FIN Chap 5 - Time Value Money
T/F: Changes in interest rates do not affect all bonds equally. Generally, the longer the bond's term, the more its price may be affected by interest rate fluctuations.
true
T/F: Most objective financial advisors suggest no load mutual funds and index mutual funds due to their superior performance.
true
T/F: The 5 year CD savings rate is higher than the 1 year CD rate
true
ABC Corp. has earnings of $300,000,000 with 100,000,000 shares outstanding. ABC's earnings per share would be_______?
$3
Chrysler recently offered the following deal for a Jeep Commander: $1,000 cash rebate at closing PLUS 2,400 gallons of gas at $1.99/gallon over a three year period (or 66.67 gallons per month END for three years). What is the present value of this deal assuming that gas prices will be $2.99 per gallon over the next three years and using a 6% interest rate?
$3,192, and if gas prices average more than $3.00/gallon, then the value of the deal to the buyer will increase
What is the AFTER TAX value of a $5,000 company car, assuming a 35% marginal tax rate? (Note that if your employer provides you with a car, the personal use of the car will be added to your W-2, and you will have to pay taxes, thus cars are a "Pre-tax" benefit).
$3,250.00
Using the same information as question 4, what is the cost of financing with Store B in the month of June?
$3.00
You are shopping for a TV, and three stores carry the same model for $300 each. Each store charges 18% interest per annum, has a 30 day grace period, and sends out their bills on the first of the month. Each store calculates the finance charge using different methods: Store A Average daily balance method Store B Adjusted balance method Store C Previous balance method Assume you bought the TV on May 5, and made one payment of $100 on June 15. What is the cost of financing with Store A for the month of June?
$3.75
A homeowner paid $75,000 for his/her house and after several refinancings now owes $140,000 on the mortgage. The house is currently worth $200,000. A bank will provide home equity loans up to 85% of the value of the house. What is the maximum amount the homeowner could borrow on a home equity loan?
$30,000
Using the same information as question 4, what is the cost of financing with Store C in the month of June? (By now you should know which one of these methods is best, and which two to avoid!)
$4.50
Let's see how leverage works in real estate investments. If you compare the answer on this question to the previous question where there was no leverage, you will quickly see why people can make so much money in real estate by taking some big risks. You buy a property for $200,000. You pay $20,000 in cash and borrow $180,000 interest free! At the end of the year, you sell the property for $240,000. What is your gain and return on investment?
$40,000 and 200%
Try to solve this problem without a calculator in order to fine tune your financial skills. You are considering joining BJs discount club, and the annual fee is $40. You expect that you will save 10% on your BJ purchases compared to your current grocery store. How much do you have to spend at BJs in order to break even on your annual fee (i.e. save an amount equal to the fee)?
$400/yr
A UCF graduate is offered a salary of $36,000 in the year 2016 and expects to receive 3% raises each year. What would be his/her salary in 2022? (Round to the nearest dollar)
$42,986
Assume the following: Item Value Liquid assets $ 14,670 Current liabilities $ 2,670 Long term liabilities $66,230 Investment assets $ 8,340 Household assets $90,890 What is this person's net worth?
$45,000
For 2016, estates up to $____________ are generally not subject to federal estate taxes.
$5,450,000
A UCF graduate is earning $43,000 a year in Orlando, and has an offer to move to a city where the cost of living is 20% higher. What would be the minimum salary this graduate would need to maintain the same standard of living?
$51,600
Using the salary search tool on PayScale, what is the MEDIAN salary for a financial analyst in Orlando Florida? Select the closest answer, the website MEDIANS seem to change slightly every month so the answer below may not tie exactly to the website. PS: You may also want to check out what your anticipated job will pay while you are visiting this site.
$52,000
You buy 100 shares of a mutual fund for $10 per share at the beginning of the year. The fund subsequently makes a $0.75/share dividend distribution. At year-end, the fund is worth $15 per share. What is the total return on your investment?
$575 or 57.5%
A student takes a $200 cash advance on his credit card in January. The cash advance fee is 2% of the amount withdrawn. In addition, he/she does not pay off the $200 balance on the credit card at month end. The credit card carries an 12% per annum interest rate. The student just received his February credit card statement. Assuming the beginning January 1 balance was zero, how much money could the student have saved in January had he/she not taken out the cash advance and paid off the balance due on time?
$6
A UCF graduate makes $750 per week and has a disability plan that pays 70% of his/her salary after the first four weeks of disability. If the graduate is disabled for 17 weeks, how much will he/she receive from the insurance company?
$6,825
Note: I highly recommend your review the homework illustration excel file in this module before attempting these problems. A student borrows $500 for one year, and is charged $50 in interest. He/she also pays a fee of $10 for the loan. What is the total cost of financing and the APR?
