Collegiate Personal Finance F151 (Ch 8, 9, 10, 11 & 13)- IUS Spring 2020
Alaina makes $50,000 per year. According to the basic rule of thumb, she can borrow about _________ for her home.
$125,000 50,000*2.5
Toni has invested $100 each of the last two months. Last month the stock was trading at $25 per share when she bought it. This month the stock was trading at $20 per share when she bought it. The stock is currently selling for $23 per share. What is the current value of her account?
$207 100/25=4 100/20=5 4+5=9 9*23=207
Claud has $450 available in his budget each month for a car after considering taxes and insurance. He has $5,000 for a down payment and his trade-in is valued at $6,500. Assuming he wants to pay the car off in four years, and the interest rate is 8.0%, what is the maximum amount of car he can afford?
$29,933 N:44 × 12 = 48; Rate: 8.0% / 12 = 0.666666667%; PMT: −450; FV: 0.Solve: PV: $18,433 + Down payment ($5,000) + Trade-in value ($6,500)= $29,933.
If you are in the 22%federal marginal tax bracket and you want to purchase something that costs $250.00, how much do you have to earn in pre-tax dollars?
$321.00 (1-.22)= 0.78 250/.78=321 You have to earn $321.00 before taxes to have $250.00 left over after taxes if you pay 22% in marginal taxes. ATM = (1 - Tax rate); ATM = (1 - 0.22); ATM = (0.78); Pre-Tax Earnings = Cost / ATM; Pre-Tax Earnings = $250.00 / 0.78 = $321.00
According to the following chart, a single taxpayer with taxable income of $38,701 would pay how much in income tax? Taxable Income Tax $0 to $9,525 10% of income $9,526 to $38,700 $952.50 plus 12% of income over $9,525 $38,701 to $82,500 $4,453.50 plus 22% of income over $38,700 $82,501 to $157,500 $14,089.50 plus 24% of income over $82,500 $157,501 to $200,000 $32,089.50 plus 32% of income over $157,500 $200,001 to $500,000 $45,689.50 plus 35% of income over $200,000 $500,001 and over $150,689.50 plus 37% of income over $500,000
$4,453.50 Since $38,701 is at the starting point of a new tax bracket, the initial amount listed is what the taxpayer should pay. Any additional amount above that income would then be taxed at 22%. The tax bracket
Alfreda wants to buy a car for $23,000 with no money down. The current interest rates are 3.75% and she would like to pay the car off in three years. What is her monthly payment? Using financial calculator: Present value is 23,000 Interest rate is 3.75 Periods is 36 months
$676.50
Katerine was considering a 36-month lease. The dealer gave her a list of numbers which included a money factor of 0.00425. What is her approximate interest rate?
10.20% 0.0045* 2,400
Neville was talking to his brother, Stan, about mortgages. He kept referring to his new mortgage as an equity mortgage. What he was really referring to was:
15-year mortgage
The company that Michele owns stock in just released its earnings statement. It earned $25 million, it has 10 million outstanding shares of stock and the shares are currently selling for $40 per share. What is its PE ratio?
16 25 mil/ 10 mil= 2.5 40/2.5= 16
Cornelius was looking to purchase stock. The company he was researching had just reported $8,000,000in earnings and was currently trading for $27 per share. There are 10,000,000 shares outstanding. What is thecompany's PE ratio?
33.75 First, calculate EPS which is Earnings divided by Shares outstanding ($8,000,000 / 10,000,000= $0.80 EPS). Then, calculate PE ratio, which is Current price divided by EPS ($27/ 0.80 = 33.75 PE ratio).
Forrest is looking to purchase a $1,000-face-value corporate bond trading at $950. The bond pays $50 in interest annually. What is the current yield on the bond?
5.3% 50/950= 5.3
Lindsey's investments are earning 7.5% per year on average. Her brokerage firm charges a 1.5% commission annually on her portfolio. At what approximate rate is her wealth really growing each year?
6.0%
Marlene is purchasing a 20-year, $1,000-face-value bond as an investment. The bond is currently selling for $1,466 and it pays $110 interest annually. What is the yield to maturity for this bond?
