ECO 3041 FSU Calhoun Final Exam Review (all exam questions)

What are the two important things to consider before making an investment?

1. When do you need the money/when do you need to liquidate the asset? 2. How much risk can you endure?

Financial institutions typically provide home equity loans up to ____ of the value of the equity in a home

80%

Which of the following is not included in the prospectus

Advice on when to buy and sell

What is buying on margin or "leveraging"?

Borrowing money from your broker to buy stocks (borrowing up to 50% of the purchase)

You _________ purchase directly from the Fed Gov.

Can (there's a website to do this)

You __________ sell directly to the Fed Gov.

Can't (have to wait until maturity or sell through a broker/secondary market)

*Which of the following is not a key budgeting influence for a personal financial plan?

Change investments from risky stocks to more conservative stocks.

Deposits in commercial banks that are members of the FDIC, are insured up to a maximum of $50,000 per account. T/F

False

If you think interest rates will rise in the near future, you should seek an adjustable rate mortgage (ARM). T/F

False

T/F You should claim the standard deduction if itemized deductions exceed the standard deduction

False-- CORRECT= (You should itemize deductions)

T/F Income earned from the sale of an asset for more than you paid for it is classified as an income gain

False--- CORRECT= (capital gain)

Deposits at commercial banks are inssued by a government-owned insurance agency called

Federal Deposit Insurance Corporation

If you have $10,000 that you do not currently need for expenses and you wish to put it somewhere so that it will earn a return, which of the following financial institutions would you not choose?

Finance company

It is usually better to lease a vehicle than buy one, since you are not responsible for the repairs or maintenance on a leased car. T/F (exam 4- 80-104) (Sections 7-8)

False

Once drivers are labeled as "high risk," they will not be able to get automobile insurance at any price. T/F

False

Since most of the problems have already been fixed, older homes usually have lower maintenance expense than newer homes. T/F

False

Since there is no limit on how much and how fast adjustable rate mortgages (ARMs) can increase, most homeowners are afraid to take out this kind of loan. T/F

False

T/F An 80/20 coinsurance means the insurance company pays 80% of the bill while the provider pays the remaining 20%

False

T/F An increase in burrowing by the U.S government will result in a downward pressure on interest rates

False

T/F Bonds are financial instruments representing partial ownership of a firm

False

T/F Bonds that may be exchanged for common stock at the option of the bondholders are called callable bonds

False

T/F Comprehensive coverage pays damages to another persons auto in an accident for which you are legally responsible

False

T/F For a federal direct subsidized student loan, eligibility is not based on financial need, but a credit check is required.

False

T/F For your graduate degree, where you earn the degree is not as important as the degree itself

False

T/F Forecasting for more than a month at time is not helpful because you can't plan for unexpected expenses in the future

False

T/F Homeowner's insurance provides insurance in the event of property damage or personal liability relating to home ownership but not theft

False

T/F Identify theft only occurs through individuals who do not have legitimate access to your information

False

T/F If your calculated tax is greater than your withholding tax, you will receive a tax refund

False

T/F Most individuals pay for a home with a down payment of 5% or less and then obtain a mortgage to finance the rest

False

T/F One of the steps to implement your financial plan should be to keep your goals constant for many years

False

T/F Refinancing a home is usually worthwhile when interest rates have risen

False

T/F Revolving open-end credit typically does not specify a maximum amount that can be borrowed.

False

T/F Stocks are usually bought or sold in round lots, which are multiples of $100.

False

T/F The Fed conducts expansionary monetary policy by buying bonds and decreasing the money supply.

False

T/F The larger the number of payments in an annuity used in determining a future value, the smaller the future value at the end of the period

False

T/F The present value of an amount at a fixed rate increases as the lump sum amount decreases

False

T/F The process of obtaining present values is known as compounding

False

T/F When a bond has a par or face value of $1,000 and a 6% coupon rate, the semiannual payment would be $60.

False

T/F You are allowed to select the company to appraise the home you are proposing to buy

False

T/F You can estimate the amount by which your wealth will increase from an investment using the previous returns

False

T/F You should determine the insurance costs within one week of purchasing a vehicle

False

T/F You will build equity in the car faster when you finance the purchase for a longe period of time

False

T/F Your budget is simply a spreadsheet used to track expenses

False

T/f The security that represents equity or ownership of a corporation is commercial paper

False

The first step in the risk management process is to insure against risk. T/F (exam 3- 51-79) (Sections 5-6)

False

The longer you maintain relationships with creditors, the lower will be your credit score. T/F

False

The time period over which you save money has very little impact on its growth. T/F

False

The timing on the sale of an investment asset earning a capital gain makes little or no difference in the amount of taxes that are owed. T/F

False

Time value of money is only applied to single dollar amounts. T/F

False

To simplify and speed up the home-buying process, you should first make a verbal offer to see if the seller is willing to take the price you are willing to offer. T/F

False

With a credit score of 500, you should have no problem getting approval for credit purchases

False

You should be very selective in shredding documents and when in doubt, do not shred them. T/F

False

T/F A breakdown of the fees and expenses of a mutual fund is not one of the items addressed in a prospectus.