$60 financing cost with a 12% APR
Under the rules of COBRA, how long can you continue medical coverage if your employer has more than 20 employees?
18 - 36 months
ABC fund has a 4.5% front-end sales load and a net asset value of $40. You plan to invest $16,000. How many more shares would you have received if the fund did not have a sales load?
18.00
Knight Corp.'s stock trades at $60. It has a book value of $15 per share and earnings per share of $3.00. What is the PE ratio for Knight Corp.?
20
Experts advise that your debt payments to take home pay ratio should not exceed 20%. A homeowner has the following monthly income and expenses: Item Value Gross salary $2,000 Taxes/social security $ 340 Visa card payments $ 35 Mastercard payments $ 30 Discover card payments $ 20 Auto loan payments $ 285 What is the homeowner's "debt payments to take home pay" ratio?
22.3%
Assume the following mutual fund transactions: Year Invest Price per share 2007 $3,000 $40 2008 $3,000 $50 2009 $3,000 $60 2010 $3,000 $55 How many shares do you now own and what is the average cost per share?
239.5455 shares with an average cost per share of $50.09
Using the same data as #7 above, how long would it take to pay off the credit card debt if the payments were increased to $500/month? Note: If the website does not work, you can solve this on your HP. Use 12 payments per year)
24 months
A UCF graduate has $7,000 of debt excluding her house and a net worth of $30,000 ($25,000 excluding her house). What is the graduate's debt to net worth ratio exclusive of the house? Experts say the ideal target ratio should not exceed 1 (100%).
28%
This question is based on a true story. A Navy petty officer needs cash and goes to a paycheck advance company for some money. He/she agrees to pay $560 in two weeks (when his/her paycheck arrives) in exchange for $500 today. What is the interest rate implicit in this loan? Hint: This is a TVM problem, and the payments per year should be listed as 365, with n = 14.
297%
Assume the following: Pre-tax return = 8% Tax rate = 25% Inflation rate = 3% What is your real return?
3%
Recently, the highest unemployment rates have been for:
individuals who did not complete high school
Refer to the web work. With respect to PGRWX (Class A shares with a front end load), which of the following properly summarizes its category, rating, and results compared to the S&P 500 index for the last TEN year period (see trailing returns %)?
large value; 2 star rating; trailed category and the S&P 500 index
Higher return may mean ___ liquidity
less
Assume you bought a 5 year certificate of deposit (CD) last year which pays 5%. If you decide to cash out of your CD before 5 years, then the bank will impose a severe penalty by reducing the interest you receive. Assume today you could buy a 5 year CD and receive 7% due to rising interest rates. You wish to cash out of your 5% CD and invest at a higher rate, but the penalty is too severe. This situation is an example of ___________ risk.
liquidity
What kind of interest rates does the Fed moderate?
long term
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain what?
max employment and stable prices (dual mandate)
Which health insurance plan is administered by each state within certain broad federal requirements and guidelines?
medicaid
Rank the following from most expensive health plan to least expensive. POS, PPO, HMO
most to least PPO, POS, HMO
A bond that provides federally tax-free interest income is called a
municipal bond
An investor who wants tax free investment income would choose a (an) _______ fund
municipal bond
Corporate bonds
must be legally paid at maturity
Which life insurance provision ensures that you will not have to forfeit all accrued benefits?
non-forfeiture clause
Which of the following investments would have the greatest potential for risk?
options or commodities
Renter's property insurance would include coverage for:
personal belongings
What type of risk effects health, safety, or costs?
personal risk
Which of the following monthly payments go to an escrow account? principal interest property taxes homeowners insurance
property taxes and homeowners insurance
What equals the after tax return minus inflation rate?
real return
trusts can be
revocable or irrevocable
An example of open end credit is
revolving credit check
A charge to purchase mutual fund shares is frequently called:
sales load
Direct real estate investments include
single family dwellings
Over the long term, which form of investment has yielded the highest returns?
stocks
Which type of investment has generally offered the best protection against inflation over long periods of time?
stocks
If you and your spouse or anyone else own property as ________________, each individual is considered to own a proportionate share for tax purposes, and only your share is included in your estate.
tenants in common
What happens if you die without a will?
the courts will determine how your assets will be distributed based on state law
the best predictor of future mutual fund performance is:
the expense ratio
If two mutual funds hold the same securities, but one has higher operating expenses than the other one, which of the following statements is true
the fund with the lower expenses will have a higher return
A mutual fund's performance is best measured by :
total return
A government security issued in minimum units of $100 with maturities that are 4-week, 13-week, 26-week, and 52-week is called a
treasury bill
If you only own U.S. stocks in your portfolio, you can reduce your overall risk by adding international stocks
true
In the event of a dispute, the written terms of the signed sales agreement will prevail.