7.00% To calculate the yield to maturity (YTM), use time value of moneycalculations: N: 25 (years until maturity) PMT: $110110 (annual interest or coupon payment) PV: -$1,466 (the cost of the bond, as a negative number) FV: 1,000 (the face value) Rate: Solve = 7.00% To calculate the yield to maturity (YTM), use time value of moneycalculations: N: (years until maturity) PMT: (annual interest or coupon payment) PV: (the cost of the bond, as a negative number) FV: (the face value) Rate: Solve
Mariah is earning 9% on investments, but they are in taxable accounts. Mariah's marginal tax bracket is only 12%. What is Mariah's effective earnings aftertaxes?
7.92% To solve for the After-tax earnings needed, first solve the After-tax multiplier (1- Tax rate (12%) = 88%. Take the Before-tax earnings (9%) and multiply by the After-tax multiplier (88%)= After-tax earnings (7.92%).
Other than the new car smell, which of the following is an advantage of buying a new car? A. Reduced maintenance. B. Peace of mind. C. Long warranty coverage. D. Most up-to-date technology. E. All the answers are correct.
All of the answers are correct.
Taxes on earnings refers to: A. Social Security taxes. B. Medicare taxes. C. Federal income taxes. D. State income taxes. E. All the answers are correct.
All of the answers are correct. A typical taxpayer will pay federal income taxes, Social Security taxes, Medicare taxes, and state income taxes (where applicable) on earnings.
The IRS has the power to: A. Audit any individual or business. B. Take a taxpayer to court for fraud. C. Take a taxpayer to court for failure to pay taxes owed. D. Shut down businesses that owe taxes. E. All the answers are correct.
All of the answers are correct. The IRS has the power to shut down businesses, perform audits, and take taxpayers to court for fraud or failure to pay taxes.
Before you step onto a car lot, it's important to determine: A. the market value of the vehicle. B. the cost to finance the vehicle. C. the cost to insure the vehicle. D. your transportation needs. E. All the answers are correct.
All the answers are correct.
Lloyd just purchased a home. Unfortunately, he did not account for the costs of customizing his home. These specific costs are likely associated with: A. adding outdoor space. B. interior decorating. C. landscaping. D. renovating. E. All the answers are correct.
All the answers are correct.
Malik is looking to purchase a fixed-rate mortgage. This means his only option is a ___________ mortgage. A. government-backed B. non-conforming C. conforming D. conventional E. All the answers are correct.
All the answers are correct.
Michael asks an investment adviser about investing outside of retirement. His adviser says he must first understand there are disadvantages to investing outside retirement, such as: A. not maximizing the company match for investments. B. paying more money in fees. C. paying taxes on earnings. D. missing out on tax deferral. E. All the answers are correct.
All the answers are correct.
Sylvester's goal is to build wealth. He should: A. pay himself first. B. assume some risk. C. make his investments a priority. D. invest his money. E. All the answers are correct.
All the answers are correct. To build wealth he needs to invest and must make it a priority to pay himself first and be willing to take some risk.
Investing is about: A. increasing the purchase power of your money. B. making money. C. long-term goals. D. building wealth. E. All the answers are correct.
All the answers are correct. Investing is about making money, building wealth, achieving long-term goals, and increasing purchasing power over time.
Edward's income places him in the category of "upper class," which, as a group, pays more than 80% of all individual income taxes in the United States. "Upper class" means his earnings must put him at least in the: A. top 5% of all taxpayers. B. top 10% of all taxpayers. C. top 1% of all taxpayers. D. top 25% of all taxpayers. E. All the answers are correct.
All the answers are correct. The top 25% or higher of all taxpayers is considered the "upper class" of income earners, and they pay more than 80% of all individual income taxes in the United States.
When determining the right bond to purchase you should consider: A. expected return. B. taxes. C. commission. D. fees. E. All the answers are correct.
All the answers are correct. To determine the right bond to purchase, you need to account for the expected return, as well as all the costs.
The way to make money in the stock market is to: A. determine when you want to sell your shares of stock. B. buy shares of stock (or stock funds). C. determine when you want to make your stock purchase. D. sell your shares of stock for more than you paid. E. All the answers are correct.
