Finance Ch 1
Paul invested $185. The interest earned is 4 percent, compounded annually. At the end of two years, Paul will have about:
$200
Phillip has an investment of $200 that is expected to earn 10% annually. How much will the investment be worth at the end of the second year if the investment earns interest compounded annually?
$242
What is the first step in the financial planning process?
determine your current financial situation
The rule of 72 is used to estimate the time that it would take for your money to:
double
parts of the fourth step in the personal financial planning process?
economic factors/conditions life situation personal values
Reviewing and revising your plan is the ______ step in the financial planning process.
final
Determining your current financial situation is the ______ step in the financial planning process.
first
The amount to which current savings will increase based on a certain interest rate and a certain time period is called:
future value
Which of the following is a possible pitfall in creating and implementing your financial plan?
inflexibility
time frame for a long-term goal
more than 5 years off
According to the text, you should do a complete review of your finances at least:
once a year
Every financial decision has a trade-off, also known as a(n):
opportunity cost
Paul can invest his money in the stock market now instead of buying a new car; however, that would require a trade-off or:
opportunity cost
_____ ______ is what you give up when making a choice; a trade-off
opportunity cost
Rachel has been shopping for a new refrigerator over the course of three days and has been putting all her household chores on hold. She finds a refrigerator that fits her needs and purchases it. This is an example of:
personal opportunity costs
What is the current value of a future amount based on a certain interest rate and a certain time period?
present value
Rule of 72
used to determine the time it would take your money to double
Developing your financial goals is the ______ step in the financial planning process.
second
Long-term financial security starts with a regular ______ plan for emergencies and unexpected bills.
savings
Another name used for calculating present value is ______.
discounting
_____ is the other term for future value.
compounding
time frame for a short term goal
withing the next year or so
Tom needs a new washing machine. A new one costs $400. He decides to save and buy one next year. All other factors being equal, if inflation is 4%, the washing machine will cost $ next year. This should be an even answer with no need for decimals.
$416
Types of opportunity costs
-Personal: time, effort, health -Financial: including time value of money
According to the text, what are the main reasons Americans have financial problems?
-advertising efforts and availability of goods encourage overspending -poor planning and weak management of money habits
Which of the following are part of evaluating alternative courses of action in the financial planning process?
-considering inflation risk -evaluating risk -considering the consequences of your choices
To calculate time value of money for savings, the following items are needed:
-length of time -principal amount -annual interest rate
Determining your current financial situation involves which of the following?
-preparing your personal financial statements -identifying current income, savings, living expenses, and debts
When determining goal-setting guidelines, what three things should you take into account?
-saving -spending -investing activities
Interest rates are affected by the following:
-supply of money -demand for money
John has an interest rate of 7.2% on his savings account. Using the Rule of 72, his money will double in __ years.
10
According to the text, there are ______ main factors that contribute to Americans having money problems.
2
time frame for an intermediate goal
2-5 years
Alex has an interest rate of 3.6% on his savings account. Using the rule of 72, his money will double in __ years.
20
rule of 72 formula
72 divided by interest rate (not in decimal) equals number of years needed to double the principal investment Ex)John has an interest rate of 7.2% on his savings account. Using the Rule of 72, his money will double in 10 years
Future Value formula
Ex) $100 6% annual $100 + ($100 x 0.06 x 1 year)
Time value of money
Increase in an amount of money as a result of interest earned.
Interest rates represent the:
The cost of borrowing money
The main purpose of the Federal Reserve is to
act as the central bank and maintain an adequate money supply
Understanding how the ages of dependents will affect your savings goal is a part of step four in the financial planning process, which involves evaluating your ______.
alternatives
Another name used for discounting is:
present value computations
Identifying alternative courses of action is the ______ step in the financial planning process.
third
An important personal opportunity cost is the ______ used for one activity cannot be used for other activities.
time
Future value is the amount to which current savings will increase based on a certain interest rate and _____ _____.
time period
What measures the increase in an amount of money as a result of interest earned?
time value of money
Key factors for most people in making financial decisions include:
-time value of money -inflation costs -financial opportunity costs
The measure of the average change in the prices urban consumers pay for a fixed "basket" of goods and services is called the:
consumer price index
Choosing to save a larger amount each month is an example of which possible course of action that is a part of step three in the financial planning process?
expanding the current situation
The measure of the average change in the prices urban consumers pay for a fixed "basket" of goods and services is called the consumer price ____
index
T/F: A key factor in making financial decisions is time value of money.
true
Three amounts used to calculate the time value of money for savings in the form of interest earned:
-the amount of the savings (the principal) -the annual interest rate -the length of time the money is on deposit
The ______ ______ System is the central bank of the United States and has significant economic responsibility.
Federal Reserve
When consumer saving and investing increase, interest rates tend to:
decrease