False -- CORRECT= it is one of the items

T/F Socially responsible mutual funds are those whose managers have taken and passed a strict financial ethics test

False --- CORRECT= they hold securities in companies that adhere to social, moral, religious, or environmental beliefs

T/F Since there is no limit on how fast adjustable rate mortgages can increase, most homeowner are afraid to take out this kind of loan

False ---- CORRECT= There is a cap (usually 5%)

*Which of the following is a true statement about student loans?

Interest payments on some loans are deferred until the students graduate and enter the workforce.

The relationship between risk and return is positive because

Investors need to be compensated with additional return on investment to accept additional risk

Younger drivers, especially males, between the ages of 16 and 25 are more likely to get in accidents and therefore pay higher insurance premiums. T/F

True

Your financial plan should include a plan for protecting your assets and income through insurance coverage. T/F

True

About one half of all ETF cash inflows go to the top twenty most popular funds. T/F

True (most popular include S&P 500, Power Shares QQQ, MSCI Emerging Markets, Vanguard Total Stock Market)

An ordinary annuity can be defined as

a series of equal payments received or paid at equal intervals of time at the end of each period.

All of the following are true of Treasury securities except they

are a means by which the U.S. government lends money.

As the lump sum amount decreases the present value of the amount at a fixed interest rate

decreases

The impact of credit ________ saving and ________ spending.

decreases; increases

What are expense ratios and why should they be reviewed?

expense ratios are how much (in % terms) the fund keeps; lower expense ratios mean more is returned to you as an investor

When the Fed conducts expansionary monetary policy, interest rates will ________ and money supply will ________.

fall; rise

You just signed a rental contract for $1,000 per month for the next 3 years. What calculation would you use to determine the value of this contract in today's dollars?

Present value of an annuity

When purchasing a home, which of the following costs will you not incur?

Real estate agent's commission

Making extra mortgage payments does which of the following?

Reduces the length of the loan

________ is a credit arrangement where the balance may be paid off monthly and interest is only charged on the remaining unpaid amount.

Revolving open-end credit

When negotiating the price of any car, which of the following statements is true?

Sales people are trained to act as if they are giving the car away

Interest income would come from earnings on

Savings account

What is shorting?

Selling a stock you don't own; borrowing a stock today, selling it immediately, then purchasing at a lower price and giving it back to the owner (only do this if you think the price will go down!)

T/F Advantages to leasing a car instead of buying one are that you need less of a down payment and that you do not need to worry about finding a buyer for your car when the lease is over

TRUE

The smaller the amount used in determining a future value

The smaller the future value at the end of the period

Credit should be used only when necessary, since it usually involves borrowed funds that you will need to pay back with interest. T/F

True

Even if you don't use the proceeds to improve your home, the interest on a home equity loan is deductible for federal income tax purposes. T/F

True

FT/F or a long-term home loan, such as 30 years, the amount of principal you pay on your loan during the first few years is quite small.

True

Good cash management requires some liquidity, but excessive liquidity has an opportunity cost T/F

True

Which of the following is the primary reason that a mortgage lender may allow a rate modification an existing mortgage holder with a fixed-rate mortgage

The burrower may obtain a new mortgage from another lender

If you have exhausted all efforts to resolve an excessive credit card balance, personal bankruptcy may be your only option. T/F

True

In most HMOs, if a person sees a specialist without being referred by the primary care physician, the HMO will not pay for the treatment. T/F

True

It is important to buy a car that is not over your budget and to finance the car properly. The more money needed to cover the car payments, the less you can add to your savings or other investments. T/F

True

It is possible that some of the expenses you incurred in an accident are not covered by your policy. T/F

True

Liquidity is necessary because there are times during the year when your cash inflows are not adequate to cover your cash outflows. T/F

True

Medical payments coverage insures against costs of medical care for you and other passengers in your car when you are at fault in an accident. T/F

True

One advantage of using a credit card is that you receive a list of your purchases, which enables you to keep track of your spending. T/F

True

One alternative to payday loans is to avoid borrowing until you have the funds to spend.