All the answers are correct. To make money in the stock market you ideally want to determine when to buy the shares, buy the shares, determine when to sell the shares, and sell those shares for more than their purchase price.
Kathryn saw that the stock from her favorite company last sold for $37 per share. She purchased it, but was surprised to find out that the _______ was $39 per share, which means the stock cost her $2 more per share than she expected.
Ask price. The ask price is the lowest price a seller is willing to accept for a security, or what the investor must pay.
To begin investing in the stock market, you will utilize some type of __________ with licensed stockbrokers.
Brokerage firm A brokerage firm is a financial institution that facilitates the buying and selling of investment securities through licensed stockbrokers.
TVG is an AA-rated corporation. Three years ago, it issued $10,000,000 worth of 2020-year, $1,000-face-value bonds paying a coupon rate of 4% (with semi-annual payments). These bonds are now selling for $945. Calculate the Current Yield and YTM for these bonds.
CY = 4.23% (PMT: $1,000 × 4% = $40 divided by PV: $945= 4.23%); YTM= 4.47% (N: 17 ×2 =34; PMT: $1,000times × 4%= $40/ 2 = $20; FV: $1,000, PV: -$ 945; CMPT: 2.233% ×2 = 4.465%)
The amount of growth of an investment is referred to as:
Capital gains. This term is defined as the growth of principal in addition to any income received while holding an investment.
To properly diversify, you should diversify across:
Companies, markets, and industries. Proper diversification means you have investments that cover differentcompanies, in different industries and in different markets.
The IRS is thought of as the __________ for the federal government.
Debt collector The IRS is like a debt collector for the federal government, with the power to enforce the collection.
The best approach is to keep a steady stream of money pouring into the market, called
Dollar-cost averaging This is an investment technique of investing a fixed dollar amount on a regular schedule regardless of current market conditions.
Investors use the ______________ ratios in order to determine the price at which they are willing to pay for a share of stock.
Earnings per share and price-earnings ratios Investors use the earnings per share and price-earnings ratios to determine the price at which they are willing to pay for a share of stock.
Yvette wanted to buy a home because she was looking forward to paying down her mortgage while the property price (hopefully) increased. She was focused on which of the following traits of homeownership?
Equity Equity is the value of the house minus the amount owed on the house.
_______ mortgages are designed to assist low-income, first-time homebuyers who would otherwise qualify but do not have enough cash for a 20% down payment.
FHA The Federal Housing Authority (FHA) offers loan programs for those who do not have a 20% down payment, but are otherwise qualified buyers.
The key to proper homeownership is to make sure homeownership fits into your overall__________________.
Financial ownership. Proper ownership includes being sure you have adequate funds to cover unexpected costs as well as pay your monthly payment(s). This is all part of your financial plan.
The easiest way to avoid paying a 10% penalty on retirement funds when you change jobs is to:
Have the check made out in the new account name. The easiest and least risky way to transfer money from one retirement plan to another is to have the check made out directly to the new retirement plan, so there is almost no chance of taxes being taken out by accident or risk of being tempted to use the money for other purposes.
Cecil has invested $500 into his investment account each of the last three months. In the first month, he bought shares at $40 per share. The second month, he bought shares for $50 per share. The third month, he bought shares for $42 per share. The investment is currently selling for $52 per share. What is the current value of his account? (Cecil can purchase partial shares in his investment account.)
He bought 12.5 shares the first month ($500/ $40= 12.5 shares), 10 shares the second month ($500/ $50= 10 shares), and 11.9 shares the third month ($500/ $42 = 11.9 shares). He currently owns 34.4 shares (12.5 shares + 10 shares + 11.9 shares = 34.4 shares). At $52 per sharetimes ×34.4 shares his account value is $1,788.80.
Gregg purchased 10 shares of stock that cost $10 per share. Later, he sold the same 10 shares of stock for $11 per share. Since he was using an online brokerage firm that charged $10 per trade, how much money did he make (or lose)?
He lost $10.
