FIN 2050 Test 2

Invoice (price of a car)

dealers costs to buy a car

suppose Sam's monthly debt payments, not including his mortgage, are $825. His monthly net income is $2,425. Sam has total liabilities of $9,400, and his net worth (not including his home) is $24,750. Calculate Sam's debt-payments-to-income ratio and his debt-to-equity ratio.

debt to payments to income ratio = 825/2425=38% debt to equity ratio= 9400/24750=38%

automobile operation fixed costs

depreciation interest on the loan insurance license, registration and taxes

Series I Bonds

earns fixed rate plus inflation rate

automobile operation variable costs

gas and oil tires maintenance and repairs parking and tolls

enrolled agents

government approved tax experts

single family dwelling

housing unit that is detached from other units

two different types of warranties

implied warranty - warranty of title, merchantability express warranty - usually written, full or limited warranty

sources of quick cash

liquidate savings (savings account, CDs, mutual funds) borrow (credit card advance, personal loan)

Sales Techniques to Avoid

lowballing high balling

buying a car on lease advantages

mall cash outflow Lower monthly payments than buying◦Lease provides detailed records - helps if you use your car for business purposes Able to obtain a more expensive car more often

sticker price (MSRP)

manufacturer's suggested retail price listed on a sticker in a new car's window

buying a car on lease disadvantages

no ownership interest must meet requirements May have additional costs for extra mileage, turning the car in early, or for certain repairs

two ways to make tax payments

payroll withholding estimated quarterly payments

"points"

prepaid interest charged by a lending institution for the mortgage; each discount point is equal to 1 percent of the loan amount

types of financial services

savings - time deposit payment services - checking accounts borrowing - for the long or short term other financial services - insurance investment, real estate purchases

ll is balancing his checkbook. His online balance shows $1,250, and his spreadsheet (where he keeps a running total of his check register) shows $450. He has outstanding checks recorded on the spreadsheet that have not yet cleared, totaling $795.50. His online account shows interest of $0.50 and rewards credits of $4.00. Does his checkbook balance?

st, subtract the uncleared checks from the online balance $1250-795.50=$454.50 Now, add the interest and rewards balance to the spreadsheet total: $450+0.50+4.00=$454.50 Will's checking account balances.

ppose your gross annual income is $52,000, and you have $24,000 to put down on a house. Your lender allows 38% of monthly gross income for PITI. You have other debt payments of $540 per month, and you expect monthly property taxes an insurance to be $480. You can get a 30-year mortgage with an interest rate of 4.5%. You do not want to pay PMI, so you would like to finance 80% of the house. What is your affordable home purchase price?

step 1. determine your monthly gross income - 4,333.33 step 2. multiply by 38% step 3. subtract other debt like property tax and insurance 540 and 480 step 4. use mortagage factor or financial calculator to figure the total amount of the mortgage. step 5. divide affordable mortgage amount by 1-.20= .80

correspondence audit

the IRS sends a letter, asking the taxpayer to respond to specific questions or produce evidence of deductions or other entries on the tax return

residual value

the expected value of a depreciable asset at the end of its useful life

money factor

the financing rate on a lease; similar to the interest rate on a loan

capitalized cost

the price of a car that is being leased average buyer pays 92% of list average leaser pays 96% of list

Prime rate

the rate that the banks charge to large corporations

office audit

the taxpayer sits down with the auditor to answer questions and produce records

Consumer Credit

the use of credit for personal needs. a major force in our economy.

tax avoidance

the use of legitimate methods to reduce one's taxes

Average tax rate

total taxes paid divided by total income

when interest rates are rising you should

use long term loans to take advantage of the current low rates. select short term savings instruments to take advantage of the higher rates when they mature

when the interest rates are falling you should

use short term loans to take advantage of the lower rates when you refinance the loan select long term loans to "lock in" the savings rates

mortgage length

usually 5-30 years

debt to equity ratio

want it less than 1.

irs modifies tax procedures on a

yearly basis

most common filing error

your signature

Series EE bonds

"Patriot bonds" sold at half of the face value 50-500

disadvantages of buying a house

*Substantial financial commitment *Requires a down payment and additional fees such as points and title insurance *Living expenses tend to be higher *Requires time commitment and work *Face the risk of losing money on your investment.

multi-unit dwelling

-Duplex (two homes) -Townhouse (2, 4, or 6 units)

disadvantages of renting a house

-No tax benefits. -Remodeling limitations. -Restrictive Covenants. -Higher utilities than apartment.

problematic financial businesses

-Pawnshops -Check-cashing outlets -Payday loan companies -Rent-to-Own Centers -Car Title Loans