True

One disadvantage of a proprietary credit card is that it limits your purchases to a single merchant. T/F

True

Proximity to schools can increase home values, while increased distance from schools often lowers home values. T/F

True

Some funds have limitations on purchase/sell amounts and the number of transactions, so it is important to read the prospects carefully. T/F

True

T/F A certificate of deposit guarantees or locks in an interest rate for a specified time and rate

True

T/F A debit card differs from a credit card in that it does not provide credit; instead, it deducts the purchase from your checking account immediately.

True

T/F A key reason for uncertainty surrounding the return on investment is the uncertainty surrounding the current economic conditions

True

T/F A long-term capital gain results from profit on the sale of capital assets that were held longer than 12 months

True

T/F A margin call is a request from a brokerage firm for the investor to increase the cash in the account in order to bring the margin back up to the minimum level.

True

T/F A person with a college degree is likely to earn over $1 million more in a lifetime earnings than a person with only a highschool degree

True

T/F A self-imposed credit limit indicates that you will use a credit card only if you will have the cash to cover the payment when you receive your credit card statement.

True

T/F A shorter financing period will reduce the total interest you pay for an auto.

True

T/F An investment that has the potential to rise substantially in value also has the potential to decline substantially in value. If you cannot afford the possible loss, you should not make that investment.

True

T/F Capital gains from mutual funds can be received if the mutual fund makes a profit on the shares it sells or if an individual investor realizes a gain on the sale of mutual fund shares

True

T/F Compared to indemnity plans, managed health care plans impose more restrictions on the specific health care providers.

True

T/F Convenience, deposit rates and insurance, and fees are primary considerations in choosing a financial institution for your needs.

True

T/F Different tax rates are associated with each filing status such as single, married filing jointly, and head of household.

True

T/F During their lifetime, bonds can be sold for more or less than their face value depending on the demand for these particular bonds

True

T/F For a direct subsidized federal loan, you do not pay interest on the loan amount while in school.

True

T/F If you don't need advice or other services offered, you are better off using a discount broker or Internet broker rather than a full-service broker.

True

T/F In getting recommendations from brokers and analysts, you need to be careful that frequent suggestions to buy or sell are not being made in order to generate revenues for these traders.

True

T/F In order to have good credit in the future you must have used it wisely in the past

True

T/F In the context of insurance, the term liability is used to mean that you may be required to pay other individuals for damages that you caused to them or their property

True

T/F Insurance can protect your existing net worth and also increase your net worth in the future

True

T/F Junk bonds offer a relatively high rate of return, but they are more likely to default than other bonds

True

T/F Life insurance is critical to protect a familys financial situation in the event that a main income earner dies

True

T/F Life insurance may not be that important for a couple who both work full time and who could each be self sufficient without the other persons income

True

T/F Many people obtain health insurance through group plans offered by employers

True

T/F Most large employers offer cafeteria-style plans, which offer a variety of plans for employees to choose from

True

T/F Most real estate agents agree that location is the most important influence on a homes future resale value

True

T/F One method of managing risk is to limit your exposure to a financial loss

True

T/F One of the six components of your financial plan should be maximizing your tax liability.

True

T/F Only the income that remains after deductions and exemptions are subtracted from adjusted gross income is taxable.

True

T/F Since insurance companies rely mostly on their premiums to cover claims, they price their insurance policies to reflect the probability of a claim and the size of the claim.

True

T/F Since interest rates vary widely between lenders you should obtain at least two quotes when selecting an auto finance company

True

T/F Some mutual funds have much higher expenses or expense ratios than others, and this expense can affect your overall returns.

True

T/F Taxpayers can have more than the minimum amount of required income tax withheld from each pay

True

T/F The decision to purchase versus lease a car is highly dependent on the estimated market value of the car at the end of the lease period.

True

T/F Thirty year bonds are more sensitive to interest rate movements than ten year bonds

True

T/F Two advantages of investing in mutual funds are diversification and professional management

True

T/F UM coverage is only available when you carry Automobile Bodily Injury Liability Coverage on your policy

True

T/F Uninsured Motorist (UM) coverage includes payments for certain medical expenses, lost wages, and pain and suffering

True

T/F You can begin to build a credit history by using utility services

True

T/F: FICA taxes include two components, which consist of Social Security and Medicare contributions

True

The most popular forms of insurance for individuals are property and casualty, life insurance, and health insurance. T/F

True

The process of obtaining present values is known as discounting.

