Personal Finance Ch. 6-10 Exam 2 Prep

(Ch.8) Annual depreciation $2,500 Annual mileage 13,200 Current year's loan interest $650 Miles per gallon 24 Insurance $680 Average gasoline price $3.68 per gallon License and registration fees $65 Oil changes/repairs $370 Parking/tolls $420 A. Compute the total annual operating cost of the motor vehicle. Total variable cost ? Total fixed cost ? B. Compute the operating cost per mile. (Input your answer in cents rounded to 1 decimal place.)

(A) Fixed Ownership Costs $2500 Depreciation $650 Interest of Loan $680 Insurance $65 License/Registration Total- $3895 Variable Operating Costs $2024 Gas $370 Oil/Repairs $420 Parking/tolls Total - $2814 Gasoline cost=(Annual mileage / Miles per gallon) × Average gasoline price per gallon =(13,200 / 24) × $3.68 =$2,024 (b) Operating cost per mile=(Total variable costs + Total fixed costs) / Annual mileage =($3,895 + 2,814) / 13,200 =$0.508, or 50.8 cents per mile

(Ch.7) Dave borrowed $500 on January 1, 2006, and paid it all back at once on December 31, 2006. The bank charged him a $5 service charge and interest was $50. What was the APR? (Enter your answer as a percent rounded to the nearest whole percent.)

Annual finance charge=Interest + Other costs =$50 + 5 =$55 APR=Annual finance charge / Principal borrowed =$55 / $500 =0.11, or 11%

(Ch.6) Which of the following is an example of closed-end credit mentioned in the video?

Automobile Loans

(Ch.6) ____________________________ is more common and has a _______________ interest rate charged by most lenders.

Closed-end credit; lower

(Ch.6) When compared to __________________, ___________________ is often more difficult to obtain because the lender must rely upon your word that you will pay back the loan.

Closed-end credit; open-end credit

(Ch. 6) Suppose that your monthly net income is $2,400. Your monthly debt payments include your student loan payment and a gas credit card. They total $360. What is your debt payments-to-income ratio?

Explanation Debt payments-to-income ratio=Debt payments / Net income =$360 / $2,400 =0.15, or 15%

(Ch.8) You can purchase a service contract for all of your major appliances for $180 a year. If the appliances are expected to last for 10 years and you earn 5 percent on your savings, what would be the future value of the amount you will pay for the service contract? Use Exhibit 1-B. (Round time value factor to 3 decimal places and final answer to 2 decimal places.)

Explanation FV= Annual payment × Future value annuity factor = $180 × 12.578 = $2,264.04

(Ch.6) Carl's house payment is $1,050 per month and his car payment is $385 per month. If Carl's take-home pay is $2,800 per month, what percentage does Carl spend on his home and car? (Round your answer to 2 decimal places.)

Explanation Loan payments-to-income ratio=Loan payments / Net income =($1,050 + 385) / $2,800 =0.5125, or 51.25%

(Ch.7) The total dollar amount you pay to use credit is called the:

finance charge.

(Ch.6) Robert Thumme owns a $140,000 townhouse and still has an unpaid mortgage of $110,000. In addition to his mortgage, he has the following liabilities: Visa $565 MasterCard $480 Discover card $395 Education loan $920 Personal bank loan $800 Auto loan $4,250 Total $7,410 Robert's net worth (not including his home) is about $21,000. This equity is in mutual funds, an automobile, a coin collection, furniture, and other personal property. What is Robert's debt-to-equity ratio? (Round your answer to 2 decimal places.) Has he reached the upper limit of debt obligations?

(a) The debt-to-equity ratio excludes both the value of a home and the mortgage on that home. Thus, these items are omitted from the following calculations. Total debt=$565 + 480 + 395 + 920 + 800 + 4,250 =$7,410 Debt-to-equity ratio=Total debt / Total equity =$7,410 / $21,000 =0.35 (b) Robert's debt-to-equity ratio is less than the upper limit of debt obligations which is defined as a debt-to-equity ratio of 1.

(Ch.7) Bobby is trying to decide between two credit cards. One has no annual fee and an interest rate of 18 percent, and the other has a $40 annual fee and an interest rate of 8.9 percent. If Bobby pays his credit card balance in full each month, which card should he choose? If Bobby just pays the minimum payment and carries a balance from one month to the next, which card should he choose?

(a)Since Bobby will not incur any interest charges, he should select the card without the annual fee. (b)Since Bobby will incur interest charges, he should most likely select the card with the lowest interest rate.