Closing Cost Components

-Title Insurance - boundaries of property -Deed - document that transfers ownership -Escrow Account - money deposited with the lending institution

advantages of buying a house

-pride of ownership -financial benefits -lifestyle flexibility

Practical Purchasing Strategies

-timing purchases (seasonal) -store selection -brand comparison -label information -price comparison

mobile banking drawbacks

0 security 0 fees 0 privacy

4 types of deposit institutions

1. Commercial banks - offer all services 2. savings and loans associations - most services 3. Mutual Savings banks- specialize in savings and mortagage accounts 4. Credit unions - user owned, non profit, lower fees and lower rates

online banking provides services like

1. Direct deposit 2. automatic payment transfer funds 3. atm access 4. debit card

6 types of deposit institutions

1. Life insurance companies - insurance plus savings and retirement 2. investment companies - mutual funds, money market funds 3. Brokerage firms - act as agents in selling and buying 4. credit card companies - specialize in short term loan 5. Finance companies - make short and medium term loans 6. Mortgage companies - mortgage loans

two types of consumer credit

1. closed end credit - one time loans for a specific amount of money for a specific amount of time 2. Open end credit - use as needed until the line max credit is reached

three phases of mortagage

1. complete application 2. lender obtains credit 3. mortgage is approved or denied

home buying five stages

1. determing home ownership needs 2. finding and evaluating a property to purchase 3. pricing the property 4. financing the purchase. 5. closing the real estate transaction.

Five filing status categories

1. single or legally separated 2. married, filing jointly 3. married, filing separately 4.Head of household 5. qualifying widow or widower with dependent (2 years)

type of form to use for taxes

1040

umer credit payments should not exceed BLANK of your net income

20%

suppose you own a home worth $200,000. Your mortgage balance is $125,000. How much can you borrow using a home equity loan if the lender will allow up to 80% loan to value?

80% of $200,000 is $160,000, so you can borrow up to (160,000 -125,000 = $35,000) using a home equity loan.

security deposit

A sum of money usually equal to one month's rent, held by the landlord to cover any damage to the apartment caused by a tenant.

Value added tax (VAT)

A tax on increased value of the product at each stage of production and distribution rather than just at the point of sale.

Reverse Mortgage

An arrangement where the lender agrees to pay money to an elderly homeowner, either regularly or occasionally, and to be repaid from the homeowner's equity when he or she sells the home or obtains other financing.

field audit

An audit conducted by the IRS on the business premises of the taxpayer or in the office of the tax practitioner representing the taxpayer.

condominium

An individually owned housing unit in a building with several such units

Five C's of Credit

Character, Capacity, Capital, Collateral, Conditions

FCBA (Fair Credit Billing Act)

Correct billings errors in a specified time

Alternative Minimum Tax (AMT)

Created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.

payment schedule

Dates on which installments are due and the amount of each installment

advantages of renting a house

Easy to move, low maintenance and responsibility low financial commitment, more space

Credit files

Employer, position, and income. Previous address. Spouse's name, Social Security number, employer, and income. Checks returned for insufficient funds FICO scores and credit information

Fixed rate and fixed payment mortgage

Fixed rate, fixed payment, amortized 5%, 10% or 20% down 15, 20 or 30 years of fixed payments

30-year, 7%, $223,000 mortgage

Monthly payment = 223 × $6.65 = $1,482.95 Payment = Principal repayment + interest PITI = payment + taxes + insurance

Series HH

No longer sold, current income bonds, pays interest every 6 months

Who can obtain a credit report?

Only authorized persons have access to your report for approved legitimate business purposes

PRBC

Payment Reporting Builds Credit

rate of return or yield

Percentage increase in value due to interest Frequency of compounding increases return

Annual percentage yield( APY)

Rate per period x # periods per year

"Truth in savings Act"

This law requires banks to disclose, in writing, such consumer bank account terms as interest rate info, balance requirements, and the circumstances under which fees are charged.

Closing

a meeting of the seller, the buyer, and the lender of funds, or representatives of each party, to complete the transaction

Adjustable Mortgage Rate (ARM)

a type of mortgage loan characterized by interest rates that automatically adjust or fluctuate in concert with certain market indexes. Generally an ARM begins with an introductory or initial interest rate, which then may rise or fall but monthly payments may not exceed ARM loan cap.

flat tax

all tax payers would pay the same amount of money. would increase taxes for many

Second mortgage (home equity loan)

allows a homeowner to borrow on the paid-up value of the property

tax credits

amount subtracted directly from the amount of taxes owed

Fair Credit Reporting Act of 1970

applicant has right to see all the stored information upon which the policy is either approved or denied

time the taxes have to be submitted

april 15th

ppose Scott needs to borrow $6,000. He has the choice of three loans. The first loan charges 6% simple interest, with one repayment at the end of three years. The second charges 6% simple interest on the declining balance with annual payments. The third loan is an add-on interest loan, also with annual payments over three years. Calculate the APR for each loan.

chapter 5

two different types of bankruptcy

chapter 7 - straight bankruptcy chapter 13- wage earner plan

dependent

children under 18 or under 24 who is a full time student with less than 2000 in investments

credit bureau

company that collects information about your credit history and sells it to lenders

three types of audits

correspondence, office, field