True

There is no Social Security tax on income beyond a certain level. T/F

True

To properly manage your money you should use a credit card only if you will have the cash to cover the payment when you receive your credit card statement. T/F

True

When buying a home, the seller pays the real estate agent's commission, so you pay no fee for the agent's services except in the form of a higher purchase price. T/F

True

T/F Maintaining liquid assets that you can easily access when you need funds allows you to avoid using credit and paying finance charges

true

T/F Universal life insurance is similar to whole life, but allows the policyholder more choices of how the savings portion of the premiums is invested

true

If you think future revenue is greater than the price, the stock is _____________________ and you should ______________________.

undervalued; purchase

What are non-load funds?

funds that do not have a fee at the time of purchase

What are load funds?

funds that have a fee at the time of purchase

What is interest rate risk?

if interest rates rise, the value of a bond falls

Before you increase your homeowner's insurance deductible you should evaluate

if you can afford to "self insure" the deductible amount in the event of a loss claim.

The standard deduction (assuming you are not over 65 or blind) is largest for

married filing jointly.

Itemized deductions include

mortgage interest, medical expenses, taxes paid, charity donations, job expenses

*To achieve both liquidity and an adequate return, you should consider investing in (exam 2- 26-50) (Sections 3-4)

multiple money market investments with varied returns and levels of liquidity.

*The opportunity cost of going to college is

the value of the best opportunity a student gives up to attend college.

What is market capitalization?

the value of the total outstanding shares : # of shares x price (EX: micro cap, small cap, mid cap, large cap, mega cap)

For most bonds, you must buy and sell _____________________________________.

through a broker

Having liability coverage as part of auto and homeowner's policies helps protect your ________ in the event of an accident.

net worth

On your credit card statement, the amount you owe the financial institution is now called the

new balance

A deductible is an amount

not paid by the insurance company.

What are non-coupon bonds?

nothing is received until maturity

If you receive a phone call that seeks to verify or update personal information you should

obtain the persons name and phone number and call the company to verify his or her credentials

In negotiating a price for the purchase of a home, you should do all of the following, except

offer the highest price you can afford first to get the purchase settled quickly

When the federal reserve buys or sells Treasury securities to affect the money supply, it uses

open market operations

An arrangement that protects a customer who writes a check or uses a debit card for an amount that exceeds the checking account balance is called

overdraft protection.

If you think future revenue is less than the price, the stock is _____________________ and you should ______________________.

overvalued; sell or don't purchase

What are stocks/partial ownership?

owning a share of a company

Contributions to both kinds of retirement plans are made ____ tax.

pre

The process of obtaining ________ values is referred to as discounting.

present

The ________ method charges interest based on the balance at the beginning of the new billing period.

previous balance

The best way to predict a mutual fund's performance is to

study the investment strategy as it related to the current economic conditions

What happens if a bond has the "convertible" feature?

the holder can convert the bond value to company stock

What are private firms?

the individual(s) own the right and are personally liable for debts; usually directly involved in management (82% of all businesses are private)

What are public firms?

the individuals own the right to the profits, but are limited with their liability to the value of the shares; usually not directly involved in management

What happens if a bond has the "call" feature?

the issuer may pay off before maturity

What is the coupon rate?

the percent of the par value that must be paid at periodic intervals

What is the responsibility involved in the Defined-Contribution Plan?

the responsibility is on the employee to plan their own retirement (employer is not liable if poor choices are made)

What is the responsibility involved in the Defined-Benefit Plan?

the responsibility is on the employer to create and manage the funds to meet the promised benefits

Pre-Tax Return % Formula

(Ending value - beginning value) / (beginning value x 100)

What are LLCs?

(Limited Liability Corporations) they capture "the best" of both private and public firms

What is the par value?

(also known as the face value) how much the issuer owes

What is the Defined Benefit/Pension Plan?

- "guarantees" income during retirement (also a chance that the company/employer doesn't follow through) - employer makes all contributions to plan - based on a formula an employee will be informed of at hiring (EX: years of service x percent per yr x avg compensation)

What is the difference between bonds and bills?

- Bonds are long-term debt obligations (usually not longer than 30 years) - Bills are short-terms debt obligations (usually a year of less); fed gov related

What are the characteristics of preferred stockholders?

- First in line to receive dividends - No voting rights - Are first in line to receive payouts after liquidation from bankruptcy

How do you know what the value of a bond is?

- Formula is a derivation of present value calculations - Value= present value of coupon payments + present par value

Where does risk/uncertainty come from?

- General Economy (GDP) - The specific industry - The general environment - The company itself - Various other factors

What are the types of stock funds?