(Ch.6) What is your debt payments-to-income ratio if your debt payments total $684 and your net income is $2,000 per month? (Round your answer to 1 decimal place.)

Debt payments-to-income ratio=Debt payments / Net income =$684 / $2,000 =0.342, or 34.2%

(Ch.8) John Walters is comparing the cost of credit to the cash price of an item. If John makes a $80 down payment and pays $34 a month for 24 months, how much more will that amount be than the cash price of $695? (Input the amount as a positive value.)

Difference=Credit purchase cost - Cash price =[($80 + (24 × $34)] - $695 =$201

(Ch.8) If a person saves $63 a month by using coupons and doing comparison shopping, what is the amount for a year? What would be the future value of this annual amount over 10 years, assuming an interest rate of 4 percent? Use Exhibit 1-B. (Round time value factor to 3 decimal places and final answer to 2 decimal places.)

Explanation (a) Annual savings=Monthly savings × 12 =$63 × 12 =$756 (b) FV=Annual savings × Future value annuity factor =$756 × 12.006 =$9,076.54

(Ch.6) Louise McIntyre's monthly gross income is $2,000. Her employer withholds $400 in federal, state, and local income taxes and $160 in Social Security taxes per month. Louise contributes $80 per month to her IRA. Her monthly credit payments for Visa, MasterCard, and Discover cards are $35, $30, and $20, respectively. Her monthly payment on an automobile loan is $285. A) What is Louise's debt payments-to-income ratio? (Round your answer to 1 decimal place.) B) Is Louise living within her means?

Explanation (a) Net income=Gross income - Taxes - IRA contribution =$2,000 - 400 - 160 - 80 =$1,360 Debt payments=Credit card payments + Auto loan payment =$35 + 30 + 20 + 285 =$370 Debt payments-to-income ratio=Debt payments / Net income =$370 / $1,360 =0.272, or 27.2% (b) Louise is not living within her means because her debt payments-to-income ratio exceeds 20 percent of her net income.

(Ch.6) Kim Lee is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Kim is living at home and works in a shoe store, earning a gross income of $820 per month. Her employer deducts a total of $145 for taxes from her monthly pay. Kim also pays $95 on several credit card debts each month. The loan she needs for chiropractic school will cost an additional $120 per month. Help Kim make her decision by calculating her debt payments-to-income ratio with and without the college loan. (Remember the 20 percent rule.) (Round your answers to 2 decimal places.) Debt payments-to-income ratio with college loan Debt payments-to-income ratio without college loan

Explanation Net income=Gross income - Taxes =$820 - 145 =$675 Current debt without college loan: Debt payments-to-income ratio=Debt payments / Net income =$95 / $675 =0.1407, or 14.07% Current debt plus college loan: Debt payments-to-income ratio=Debt payments / Net income =($95 + 120) / $675 =0.3185, or 31.85% If Kim adds the college debt to her current credit card debt, her debt-payments-to-income ratio will exceed the recommended 20 percent limit. However, if Kim can pay off her credit card debt, then the college loan is affordable as seen here: College loan only: Debt payments-to-income ratio=Debt payments / Net income =$120 / $675 =0.1778, or 17.78%

(Ch.9) Kelly and Tim Browne plan to refinance their mortgage to obtain a lower interest rate. They will reduce their mortgage payments by $83 a month. Their closing costs for refinancing will be $1,670. How long will it take them to recover the cost of refinancing? (Round your answer to 1 decimal place.)

Explanation Recovery time=Refinancing cost / Monthly savings =$1,670 / $83 =20.1 months

(Ch.9) Which mortgage would result in higher total payments? Mortgage A: $970 a month for 30 years Mortgage B: $760 a month for 5 years and $1,005 for 25 years

Explanation Total payments=Monthly payment × Number of months per year × Number of years Mortgage A: Total payments=$970 × 12 × 30 =$349,200 Mortgage B: Tota payments=($760 × 12 × 5) + ($1,005 × 12 × 25) =$347,100 Mortgage A has higher total payments than mortgage B.

(Ch.8) Purchase Costs Down payment $1,500 Loan payment $450 for 36 months Estimated value at end of loan $4,000 Opportunity cost interest rate 4 percent Leasing Costs Security deposit $500 Lease payment $450 for 36 months End of lease charges $600 Based on the costs listed in the table above, calculate the costs of buying and of leasing a motor vehicle. Based on the costs listed in the table above, calculate the costs of buying and of leasing a motor vehicle.

