Personal Finance MidTerm study guide
If the maximum loan-to-value ratio that a lender will accept on a $100,000 home is 80 percent, then the borrower must make a down payment of at least
$20,000.
Janie Long has checking and savings accounts in a federally insured financial institution. The maximum amount of her insurance coverage is
$250,000
For 2014, each personal exemption reduced taxable income by
$3,950
The average graduating college senior leaves school with about _______ in debt.
$30,000
You have $450 in your checking account when your EFTS card and PIN are stolen. You could lose up to ____ if you report the lost EFTS card within 2 business days.
$50
You have $900 in your checking account when your EFTS card and PIN are stolen. You could lose up to ____ if you report the lost EFTS card within 60 business days.
$500
Barney Smith has only one itemized deduction item, the $4,400 he gave to his church. His standard deduction this year is $6,200, and he is in the 15% marginal tax bracket. How much will his contribution to the church save Barney in taxes this year?
0
Theresa invested $5,000 in an account she expects will earn 7% annually. Approximately how many years will it take for the account to double in value?
10 -rule of 72
You made an error when you filed your tax return last year. You can correct this error by filing Form
1040X
Jamil invested $9,500 in an account he expects will earn 5% annually. Approximately how many years will it take for the account to double in value?
14.4 (rule of 72)
In 2014, the total social security tax was
15.3%
Most lenders do not want mortgage payments to exceed ____ percent of your monthly gross income.
25-30 %
If your total liquid assets equal $50,000 and your total current debts equal $15,000, your liquidity ratio is
30%
Mindy and Lou had total liquid assets of $10,000 and total current debts of $30,000. What is their liquidity ratio?
33%
A taxpayer can file for an automatic extension of ___ months.
6 months
Personal net worth is highest at about what age range?
65-74
Kim's net worth is $85,000 and her total assets are $100,000. What is Kim's solvency ratio?
85%
Itemized deductions are listed on Schedule
A
Which of the following is NOT a common misconception about financial planning?
A second income doesn't add as much as expected to the bottom line.
____ would be considered taxable income.
Alimony received
____ would be an indication of overspending.
All your credit cards are charged up to their limits, collection agencies are calling you frequently, your checks are bouncing, you have no cash reserves and must borrow for incidentals.
Joe Gustafson is a very busy person who likes to handle all his financial service needs with one account if possible. Which of the following types of accounts would best serve this need?
Asset management account
Personal insolvency can be legally satisfied by
Chapter 7 & 13 bankruptcy
Which of the following is a major source of home mortgages?
Commercial banks Thrift institutions Mortgage bankers and brokers Credit unions
Which of the following loan sources is the most expensive?
Consumer finance companies
Which of the following is a measure of inflation based on changes in the cost of a market basket of consumer goods and services?
Consumer price index (CPI)
____ tends to increase and then decrease over the life cycle.
Debt & Income
Which of the following are recommended if you loan money to a friend or relative?
Do it in a business-like fashion. Charge interest if the loan is not to be quickly repaid. Be sure both parties understand it is a loan, not a gift. Lend only money you can afford to give away.
While you are still working, you should be managing your finances for retirement planning. Which of the following is not a goal of your retirement planning?
Effectively passing wealth on to heirs
Tax practitioners that are federally licensed are called
Enrolled Agents
Commercial banks are insured by the
FDIC Federal Deposit Insurance Corporation
____ is a reason for preferring to rent rather than to buy.
Flexibility No maintenance worries Lower monthly cash flows Down payment money better used elsewhere
Which of the following questions should you ask yourself when developing your financial goals?
How important is money to me? Am I a risk taker? What do I like to buy? Does money make me feel secure?
You are preparing your own tax return. The least costly source for answering your questions would be
IRS 800 numbers
Which of the following is true regarding auto loans?
Longer term, higher rate, lower payment
Henry is married to Lillian, and they have two dependent children. Henry can legally file using which of the following filing statuses?
Married filing jointly
Which of the following offer tax preparation services?
National and local tax services Certified public accountants Enrolled agents (EAs) Tax attorneys
Which type of educational loan most likely carries the highest interest charges?
PLUS loan
____ would not be a long-term financial goal.
Paying your phone bill
Which of the following is among the four categories accounting for almost three-quarters of consumer spending?