- Growth (zero or very low dividends; look for cap appreciation) - Cap Appreciation (solely looking at price increase) - Small Cap (small market cap) - Mid cap (mid market cap) - Equity Income (higher dividend yields) - Balanced Growth and Income (growth and equity income stocks) - Sector (narrowly defined in a certain industry) - International (foreign stocks only) - Global (US and foreign stocks)

Stock Exchanges are limited to _______________________________.

- Members of the exchanges (brokerage firms and other businesses that purchase membership to make transactions) - Company stock that is listed with that exchange (not all companies are listed with all exchanges)

Key info when analyzing and selecting stocks:

- Price - 52 Week Range - PE Ratio (price for $1 of earnings) - Yield (return from the dividend)

What are the typical measurements of risk?

- Range of returns - Standard deviation of returns - Subjective/personal measures (gut instinct)

What are the "Big Three" Bond Rating Industries?

- S&P Global Ratings - Moody's - Fitch Group

What are the characteristics of common stockholders?

- Second in line to receive dividends - Have voting rights - Are second in line to receive payouts after liquidation from bankruptcy

What are some factors that determine bond prices?

- Supply/demand shifts - Coupon rate and price changes - Change in price is reflected in the secondary bond market where bonds are bought and sold

Who are the most common issuers of bonds?

- The Fed Gov (treasuries) - Fed agencies (Ginnie Mae, FHA) - State and local gov (municipal) - Corporations

What are the types of bond funds?

- Treasury (fed gov) - Fed agencies (ex: Ginnie Mae) - Corporate (various ratings) - High Yield (low ratings) - Municipal - International

What is the Defined Contribution Plan?

- amount put into retirement account is determined - both employer and employee contribute - income at retirement depends on choice of investment and performance of the investment - employee choses where to invest - regular changes can be made - employer match will vary (employee must contribute at least as much as employer to get matched)

What are the disadvantages of ETFs?

- can be illiquid depending on how active the secondary market is - commission applies to each transaction (no commission with regular mutual fund)

How much you need in your retirement fund is determined by the following factors:

- current age vs retirement age - inflation and cost of living - taxes - family obligations - health issues

401(k) Contribution Plan:

- defined-contribution plan - offered by for-profit companies - max contribution in 2020 was $19500 plus $6500 if over 50 yrs old - details in the IRS retirement limits document

403(b) Contribution Plan:

- defined-contribution plan - offered by not-for-profit companies - max contribution in 2020 was $19500 plus $6500 if over 50 yrs old - details in the IRS retirement limits document

What is the return on mutual funds?

- dividends - asset appreciation

What are the advantages of ETFs?

- lower expense ratios - no load fees - tax efficiency (dividends paid but no cap gain distributions to shareholders) - can sell during the trading day at the market price (regular mutual funds must be sold at the end of the day when the NAV is regulated) - can buy and sell like stock with market, limit, stop-by, and on margin

Roth Plan limits include:

- max contribution is $6000 for an individual under 50 and $7000 for over 50 (can contribute to either or both plans, Traditional and Roth, but the limit is for total combined) - tax deduction is phased out for income over $124,000 - withdrawn funds before age 59.5 are taxed as ordinary income and have a 10% penalty income applied

What is a Roth Individual Retirement Plan?

- tax applied at contribution - tax free at withdrawal

What is a Traditional Individual Retirement Account?

- tax deduction at contribution - tax applied at withdrawal

What are the two general kinds of stocks to purchase?

1. Growth stock 2. Dividend stock (Can be both!)

What is the major criteria when selecting a broker for both stocks and bonds?

1. How much advice do you want? 2. How much are you willing to pay? 3. What are the limits/restrictions? 4. What are the characteristics of your account?

Other questions to ask yourself when retirement planning include:

1. How much will you contribute? 2. Which investments? 3. Which plan?

What are the three general strategies when buying bonds?

1. Interest rate- select bonds that match your interest rate desires 2. Passive- select a variety of bonds to diversify 3. Maturity- select. maturity dates that match when you need the money

What are the two ways to earn positive return on a stock?

1. Price appreciation 2. Dividend Yield

What are the two main rules of retirement planning?

1. Retirement annual income should be 70-80% of pre-retirement annual income 2. Retirement savings should be 10-12% of pre-retirement income

What are the four common types of investments?

1. Stocks 2. Bonds 3. Mutual Funds 4. Real Estate

3 Most Common Investment Mistakes:

1. Unrealistic Goals 2. Borrowing to invest 3. Taking risks to recover losses

What are the two main questions involved in retirement planning?

