Chapter 1 Questions

Which of the following is an example of a financial opportunity cost?

Forgoing wages to attend school

An investor should expect to receive a risk premium for

Higher uncertainty about getting his/her money back

To develop financial goals, one should

Identify specific, realistic goals that are measurable along with a time frame and an action plan

An advantage of effective personal planning is:

Increased control of financial affairs

Which of the following best describes the concept of the time value of money?

Increases in an amount of money as a result of interest earned.

The goal of investing $50 per month for the next 12 years for your nephew's college fund is a(n) ________ goal.

Long-term

Increased consumer saving and investing is likely to be accompanied by

Lower interest rates

The 'borrowing' component in a financial plan relates to

Maintaining control over credit-buying habits

To calculate the time value of money, we need to consider all of the following except the

Type of investment.

The Rule of 72 is:

Used to estimate how fast prices will double using a given annual inflation rate

Opportunity cost refers to

What you give up by making a choice.

The tangible and intangible factors that create a less than desirable situation is referred to as ________ risk.

personal

If inflation is expected to be 8 percent, how long will it take for prices to double?

9 years

Present value computations are also referred to as

Discounting.

________ goals relate to infrequently purchased, expensive tangible items.

Durable-product

If a $10,000 investment earns a 4 % annual return, what should its value be after one year?

$10,400

If Melinda Miller estimates that her $100 weekly grocery bill will increase at an annual inflation rate of 4%, what should her weekly grocery bill be in 3 years?

$112.50

If a $10,000 investment earns a 7% annual return, what should its value be after 6 years?

$15,010

If you deposit $500 into a Certificate of Deposit earning 3%, what would be your earnings after 12 months?

$15.00

Which of the following is correct?

Food and clothing are consumable-product goals.

Randy Hill wants to retire in 20 years with $1,000,000. If he can earn 10% per year on his investments, how much does he need to deposit each year to reach his goal? Round your answer to the nearest dollar.

$17,460

If you begin saving $2,000 a year at 5% (from age 22 to age 30 or 9 years), what will these funds grow to in this time period?

$22,054

If you want $1,000 three years from now and you earn 4 percent on your savings, how much do you need to deposit now?

$889

If a $10,000 investment earns interest of $500 in one year, what is its rate of return?

5 percent

The saving component of financial planning focuses on long-term security and includes:

A regular savings plan for emergencies

Who is less likely to be harmed by inflation?

Borrowers

The problem of bankruptcy is associated with overuse and misuse of credit in the ________ component of financial planning.

Borrowing

Future value computations are often referred to as

Compounding.

The first step of the financial planning process is to

Determine your current financial situation.

Using the services of financial institutions or financial specialists (such as insurance agents, certified financial planners or investment advisers) to seek relevant information is done in which step in the financial planning process?

Evaluate your alternatives.

Every decision involves uncertainty, which is referred to as

Evaluating risk.

A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities is a(n)

Financial plan.

If I can invest a dollar today and earn interest on it, then it should be worth ________ in the future.

More

Attempts to increase income are part of the ____________ component of financial planning.

Obtaining

Robert Brown is interested in attending a concert next weekend. Unfortunately, he is scheduled to work. If he finds a substitute for his shift so he can attend the concert, what kind of cost is he incurring?

Personal opportunity cost relating to time

Which of the following would increase the interest rate for a loan

Poor credit rating

Many Americans have money problems because of

Poor planning and weak money management habits

Which of the following intermediate goals is stated most clearly using the SMART approach?

Purchase a house within the next 5 years with a mortgage no greater than $150,000

The step in the personal financial planning process that follows immediately after the step: "Create and implement your financial action plan" is

Review and revise the financial plan

Changes in personal, social, and economic factors may require you to

Review and revise your financial plan more frequently.

Making financial decisions related to income involves all of the following except

Taking

The consumer price index measures:

The average change in prices of a fixed basket of goods and services of urban consumers

An example of a personal opportunity cost would be

Time comparing several brands of personal computers.

The stages in the family situation and financial needs of an adult

adult life cycle

The loss of a job or encountering an illness results in ________ risk.

income

The rising or falling of prices that causes changes in buying power is referred to as ________ risk.

inflation

Changes in the cost of money is referred to as ________ risk.

interest-rate

The difficulty of converting savings and investments to cash is referred to as ________ risk.

liquidity