Chapter 1 - Personal Finance Basics and the Time Value of Money

According to the text, why is goal setting an important aspect for personal financial growth?

Goal setting assists with the financial decision making process.

Saving for four years for a down payment on a house affects how soon you are able to purchase a home. This is an example of:

an intermediate goal that affects a long-term goal

A series of equal deposits or payments is called a(n):

annuity

The amount to which current savings will increase based on a certain interest rate and a certain time period is called:

future value

Personal financial planning is the process of managing your money to achieve

personal financial goals

Rachel has been shopping for a new refrigerator over the course of three days instead of being at work. This is an example of:

personal opportunity costs

Which of the following do not influence personal financial planning, as shown in the fourth step of the financial planning process?

political orientation of the investor

Discounting is the process of calculating:

present value

The current value of an amount at some time in the future, based on a certain interest rate and a certain time period is called:

present value

Examples of short-term consumable products are:

food and clothing

A key factor in making financial decisions is time value of money. True or False

true

Personal ______ are the ideals and principles that a person considers correct, desirable, and important.

values

One of the methods used to calculate future value is:

spreadsheet software

A person that adheres to the same principles in all situations has:

strong values

Which of the following is the outcome of poor financial management and extensive selling efforts by Americans?

Financial problems

Marie will be receiving $300 per year for the next six years. The interest on the account is 5%, compounded annually. What is roughly the present value of this annuity? Use the appropriate table in the appendix at the back of the chapter for the present value of an annuity.

$1,523

Paul needs to have $200 in two years. The interest earned on the account is 4%, compounded annually. How much does he need to invest today?

$185

Your life situation, personal values, and economic factors influence what?

Your financial plan

So many Americans have money problems because

of weak money management habits of poor planning

What type of global influence does American consumption have on foreign companies?

American consumers provide foreign companies with a market.

What is the current value of a future amount based on a certain interest rate and a certain time period? Notice that the future value is already known. You want to find the current value of that amount.

Present value

What is the Federal Reserve doing when it lends more money, buys government bonds, and changes interest rates?

The Fed is maintaining or increasing the money supply.

How does a rapidly increasing unemployment rate influence a person with a job?

The decisions that the person makes will usually be lower risk and will focus on ways to preserve savings and maintain financial security.

When planning your financial goals, what role does the economy play?

The economy can play a direct role in your planning process.

What is the definition of economics as described in this text under economic factors?

The study of how wealth is created and distributed

How is the money supply maintained by the Federal Reserve?

Through borrowing, interest rates, and buying and selling of government bonds

What measures the increase in an amount of money as a result of interest earned?

Time value of money

Which economic factor measures the difference between a country's exports and imports?

Trade balance

The fourth step of the financial planning process is evaluating each alternative course of action, taking into account the individual's life situation, personal values, and current economic conditions. True or False

True

American consumers spend dollars on goods and services. The goods and services are manufactured or offered by American companies and companies from other countries. This is an example of:

a global economy and foreign competition

The purpose of the Federal Reserve System is to:

act as the central bank and maintain an adequate money supply

What is another term for opportunity cost?

trade-off

Paul invested $185. The interest earned is 4%, compounded annually. At the end of two years, Paul will have about:

$200

Sam has an investment of $200 that is expected to earn 10% annually. How much will the investment be worth at the end of the first year if the investment earns simple interest?

$220

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 simple interest compounded annually?

$242

If you deposit $500 per year in an account for six years at 9%, how much will you have in the account? Use the appropriate table in the appendix at the back of the chapter for the future value of an annuity. Round your answer to the nearest whole dollar amount.

$3,762

Paula needs to have $400 in three years. The interest earned on the account is 6%, compounded annually. How much does she need to invest today? Use the appropriate table in the appendix to the chapter for the present value of $1. at the end of a given number of time periods.

$336

Paula invested $370. The interest earned is 4%, compounded annually. At the end of two years, Paula will have about:

$400

If you deposit $500 per year in an account for nine years at 6%, how much will you have in the account?

$5,746

Simon will be receiving $200 per year for the next five years. The interest on the account is 6%, compounded annually. What is roughly the present value of this annuity? Use the appropriate table in the appendix at the back of the chapter for the present value of an annuity.

$843

Samantha is trying to decide between two investments. The first one will earn 5% simple interest annually. The second investment will earn 5% compounded quarterly. Assuming they have the same amount of risk, which is the better investment?

5% compounded quarterly

Which term is a set of federal laws that allows you to either restructure your debts or remove certain debts?

Bankruptcy

What are examples of well-written financial goals?

Developing a savings plan of $100 per week to make a down payment on a car in a year Investing $250 per month for retirement in 40 years

The fifth step of the financial planning process is to create and implement the financial action plan. What is involved in this process?

Developing an action plan that identifies ways to achieve your financial goals.