1. What is your goal? (age, amount in account, etc.) 2. How can you achieve this goal?

Which of the following ranges of returns would indicate a less risky, more stable investment

1.5% to 5.75%

Which of the following does money management not involve

A long term time period

____ corporate bond will pay a ____ return

A lower rated, higher

What is a stock index?

A measure of many stock prices (general) that is intended to give information about the market

What is a mutual fund and why invest in them?

A portfolio of stocks and/or bonds that give the investor access to many assets instead of just one. Buying "bundles" is simple and allows for diversification.

What does money management involve

A series of decisions, cash inflows, cash outflows

Before buying a house you should do the following.

A, B and C are all important.

Ceteris paribus, which stock would be a better purchase for you? A. Company ABC with a PE of 12 B. Company DEF with a PE of 20

A. (you pay less for $1 of earnings) Note: generally speaking you want a lower PE, but you need to account for other factors

Why do people, businesses, and governments borrow?

All for the same reason: they want the funds to buy or do something now, and they can pay back later

Why is the rating of the insurance company from whom you plan to purchase a life insurance policy important?

All of the above are important considerations.

The total cost of owning a home versus renting is calculated by

All of the above.

Who can issue a bond?

Almost any institution can contract with an underwriter or investment bank, get the bond rated, and make an issue

The interest rate on an ARM may be adjusted

Any of the above depending on the terms of the loan.

What is an odd lot order?

Any order not in an increment of 100 (more expensive)

Which of the following is not a step you should take to try to improve your credit score?

Applying for more credit cards

Which of the following is usually not offered as part of a benefits package to employees?

Auto Insurance

"Wise" use of credit cards includes the following behaviors

Both A and B are correct.

Everything else being equal, the ________ the interest rate, the ________ the final accumulation of money.

Both A and B are correct.

In general, insurance companies generate their revenues from

Both A and B are correct.

If you leave your employer will you get to take your entire retirement account with you? A. Yes B. Sometimes C. No

Both B and C (involves vesting)

What are the two kinds of bonds?

Coupon bonds and non-coupon bonds

Which of the following statements is true regarding non-installment credit?

Credit is usually issued for 30 days or less.

What are bonds?

Debts/liabilities for the issuers ("IOUs") and financial assets to the holders

What are bond ratings?

Determine the safety/risk of the bond (all bonds are rated); government bonds are usually rated highest, corporate bonds have various ratings. High rating: safest (EX: AAA) Low rating: "junk bonds"; highest default risk (EX: BB or lower)

What are ETFs?

Exchange-Traded Funds: funds traded on stock exchanges (look more like stocks, but are mutual funds); similar goals as regular mutual funds

*Certificates of deposit (CDs) with shorter maturity dates tend to pay higher interest rates than those with longer maturity dates.

False

*Obtaining a graduate degree will always improve your personal financial position. T/F

False

An annuity is a stream of equal payments that are received or paid at random periods of time. T/F

False

Because of potential security concerns, it is unlikely that you will find a financial institution that offers mobile applications. T/F

False

Certificates of deposit are highly liquid and pay the highest investment returns. T/F

False

What is the difference between full service and discount brokers for stocks and bonds?

Full service provide lots of personal advice and are more expensive, while discount brokers are cheaper and provide less info and recommendations (more responsibility on the investor)

You want to put $200 per month into an individual retirement account at 15% for forty years. What are you solving for?

Future value

To determine how long it would take an investment to double at 10% interest, which interest rate table would you use?

Future value of $1

You want to know how much you need to save every year to accumulate $15,000 in five years at a 10% interest rate. Which of the following calculations should you complete?

Future value of an ordinary annuity

*Which of the following statements is not true regarding education and financial position?

Higher education always guarantees a higher income.

The opportunity cost of building a park in your hometown would be the

Highest valued bundle of other goods and services that must be forgone because of the park construction

Which of the following is the best rule to follow in shredding information?

If you have any question, shred it.

The Annual Percentage Rate (APR) is all of the following except

It requires a complex formula to compute

In general, the more liquid an investment is, the ________ the return you will receive.

Lower

Which of the following is not a factor in the FICO credit scoring?

Marital status

*Which of the following is true about millionaires?

More than 75 percent of American millionaires have college degrees.

The stock exchange that is largest in terms of dollar volume is the

NYSE

What is a NAV?

Net Asset Value: (similar to market capitalization) net market value of all assets in the mutual fund -> general idea; usually expressed in "per-share" terms

Is a stock with a 0% yield always undesirable and should not be purchased?

