial institutions obtain funds for loans by: a. borrowing from other banks b. accepting deposits from individuals c. borrowing from large corporations
b. accepting deposits from individuals
Credit unions: a. focus on making loans to institutions. b. are nonprofit organizations that accept deposits and provide personal and mortgage loans only to their members. c. accept deposits but focus on providing mortgage and personal loans to individuals rather than commercial clients.
b. are nonprofit organizations that accept deposits and provide personal and mortgage loans only to their members.
The personal balance sheet summarizes: a. liabilities b. assets, liabilities and your net worth c. your net worth (liabilities minus assets) d. assets
b. assets, liabilities, and your net worth
Using credit cards: a. can create the illusion of zero cost and ultimately result in lower levels of spending b. can create the illusion of zero cost and ultimately result in higher levels of spending c. can create the illusion of high cost and ultimately result in lower levels of spending
b. can create the illusion of zero cost and ultimately result in higher levels of spending
The purpose of income tax is to: a. identify those in need b. finance governmental programs and services c. limit consumer spending and inflation
b. finance governmental programs and services
Liquidity means: a. having enough money to invest b. having sufficient funds to cover short-term cash deficiencies c. not having any outstanding loans d. not having any debt
b. having sufficient funds to cover short-term cash deficiencies
A taxpayer is entitled to one exemption for: a. himself and one for his children b. himself and one for each of his dependents c. himself
b. himself and one for each of his dependents
The deduction: a. does not vary according to your filing status b varies according to your filing status c. is affected by the amount of income you earned during the year
b. varies according to your filing status
The interest rate for loans is determined by adding: a. varying percentage points to the default rate b. varying percentage points to the rate paid on deposits c. the rate paid on deposits to the inflation rate
b. varying percentage points to the rate paid on deposits
There is no risk because a risk-free investment: a. would pay investors only if the financial institution went into bankruptcy b. would pay investors even if the financial institution went into bankruptcy
b. would pay investors even if the financial institution went into bankruptcy
Potential investment vehicles include:
bonds
Most other individual taxpayers file: a. Form 1040D b. Form 1040A c. Form 1040 d. Form 1040EZ
c. Form 1040
An annuity is: a. a lump-sum payment received at a specified point in time b. the sum of occasional contributions to a savings account c. a stream of equal payments that are received or paid at a determined time interval
c. a stream of equal payments that are received or paid at a determined time interval
A risk free rate is: a. an interest rate that is not guaranteed on an investment for an unspecified period. b. an interest rate guaranteed on an investment for a unspecified period. c. an interest rate guaranteed on an investment for a specified period.
c. an interest rate guaranteed on an investment for a specified period.
A standard deduction is a: a. variable amount deducted from adjusted gross income to determine taxable income b. fixed amount deducted from unadjusted net income to determine taxable income c. fixed income deducted from adjusted gross income to determine taxable income
c. fixed income deducted from adjusted gross income to determine taxable income
What two factors are considered in managing liquidity? a. mortgages and credit cards b. checking accounts and savings accounts c. money management and credit management d. money management and savings accounts
c. money management and credit management
The time value of money refers to the fact that dollar received today is worth: a. less than a dollar received tomorrow because it can be lent out b. more than a dollar received tomorrow because it can be spent c. more than a dollar received tomorrow because it can be saved and earn interest
c. more than a dollar received tomorrow because it can be saved and earn interest
What might be one of the opportunity costs of spending $10 per week on the lottery? a. the lottery winnings b. the expected winnings c. reducing debt by an additional $40 per month d. the time spent buying the ticket
c. reducing debt by an additional $40 per month
The risk premium is calculated as the: a. return on the risky deposit minus the market rate. b. market rate minus the return of the risky deposit c. return on the risky deposit less the risk-free rate.
c. return on the risky deposit less the risk-free rate.
Form 1040EZ is typically filed by: a. taxpayers who are married filing jointly and have no dependents b. taxpayers who are single and have dependents c. taxpayers who are single or married filing jointly with no dependents and taxable income of $100,000 or less
c. taxpayers who are single or married filing jointly with no dependents and taxable income of $100,000 or less
Discounting is the process of determining: a. how much an amount today will be worth in the future b. the sum of net cash flow c. the amount needed today (i.e. the present value) to accumulate a specified amount in the future
c. the amount needed today (i.e. the present value) to accumulate a specified amount in the future
What two personal financial statements are most important to personal financial planning? a. the personal income statement and the personal balance sheet b. the personal cash flow statement and the personal income sheet c. the personal cash flow statement and the personal balance sheet d. the personal asset flow statement and the personal income sheet
c. the personal cash flow statement and the personal balance sheet
It is important to track your spending before creating a budget because: a. you may not need to create a budget if you know what you spend money on. b. until you know what you spend money on it will be impossible to forecast all of your assets. c. until you know what you spend money on it will be impossible to forecast all of your expenses. d. you may not need to create a budget if you have enough money to purchase everything you want.
c. until you know what you spend money on it will be impossible to forecast all of your expenses
Interests rates: a. will be lower for loans that are a higher amount. b. will be higher for loans that are made to depositors c. will be higher for loans that are exposed to higher default risk.
c. will be higher for loans that are exposed to higher default risk.
Money management deals with: a. finding the best prices on products b. the decisions you make on the amount of credit to use to support your spending. c. determining who to lend money to. d. deciding how much money to retain in liquid form and how much to invest
d. deciding how much money to retain in liquid form and how much to invest
An understanding of personal finance enables you to: a. sit for a listening exam b. teach personal finance c. understand the news. d. pursue a career as a financial advisor
d. pursue a career as a financial advisor
When a period's budget indicates a cash: a. surplus, you can plan to use savings for the period. b. shortage, you can determine the amount that you will have available to invest in additional assets c. balance, you can determine the amount that you will have available to invest in additional assets. d. shortage, you can plan to use savings for the period
d. shortage, you can plan to use savings for the period
With any investment there is: a. a required payment b. some loss c. some gain d. some risk
d. some risk
The primary objective of investing is to: a. avoid use of savings accounts b. use funds needed for liquidity purposes to earn a high return c. reduce risk d. use funds not needed for liquidity purposes to earn a high return
d. use funds not needed for liquidity purposes to earn a high return
How does the Bible describe quality of life?
the Chief end of man is to love God and enjoy Him forever
Your personal balance sheet lists:
the market value of the things you own (assets) and also your current debts (liabilities). Your assets minus your liabilities is equal to your net worth.