Albert wants to start investing outside of retirement. A good reason to do so is:
He wants to be able to pay for his 2 year old child's eventual college education. Paying for a young child's education is a good reason to start investing.
Which of the following is not an advantage of renting a place to live?
Hedge against inflation. Renting costs will go up as inflation increases. Owning a home can provide a hedge against inflation, but renting does not.
Rashaun wants to invest some of his money. He is willing to take some risk because he wants to earn a decent return. He is most likely a(n) __________ investor.
Moderate Moderate investors will accept some risk in order to achieve better returns.
__________ represent many different lenders and provide you with the convenience of a one-stop shop for mortgages.
Mortgage brokers A mortgage broker can represent multiple companies and can shop for your best option.
Priscilla was complaining to her friends at work about how much time she was spending trying to keep her house looking good in the springtime. Basically, her issues were about...
Non-financial costs Time spent on maintaining a home is one of the key non-financial costs.
Blanche is trying to decide if she should invest outside of retirement. Her friend, Cecilia, asks her why she wants to invest. Cecilia says she certainly picked a good reason. Most likely, Blanche's reason was: A. she wants to establish a small emergency fund. B. she wants to build up a fund to purchase a car within the next two years. Your answer is not correct. C. she hates paying taxes and wants to minimize them as much as possible. D. she hates taking risk and prefers to play it as safe as possible. E. None of the answers are correct.
None of the answers are correct.
Ozella was surprised by how much her monthly mortgage payment was. She had made her decisions using an online calculator but failed to account for the entire monthly payment, also referred to as:
PITI Principal, Interest, taxes and insurance.
_______ tax is paid annually on items such as cars, boats and pets in some states.
Personal property tax In several states, you are required to pay an annual tax on certain personal property items including cars, and boats, and even pets in some instances.
Krista was looking at stocks to purchase when she is nearing retirement. She chose _______ because she wanted the fixed dividends and did not care about voting rights.
Preferred stock Preferred stock owners receive a fixed dividend, but do not have voting rights like common stockholders do.
Bobbie wanted to invest conservatively, but her friend Wilbur insisted that she invest aggressively instead, so she listened. When the markets dropped by 2% the next month, Bobbie panicked and moved all her money into the bank instead. The problem was that Wilbur did not consider Bobbie's ____________ when making his recommendation.
Risk tolerance Each person has their own risk tolerance. While one person may be able to handle ups and downs in the market, others may not.
Lamar is investing for retirement outside of his employer. His investment does not provide immediate taxbenefits, but all of his earnings are tax-free and he will not pay taxes when he withdraws his money atretirement, if he abides by the rules. Lamar is investing in a:
Roth IRA
If you wanted to invest in a retirement account that allows you early access to the funds you contribute without penalty, you would choose a:
Roth IRA A Roth IRA allows you to withdraw the funds you invested early, but not the earnings, without penalty, after a certain time period.
Jennie does not like paying any more in fees or commissions than she has to, and she would rather research her investments than trust someone else to do it for her. Her best option for investing outside of retirement would be to use:
Self-directed investing Self-directed investing allows her total control over the types ofinvestments, the frequency of trades, and thus the amount of commissions and fees.
Kendra uses an online brokerage that charges $5 per trade. She bought 25 shares of a stock that was trading for $40 per share and later sold those same 25 shares for $42 per share. How much money did she make (or lose)?
She made $40. She paid $40 ×25 shares = $1,000 for the stock and she paid $5 in commission for a total cost of $1,005. Later, she sold the stock for $42 ×25 shares= $1,050 minus the $5 in commission = $1,045 revenue. She spent $1,005 total and received $1,045 total so her return was $1,005−$1,045 = +$40.
Laurie has been investing for her retirement for the past five years. She just heard a report that the markets were down 25%. She just smiled and felt good about the money that was coming out of her next paycheck that would be invested in the same markets that just went down. Why was she happy if the markets weredown?
She thinks of a down market as if her investments went on sale. When prices fall in the short term, if you are regularly investing, then it is like everything is on sale during that time. In the long-term, the markets should recover.
When you first begin to invest, it is best to start with:
Simple investments. Using simple investments will make it less likely that you, as the investor, will get confused or lose money on complex trades.