No, because you can have a 0% yield and huge price appreciation (more of a growth stock than a dividend stock)

As an individual investor, can you make transactions with the NY Stock Exchange and NASDAQ?

No, not without a broker

What is a round lot order?

Orders in increments of 100

For minimal tax consequences, when your stock increases in value it should be held for

Over a year

You are opening a new savings account today that pays 3% anual interest and want it to grow to $500 in 2 years. What is the missing variable you need to solve this problem?

Payment

Sandy wants to know how much she needs to save today to have $5,000 in five years at a 7% interest rate. Which of the following calculations should she complete?

Present value of $1

What is the core purpose of buying insurance?

Protect your wealth and assets

Present and future values concepts are applied in

Purchase of a home, calculation of withdrawals needed during retirement, calculations of savings for a large purchase

Defined Benefit and Defined Contribution are _________________________ plans.

Qualified (means they qualify for special tax benefits according to IRS rules)

What are Individual Retirement Plans?

Retirement plans outside for self-employed individuals or aside of plans involved with employers.

What is the SEP?

Simplified Employee Pension Plan; in 2020, the max contribution was $57,000 or 25% of compensation

What is the relationship between market cap and growth?

Smaller cap = faster growth Larger cap = slower growth

Example of a possible stock, bond, and mutual fund buying strategy:

Start: high risk, high growth Then: medium risk, medium growth End: low risk, low growth, but high dividend

What are the two kinds of stock analysis?

Technical analysis and fundamental analysis

What is a market order?

Telling your broker to buy or sell at the prevailing market price when the order is received

What is a limit order?

Telling your broker to buy or sell with a restriction (EX: max or min price); usually a time frame involved

What is default risk?

The biggest risk you take with bonds: when the issuer doesn't pay (can happen with low rated bonds)

How do you know what the yield to maturity is?

The formula is a derivation of future value calculations; combine discounted value of the par value and coupon payments (if any)

Auto insurance rates are based upon

The number of miles and the type of driving you do

How can ETFs be purchased?

Through a broker; commission is payed like on a stock

*When money earns interest on interest, it is said to be compounding. T/F

True

A higher deductible reduces the amount of coverage provided by homeowner's insurance, and therefore results in a lower insurance premium. T/F

True

A payday loan is a short-term loan provided to you if you need funds in advance of receiving your paycheck. T/F

True

A risk premium is the amount of interest you might receive over and above the risk-free return insured by the federal government. T/F

True

A risk-free rate is a return on an investment that is guaranteed for a specified period. T/F

True

An alternative to MasterCard, Visa, and American Express credit cards is a retail or proprietary card that is issued for use at a specific retail establishment. T/F

True

An annuity is a stream of equal payments that are received or paid at equal intervals in time. T/F

True

*Interest rates could change due to all of the following except

United Nations resolution to change the U.S. Treasury rate.

What are coupon bonds?

a payment is made to the holder; annual and semi-annual are typical

Can you borrow money from your broker to buy stocks?

Yes

Can private firms have shares?

Yes, but they are not traded on market exchanges like public

Do you need a broker for buying and selling mutual funds?

Yes, for ETFs and when selling a closed-end fund. No, when buying and selling directly with open-end fund companies

Can you earn a positive return on a stock when the price stays constant?

Yes, if the company pays dividends

Can you contribute to an IRA (Individual Retirement Account) if you already have a pension, 401(k), or 403(b)?

Yes; with limits (for single tax payments covered by a workplace retirement plan, the phase-out range is $65000-75000, more details in IRS retirement limits 2020 doc)

Life insurance would be necessary in all of the following situations, except

You are single and have no dependents

How do you buy and sell stocks and bonds?

You tell your broker what, how much, and when to buy and sell.

Compared to indemnity plans, what is an advantage of managed health care plans?

You will have lower insurance premiums.

If you have an accident resulting in $2,000 damage to your car and have $500 deductible collision coverage, which of the following statements is true?

You will pay the first $500 and your insurance company will pay $1,500.

To earn the highest possible return in the stock market, you will need to

accept a high level of risk

Checking accounts may offer all of the following except

account balance insurance in excess of $250,000.

The concept of time value of money is important to financial decision making because

all of these

Present and future values concepts are applied in all of the following except

annual cash inflows

Future and present values are dependent upon all of the following except

annual income

To join a credit union, you need to

be a member of a group with a common bond.

All of the following situations are valid reasons to borrow funds except

borrowing for every day living expenses.