Bill recently created his financial plan after much thought and decision making. He implemented his plan, and so far the plan is working. What must Bill do now?

He must maintain his financial plan. He must continue to review and revise his plan.

One essential element of personal financial planning is:

adequate insurance coverage

The different stages of the financial and family needs of an adult is called the:

adult life cycle

The legal status of a person who is not able to pay debts owed is called

bankruptcy

The Fed has indirect control over interest rates. This will have an influence on which of the following items:

business expansion consumer spending

The Fed influences the money supply by:

buying and selling government securities controlling interest rates

Financial planning is designed to:

create a better life

Financial planning would NOT improve your quality of life by:

creating specific rules for how everyone should live guaranteeing happiness creating barriers to enjoying life

The present value is the ______ value for a _____ amount based on a particular interest rate for a certain period of time.

current; future

The first step in the financial planning process is:

determining your financial situation regarding income, savings, living expenses, and debt

One of the most commonly overlooked type of insurance is (found in discussion of managing risk):

disability

Another name used for calculating present value is ______.

discounting

The _____________ environment includes various institutions, including businesses, labor, and government, that work together to satisfy needs and wants.

economic

The three elements that affect personal financial planning are your life situation, personal values, and current ___________________ conditions.

economic

An annuity is a series of _____ deposits.

equal

The fourth step of the financial planning process is:

evaluating each alternative method and taking into account the individual's personal finances, values, and the state of the economy

Creating and implementing a financial action plan is the third step of the financial planning process. True or False

false

Everyone has the same personal financial goals. True or False

false

When creating a financial plan, it is a simple, static process that is easy to implement and requires little maintenance moving forward. True or False

false

Obtaining monetary resources is the foundation of personal ______ planning.

financial

Determining your current financial situation regarding income, savings, living expenses, and debts is the _______ step in the financial planning process.

first

Examples of opportunity costs do NOT include:

having enough money to fund retirement and pay for current expenses

Liquidity needs vary based upon which of the following items?

health the person's age family situation

You are thinking of investing and you are concerned about the risk involved. Which of the following can be used to evaluate the risk that is involved?

identify a successful investor as a mentor and read financial planning sources to gain knowledge

the third step in the financial planning process is:

identify alternative courses of action

Future value computations are often referred to as compounding, as _____.

interest is earned on previously earned interest

Sandra continues to have challenges keeping her debt at a reasonable level. This will mean that there will be:

less money available for the future

Spending _____ you earn is the only way to achieve long-term financial security.

less than

What are three main elements that affect overall financial planning?

life situation personal values economic situation

Spending less than you earn is the only way to achieve ______-term financial security.

long

When people first begin planning for retirement, saving for a child's college education, and planning the purchase of a vacation home, these are usually:

long-term goals

Since Carl has gone bankrupt, he decided to stop misusing his credit. This will mean that there will be:

more money available for the future

Examples of opportunity costs include:

not getting a high yield because you have set aside funds in a low risk investment not having as much money in savings because you purchased new appliances to save energy costs taking home less pay now because you have increased tax withholdings to receive a larger tax refund

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 costs

Common ways to obtain financial resources are:

ownership of a business investments employment

To calculate time value of money, the following items are needed:

principal amount annual interest rate length of time

If foreign companies decide not to invest their dollars in the United States, the domestic money supply is:

reduced

In order to evaluate risk, people need

reliable information

Your chances of losing something of great value is one way of looking at

risk

Two methods that will NOT help develop long-term successful financial habits are:

saving as much money as possible for only one year regularly using your emergency fund for routine expenses

Food and clothing are examples of:

short term consumable goods

When setting financial goals, you should ensure they are:

specific measurable action-oriented realistic time-based

A married couple are going to purchase a car that is five years old. Should the couple make their decision using sources that are five years old or updated sources?

the couple should use updated information sources to make their decision

What type of cost do you indirectly incur if you decide to go to school and not work?

the opportunity cost of not earning current income

The definition of personal financial planning is:

the process of managing your money to achieve personal economic satisfaction

What is the definition of the adult life cycle?

the stages in the family and financial needs of an adult

An important personal opportunity cost involves the resources of money or ______.

time

What are some of the methods that can be used to compute time value of money?

time value of money tables mathematical formulas financial calculators

A financial plan is a formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities. True or False

true

Creating and implementing your financial action plan is the fifth step of the financial planning process. True or False

true

Frank can invest some of the money he has been saving in the stock market now; however, that would probably require some trade-offs on his part. True or False

true

Liquidity needs vary based upon a person's age, health and family situation. True or False

true

Relevant information is required at every stage of the decision-making process. True or False

true

Three items needed to calculate future value include: principal, length of time, annual interest rate. True or False

true

Long-term financial security begins with a regular savings plan to provide for:

unexpected bills replacement of major items emergencies

Savings plans are not designed to provide for:

unplanned social events last-minute vacations