Personal insurance and pensions
____ is a reason for owning your own home.
Pride of ownership A feeling of permanence A sense of stability A tax shelter
The act requiring mortgage lenders to give borrowers HUD booklets and good faith estimates of the closing costs is called the
Real Estate Settlement Procedures Act.
Which of the following are true regarding credit scoring systems?
Scoring systems are based on statistical studies.
____ loans do not have to be repaid until after you graduate from college.
Stafford and Perkins
____ is a benefit of using credit.
The ability to buy expensive goods while spreading the payments over time Providing payments that fit into a budget Having a permanent record of transactions Being able to purchase goods and services when checks are not acceptable
On which of the following types of income would you normally have income tax withheld?
Tips
The personal balance sheet equation is
Total Assets − Total Liabilities = Net Worth.
When you receive title to an individual unit and joint ownership of any common areas and facilities, you have purchased
a condominium
When you lease your apartment from the corporation that owns the building and your lease is an ownership share, your apartment is
a cooperative
____ cards offer the cardholder a way to contribute to a worthy cause, sometimes described as "painless philanthropy."
affinity
You should not record ____ on an income and expense statement covering January 1 to June 30.
an $800 refrigerator bought on credit June 2 for which payment is not due until July
Christina works at a company that offers direct deposit of her paycheck. This service is called
an EFT service
All of the following are useful ways to build a strong credit rating except
apply for a long term loan and occasionally be late with the payment
A characteristic of consumer loans is that they
are all of these
Compared to other depository financial institutions, credit unions
are run to benefit their members. pay higher interest on savings. charge lower rates on loans.
Ideally, retirement planning should begin
as soon as one starts earning
The personal balance sheet describes a family's wealth
at a certain point in time
One can arrange auto loans through
auto dealers, banks, credit unions, consumer finance companies
____ are not a type of open account credit.
bank debit cards
In order to minimize the difficulty associated with meeting monthly loan payments, the debt service ratio should be
below 35%
Vicki Vasquez owns a six-month treasury bill that is four months from maturity. She recently encountered medical problems and needs the money now. She
can sell the T-bill in the open market.
The down payment on the car you are leasing is called the
capital cost reduction
The most important financial planning for young people concerns
career.
Historically, the primary purpose of savings and loan associations was to
channel savings into mortgages.
The lender uses a credit application to determine whether the borrower has the ____ to handle the debt.
character and capacity
____ is(are) an up-front, one-time cost of home ownership.
closing costs
Effective financial plans should
consider your wants and needs. consider your financial resources. reflect your personality. reflect your emotional reactions to money.
Estate planning involves
considering how your wealth can be most effectively passed on to heirs
Consumers whose debt burden has become very heavy might apply for a(n)
consolidation loan
The highest interest rate installment loans are usually made by
consumer finance companies.
Factors typically influencing the choice of where to maintain a checking account are
convenience, services, and cost
If you needed a loan to buy furniture, the lowest interest rate would usually be available from a
credit union
Personal balance sheet liabilities should be recorded at their
current outstanding ballance
Theresa is a bit of a spendthrift. She has trouble saying no when it comes to buying things. Which of the following cards would keep her out of debt?
debit
Generally, as income rises, the average propensity to consume
decreases.
To qualify for a Stafford loan, you must
demonstrate financial need and make satisfactory academic progress
When an S&L is a mutual association, it means that it is owned by the
depositors
Chapter 7 bankruptcy will typically
eliminate most debt obligations
It is not a good idea to use credit
for consumable items
budgets are
forward-looking
Businesses provide
goods and services
The three key groups in the economic environment are
government, consumers, and business.
A strong economy leads to
higher employment
If interest on a savings account is compounded monthly, the effective rate of interest will be
higher than the nominal rate.
Interest rates on ____ are typically lower than on any other form of consumer credit.
home equity lines of credit
The federal government gets the majority of its revenue from the ____ tax.
income
Your income tax withholding is dependent on
income level and number of withholding allowances
The income and expense statement includes
income, expenses, and cash surplus or deficit.