Explanation Total purchase cost = Down payment + Loan payments + Opportunity cost − Estimated value at end of loan = $1,500 + ($450 × 36) + ($1,500 × 0.04 × 3) − $4,000 = $13,880 Total lease cost = Lease payments + Opportunity cost + End-of-lease charges = ($450 × 36) + ($500 × 0.04 × 3) + $600 = $16,860

(Ch.7) What are the interest cost and the total amount due on a six-month loan of $1,500 at 13.2 percent simple annual interest? (Do not round your intermediate calculations. Round your answers to the nearest whole dollar.) Interest cost Total amount due

Explanation Interest=P × r × T =$1,500 × 0.132 × (6 / 12) =$99 Total amount due=Principal borrowed + Interest =$1,500 + 99 =$1,599

(Ch.9) You estimate that you can save $3,800 by selling your home yourself rather than using a real estate agent. What would be the future value of that amount if invested for five years at 9 percent? Use Exhibit_1-A. (Round time value factor to 3 decimal places and final answer to 2 decimal places.)

FV=Inital savings × Future value factor =$3,800 × 1.539 =$5,848.20

(Ch.7) Dave borrowed $500 for one year and paid $50 in interest. The bank charged him a $5 service charge. What is the finance charge on this loan?

Finance charge=Interest + Other costs =$50 + 5 =$55

(Ch.9) According to the video, the decision to rent or buy a home is an important decision that can affect not only your ________________, but also your _________________.

Financial decisions; quality of life According to the video, the decision to rent or buy a home is an important decision that can affect not only your financial decisions, but also your quality of life.

(Ch.7) Damon convinced his aunt to lend him $2,000 to purchase a plasma digital TV. She has agreed to charge only 6 percent simple interest, and he has agreed to repay the loan at the end of one year. How much interest will he pay for the year?

I=P × r × T =$2,000 × 0.06 × 1 =$120

(Ch.7) Rebecca wants to buy a new saddle for her horse. The one she wants usually costs $500, but this week it is on sale for $400. She does not have $400, but she could buy it with $50 down and pay the rest in 6 months with 10 percent interest. How much will Rebecca save or lose by buying the saddle this week? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Interest=P × r × T =($400 - 50) × 0.10 × (6 / 12) =$17.50 Total cost=Down payment + Principal borrowed + Interest =$50 + 350 + 17.50 =$417.50 Amount saved=Regular price - Total cost =$500 - 417.50 =$82.50

(Ch.9) According to the video, all of the following is a disadvantage of buying a home, except:

It can be hard to maintain ownership of the home. Disadvantages of buying a home include the higher cost to buy a home, difficulty in moving or changing homes, and difficulty in finding a buyer that will pay what your home is worth and can qualify for a loan to buy your home may take time.

(Ch.8) Calculate the unit price of each of the following items (Round your answers to 1 decimal place.): Motor oil $1.95 2.5 quarts Cereal $2.17 15 ounces Canned fruit $0.89 13 ounces Facial tissue $2.25 300 tissues (cents per 100) Shampoo $3.96 17 ounces

Motor oil$1.95 / 2.5 = $0.7878 cents a quart Cereal$2.17 / 15 = $0.144614.5 cents an ounce Canned fruit$0.89 / 13 = $0.06846.8 cents an ounce Facial tissue$2.25 / 300 × 100 = $0.7575 cents per 100 tissues Shampoo$3.96 / 17 = $0.232923.3 cents an ounce

(Ch.8) What would be the net present value of a microwave oven that costs $159 and will save you $68 a year in time and food away from home? Assume an average return on your savings of 4 percent for five years. Use Exhibit 1-D. (Round time value factor to 3 decimal places, intermediate and final answers to 2 decimal places.)

NPV=PV of cost savings - Initial cost =($68 × 4.452) - $159 =$143.74

(Ch.7) Which one of the following is often the source of the least expensive loan?

Parents or family members

(Ch.6) Drew's monthly net income is $1,600. What is the maximum he should use on debt payments?

The recommended maximum debt payments-to-income ratio is 20 percent. Thus, the maximum monthly debt payment amount is: Maximum monthly debt payment=0.20 × Monthly income =0.20 × $1,600 =$320

(Ch.7) Which federal law, passed in 1969, requires creditors to state the cost of borrowing as a dollar amount?

Truth in Lending Law

(Ch.7) A "float" period can be defined as:

a certain number of days during which no interest is charged.