Jettie was discussing some closing costs on her recent home purchase with her friend, Marcelino, who is studying real estate. When she mentioned her list of expenses, Marcelino said they were all legitimate except: A. title refinancing fee. B. property inspection. C. title insurance. D. property appraisal E. All the expenses are legitimate
Title refinancing fee.
The mission of the _______________ is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.
U.S. Securities and Exchange Commission (SEC) The SEC's mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.
Wilford was excited because he got such a great deal on his car. Unfortunately, he didn't realize it wasn't that much of a deal because he focused on how much he saved compared with the: A. sticker price. B. listed price. C. total vehicle price. D. MSRP. E. All the answers could be correct.
Whether it is the MSRP or the sticker price (which is also called the listed price or the total vehicle price), these numbers are all based on a dollar amount predetermined by the auto maker's marketing department to entice you to pay more and think it is a great deal.
Miles thought he understood the additional costs associated with owning a home, but after moving out of his apartment into his first home, he totally forgot to budget for:
Yard maintenance Yard maintenance is generally associated with home ownership, but not with rentals.
Lillia really wants to own a home and is trying to choose the best mortgage for her situation. She knows that she will live in her house for at least seven years. Interest rates are currently very low and are expected to rise in the next few years. Her best option is likely:
a fixed-rate mortgage Since rates are low and expected to rise, choosing a fixed-rate mortgage will lock in the low rates for the life of the loan.
Amos is willing to take more risk with his investing because he wants to earn large returns over the long term. He is considered a(n) ___________ investor.
aggressive
Maggie's investment adviser told her she has the chance to purchase stock from a company that has never issued stock before. She was so excited because this will be the first time she gets to buy stock as part of:
an initial public offering.
Carol was not intimidated when it came time to start her investing, because she approached investing as:
any other purchase.
When it comes to investing, risk is not something we should __________, but rather something we should __________.
avoid; embrace To invest well, you must embrace some measure of risk.
Pierre is very practical when it comes to shopping for a car, realizing that the car will only last a limited amount of time. He doesn't care what it looks like so long as it gets him where he needs to go. Basically, he sees a car as nothing more than a:
box of miles
Assuming Dino is not going to pay cash for his next car, to determine what he can afford for a car payment, his first step should be to look at his:
budget
Tabatha forgot to _________, which is the very first step of the investment process. This caused her to commit to some investments that she really could not handle.
check her budget.
Lucretia is tired of renting and wants to own a home. Her first step should be to:
consult her net worth statement She should start with her net worth statement to see if she has the resources for a down payment and other costs.
Gilbert was holding a ___________ bond. His adviser called and told him that he should exchange it for 90 shares of stock from the issuing company instead and explained that he had that right because of the type of bond that it was.
convertible A convertible bond can be converted into a specified number of shares of stock in the issuing corporation.
Gloria's employer has told her that if she works for them for 20 years, she will be guaranteed a retirement plan that pays her 75% of her average salary for her highest 5 years of pay. In other words, Gloria's is in a______________ plan.
defined benefit plan.
Lora is investing in her retirement plan at work. When she asked her Human Resources department about how much she will make during her retirement, they explained that since she is investing in a ___________ plan, it will really depend on the returns from the funds she chose, based on those offered through the plan.
defined contribution A defined contribution plan is a company retirement plan that only defines what is being contributed by your employer, but does not define what level of financial benefits you will receive, since it will be based on the types of investments that are chosen.
A 401(k) would be considered a:
defined contribution plan. A 401(k) only defines what is being contributed by your employer, but does not define what level of financial benefits you will receive, since it will be based on the types of investments that are chosen.
Anderson was doing very well in his negotiations until he mentioned how much he loved his current car and was upset he had to trade it in. At this point, the dealer smiled as she knew what Anderson's _______ would be.
emotional trigger
Otto tried to invest based on the five investments concepts, but his returns were too low because he chose one of the following concepts, which was incorrect:
fees do not matter.
Lucio listened to his finance professor and was determined to make a(n)________ decision when negotiating his car and not a(n) ______ one.
financial; emotional
Private mortgage insurance (PMI) is required:
for mortgages that are more than 80% of the home value.