Who would be most likely to have to pay estimated taxes?
independent consultant
For the first 15 years of a 30-year mortgage, the majority of each monthly payment goes to
interest
Home equity loans are similar to other installment loans except
interest paid is generally tax deductible your home is used as collateral
A(n) ____ would not be listed as an asset on your balance sheet.
leased automobile
The capital cost reduction on a vehicle lease is
like the down payment on a loan
Using personal balance sheet information, the ____ ratio indicates your ability to meet current debt payments.
liquidity
It is not a good idea to use credit to
live beyond one's means
Personal financial management is important because it
makes personal financial goals easier to achieve.
Credit unions lend money to qualified people who are
members
The financing rate on the car you are leasing is called the
money factor
The main purpose of a budget is to
monitor and control financial outcomes
The majority of loans made by savings and loan associations are ____ loans.
mortgage
Credit unions are:
mutual associations.
If you borrow money with a single-payment loan and discover you cannot pay it back when it is due you should
negotiate a loan rollover
Anna uses her credit card regularly, but she pays the total balance monthly. Anna should look for a credit account with
no annual fee long grace period
You have owned and lived in your home for 8 years. Now you have received an excellent promotion, but you will have to sell your home and move to another community. You expect to realize a capital gain of $100,000 on the home's sale. The capital gain will
not be taxable because the home was your principal residence.
The least expensive method for banks to interact with their customers is
online
To establish creditworthiness you probably should first
open savings and checking accounts
A check you wrote to buy shoes last week has not yet been processed by the bank. It is said to be
outstanding.
A credit card can provide an interest-free loan if you
pay the entire balance on or before the due date
The average propensity to consume refers to the
percentage of income spent for current consumption
The federal income tax is
progressive
____ can be deducted on your federal tax return.
property taxes
The most popular use of consumer loans is to
purchase a car
At the end of the lease period, you are never required to
purchase the vehicle at its residual value
The financial crisis of 2008 and 2009 is best characterized as a
recession.
Low interest rates are helpful in
reducing the service cost on the national debt.
A(n) ____ is not an interest-bearing account.
regular checking account
All of the following are key items lenders look at in granting credit except
religious affiliations
Phil and Christina are recently married and unsure of where they will be relocated after Christina finishes her residency in 9 months. Based on this information, which of the following housing recommendations would be most appropriate for them?
rent an apartment
A check you issued has been stolen. You can prevent it from being withdrawn from your account by an unauthorized person by
requesting a stop payment order
In which of the following situations would you have to pay additional money when returning a vehicle using an open-end lease?
residual value is less than expected mileage limits were exceeded
Sam and Lele are in their late 20s with 3 young children. Their most important financial planning concerns would probably include all of the following except
retirement and estate planning.
The primary reason people use financial advisors is
retirement needs.
Inflation refers to
rising prices
Persons with very poor credit ratings can still get ____ credit cards.
secured
Lower interest rates on certificates of deposit are associated with
shorter time periods
Molly and Jason were married. Their only "dependent" was Spot, their black standard poodle. Jason died in 2013. Assuming she does not remarry, in 2014 the only legal filing status for Molly would be
single
If you do not wish to itemize deductions, you can use the
standard deduction.
The Robertsons, a couple with an AGI of $28,500, decided to contribute the maximum amount possible towards their IRAs even though Mr. Robertson had a pension plan at work. He named his wife as beneficiary of the IRA. What is such a tax strategy called?
tax deferral since he'll have to pay taxes later when he withdraws the money
A problem with home equity loans is the
temptation to spread payments over a long term
With open account credit, one can often avoid interest charges if
the account balance is paid in full every month
A real estate sales contract will include
the amount you are willing to pay for the property
Sometimes it may be better to use savings rather than credit to make a purchase. This would be recommended when
the cost of borrowing is greater than the interest earned on the savings.
Utility refers to
the satisfaction you receive from purchasing something.
Regarding student loans, which of the following is true?
there is a limit on how much can be borrowed with each loan
Commercial banks generally charge lower interest rates than other lending institutions because
they usually only take the best credit risks
Which of the following is a potential advantage of online bill payment systems?
time and postage savings
single payment loan
usually matures in one year or less
Which of the following is not among the four categories accounting for almost three-quarters of consumer spending?
utilities
Which of the following are not among the four categories accounting for three-quarters of consumer spending?
utilities and clothing
Purchasing credit life or disability insurance protection is usually
very costly