What are closed-end funds?

buy directly from a company/investor, but need a broker/secondary market to sell them

Which of the following is most risky?

buying on margin

Bonds that may be exchanged for common stock at the option of the bondholders are called

convertible bonds

The susceptibility of a mutual fund's performance to general stock market conditions is known as

market risk

Comprehensive coverage would cover financial losses due to

damage to your car caused by wind or hail.

What is the maturity date?

date the payment must be made

If a bond's value rises above its face value during its life, interest rates have:

decreased

Financial institutions that accept deposits (that are insured up to a maximum level) from individuals and provide loans are called

depository institutions.

Retirement planning can be defined as ____________________________________________________________.

determining how to balance your current lifestyle with your future one

Gross income includes all of the following except

employer's current contribution to 401(k).

Lisa wants to know how much savings she would accumulate in 15 years if she saves $2,000 per year and her savings earns 4% per year. She needs to determine the

future value of an annuity.

Credit scores in the 500-600 range will likely result in

higher interest rates.

As the lump sum amount increases, the present value of the amount at a fixed interest rate

increases

For a bond, the key is the ____________________ relationship between the ______________ and _______________________.

inverse; price; interest rate

A disadvantage of term insurance is that

it becomes more expensive when you renew it.

If a stock was purchased in January 2014 for $1000 and sold in December 2015 for $3000 a ______ of $2000 results

long-term capital gain

The _______________ the bond rating, the _________________ the risk premium will be (and usually the ________________ the return will be).

lower; higher; higher (higher probability you aren't getting anything)

When obtaining a mortgage you should

maintain some funds for liquidity purposes to cover unanticipated bills.

What. is an index fund?

manager ensures the fund is in proportion to the designated index, but little management (note: index funds can mirror a specific market index; most common is S&P 500)

The highest tax rate a taxpayer is charged on his or her federal tax return is called the ________ rate.

marginal

Since all student loans are not issued at the same interest rate over the course of a student's education year, once the student graduates and begins working and is starting to pay back the loans they should

prioritize the loans from highest interest rate to lowest interest rate and use excess cash flow to make additional payments on the high rate loans.

To significantly reduce your automobile insurance premiums and still have adequate coverage, you should

raise the deductibles on comprehensive and collision

A ____ is responsible for determining the value of the home as part of the loan process

real estate appraiser

The cost of health care has risen dramatically in recent years due to all of the following EXCEPT

reduced litigation costs

__________________ are bought and sold one share at a time, while ____________ are bought and sold in whole without increments ("all or nothing").

stocks; bonds

What is vesting?

refers to the employee's right to the employer's contributions or benefits attributable to the contributions if employment terminates prior to retirement; many variations exist; your personal contributions are 100% vested

What is a managed fund?

returns are directly influenced by the manager's decisions

*The ________ is the return on an investment that is guaranteed for a specified period.

risk-free rate

What is the risk with mutual funds?

same as with an individual asset, but a fund is more diversified, so there is a lower risk

What are open-end funds?

sell directly to and purchase directly from individual investors

If a stock was purchased for $5,000 in January 2015 and is sold in December 2015 for $3,000, a ________ of $2,000 results.

short-term capital loss

What are commercial papers?

short-term debt obligations made by corporations; usually less than 30 days but can be as long as 9 months

What are treasury bills?

short-term debt obligations made by the fed gov

The standard deduction is smallest for

single filers, assuming under age 65.

A wise long run strategy for buying mutual funds:

start with an index fund to give your investment portfolio a solid foundation, then after "tank is sufficiently filled", diversify with other assets such as individual stocks and other mutual funds

If your financial plan objective is to provide your family with the most insurance benefit in the event of your untimely death, you should purchase

term insurance.

Since career choices affect your income, you should choose the career that (exam 1- questions 1-25) (Sections 1-2)

that will be enjoyable and will suit your skills.

What is the yield to maturity?

the annualized return if the bond were held to maturity

What is fundamental analysis?

using a company's financial statement and forming expectations to make buying/selling decisions

What is technical analysis?

using historical data to identify buying/selling opportunities

One advantage of whole life insurance over term life insurance is

whole life insurance forces people to save money.

Taxes for retirement funds are applied at __________________________.

withdrawal

All of the following are reasons to avoid payday loans except

you don't want to pay interest on your credit card that charges an annual rate of 18%.

How do you decide between the Traditional and Roth Individual Retirement Accounts?

you want to have. the lowest tax rate applied, so you compare and contrast what the tax rate will be now compared to at retirement (lower at retirement: pick Traditional; lower now: pick Roth); sometimes can be a complete guess

Refinancing a home is usually worthwhile when

you will live in your home long enough to recoup the closing costs.