Randall wanted to purchase common stock because it was important for him to:
have ownership in a company.
Drew, who graduated college two years ago, was trying to convince his parents why he should be renting instead of buying a home. His parents were on board once he explained:
he needed to be mobile since he was still early in his career.
Domenica was negotiating for the purchase of a new car. The dealer showed her the invoice and offered to sell the car for only $1 over his invoice price. She knew there was more room to negotiate because she understood _____ and dealer incentives.
holdbacks
A seller's market is generally one where:
houses have been on the market for less than six months.
Cristine was visiting her parents in her home town and stopped by the local store where she used to buy her favorite candy. She remembered paying $1 for her candy, but now the same candy costs $1.45. What she experienced is called:
inflation
Hector wanted to purchase a house, so he correctly hired a(n) _________ to check the plumbing, wiring, and so forth to make sure there were no issues.
inspector A home inspector inspects the house to see if there are any issues that may need repaired or replaced.
Although no "right" answer exists on how best to select an investment advisor, it is acceptable to _____________ different advisors when doing your research.
interview. It is acceptable to talk with multiple advisors until you find one with which you are comfortable.
Orville is interested in setting money aside that he will not need for at least ten years. He correctly chose to_________ his money by purchasing shares of company stock.
invest.
When investment prices fall in the short term, it means:
investments are on sale. When the stock market prices decrease, it means any stock or fund you wish to purchase is currently trading for less money—which is like being on sale.
Josef was approved for a $200,000 mortgage and bought a house for that amount. Six months after purchasing hishome, he fell behind on his monthly mortgage payments and couldn't understand why he was struggling when his income had not decreased. He didn't understand that:
lenders can approve a borrower for more money than they can afford.
Once you are at a stalemate in the price negotiations, a couple of hundred dollarsapart, if you really want the vehicle, you should:
negotiate other options, such as floor mats or oil changes.
When you lease a car you are essentially:
renting it.
Bertram wants to find the right car loan. Each of the following steps should help him except:
save cash by putting everything on his credit card.
Colleen was looking to purchase a bond, but wanted some assurances that the bond issuer would not end up too far in debt. She really liked one particular bond because it had a _________ provision that specified that the issuing company would periodically set aside funds to redeem a portion of the issued bonds.
sinking fund
The dishwasher in Jermaine's apartment quit working only 3 months into his 12-month lease. His landlord said he was not obligated to fix it and Jermaine would have to do without a dishwasher. The landlord could do this legally because:
the dishwasher was not included in the list of appliances on the lease.
Tempie just purchased a car and was excited because she got everything she wanted, which should include all the following except:
the longest loan possible. The longest loan possible will result in being in debt longer and possibly paying much more in interest.
Doretta wants to calculate how much the monthly payment will be on her car loan. She needs all the followingexcept:
the sticker price of the car.
Denice got a car loan based on her monthly budget. After a couple of years, while still making monthly payments, she could not afford some of the repairs and routine maintenance. What she did not consider was the:
total cost of ownership. The estimated total cost of ownership for many makes and models isavailable, and accounts for repairs and maintenance and more
Mitchell wants to open a retirement account with his local bank. He wants to invest in an account that growstax-free and lets him contribute pre-tax income to the account. Mitchell should invest in a:
traditional IRA A traditional IRA allows for contributions to be invested pre-tax and the growth remains tax-free until withdrawal, at which time funds are taxed at your current marginal income tax rate.
Amee went to CarFax and got a __________. As a result, she discovered the used car she was going to purchase had been in two accidents!
vehicle history report
Always remember during the negotiating process:
you are doing them a favor by purchasing from them.
Winfred proudly negotiated with the dealer for his car purchase at just $16,325. When he was sitting in the finance office signing papers, he noticed the total amount due was $17,150 because taxes and other fees were added. He failed to negotiate the:
drive-off price. He should have negotiated the drive-off price, which includes taxes and fees. That way he would know exactly what price he was agreeing to!
The problem with the invoice price is that:
it's padded to help line the dealer's pockets.