true
Income earned on municipal bonds or dividends paid by municipal bond funds are generally exempt from federal taxes.
true
T/F- Many employers are eliminating pensions
true
T/F: A money market mutual fund that invested in commercial paper issued by corporations would generally be considered a low risk investment.
true
T/F: Bonds may be purchased in either the primary or secondary market.
true
T/F: The holding period for short-term capital gains is 12 months (1 year) or less
true
T/F: The recent trend is for the federal government and corporations to shift more responsibility to the individual with respect to providing for their financial future.
true
T/F: The slope of the treasury yield curve normally reflects increasing interest rates over time, and represents the cost of borrowing for the US government.
true
You should always find your cheapest source for financing for a car prior to actually visiting a car dealer to shop for cars.
true
Which policies provide term insurance with a money market type investment feature?
universal life
When you invest in an employer's retirement savings plan such as a 401-K, your contributions are taxed:
when you withdraw them during retirement
Life insurance is usually sold not bought, because the life insurance industry has a vested interest in selling you high commission, high cost ____________ policies.
whole life
If a fund charges an expense ratio of 1% for the current year:
your fund returns will be reduced by 1% in the current year
The goal of an index fund is to:
track the investment return of a specific stock index or bond index
You are shopping for a new cell phone. Your current monthly usages are as follows: Data: 2.5 GB Talk: 300 minutes Text messages: 500 Here are the current offerings: ATT $95/month for 3 GB of data, 250 minutes, and 500 text messages. Additional data is $10/GB and you must buy in 1 GB increments, overages are not prorated. Additional minutes are $0.15 each and additional texts are $0.10 each. Verizon $90/month for 2 GB of data, 500 minutes, and 400 text messages. Additional data is $15/GB and you must buy in 1 GB increments, overages are not prorated. Additional minutes are $0.05 each and additional texts are $0.10 each. Sprint $110/month unlimited data, talk and text Assuming you use exactly the amounts listed above for your historical usage, list the plans in order from lowest price (first) to highest price (last).
ATT, Sprint, Verizon
T/F There are numerous mortgage products, many are risky
true
If interest rates decline, the price of a bond or bond fund will generally:
increase
You buy a property for $200,000 in cash and sell it at the end of the year for $240,000. What is your gain and return on investment?
$ 40,000 and 20%
A student has two credit card offers. Credit card "A" has an 17% per annum interest rate with no fee, while credit card "B" has an 12% per annum interest rate with a $50 annual fee. If the student maintains an average balance at month end in excess of $______, he/she should select the card "B" which has a lower rate with an annual fee. (i.e. what is the break-even point?) Instructor's note: You will never get ahead financially in life by carrying high cost credit card balances each month. The ideal solution is to get a card with no fee and pay it off monthly. Notwithstanding my advice, I recognize that some of you will indulge anyway, so you might as well know how to get the best deal!
$1,000.00
You have elected to deposit $130 per month in your flexible spending plan next year. Assuming a 25% tax bracket, how much in qualifying medical expenses would you have to incur to break even on your deposits to the flexible spending plan next year?
$1,170
A $1,000 corporate bond has a 9.5% coupon rate. Since issuance, interest rates have fallen for comparable bonds to 8%. What would be the market value of the bond now that interest rates have fallen (i.e. what would you have to pay for this bond today in order to achieve the same yield)?
$1,187.50
An investor bought 100 shares of JNJ stock for $28.50 per share plus a commission of $10. He/she sold the stock after two years for $38 per share and again paid a commission, this time for $10. The investor received dividends while holding the stock of $0.46 per share per quarter (a total of eight quarters). What is the total gain and annual return on this stock? Hint: See supplemental slides at the end of Chapter 14 lecture.
$1,298 gain, 20% annual return.
A student's bank statement reflects $1,600 at month end. The student's checkbook, before reconciling, reflects $1,500. The student has $10 of interest on the bank statement which has not been posted to his/her checkbook, deposits in transit of $100, and outstanding checks of $190. What is the reconciled bank balance?
$1,510
A driver has 50/100/15 auto coverage. He/she is in an accident (and at fault) resulting in $5,000 of damage to a parked car and $20,000 damage to a store. How much must the driver pay of the total claims?
$10,000
A UCF graduate is getting a masters degree at night. The graduate expects to receive an annual salary of $7,000 per year more as a result of getting a masters degree. The graduate plans to work for 40 years, so he/she will earn $280,000 more in their lifetime ($7,000 x 40 years). What is the present value of a stream of $7,000 payments for 40 years based on an annual interest rate of 6%? Assume the $7,000 is paid annually at the END of the year. By the way, if it costs say $25,000 today to get a masters degree, do you think a graduate degree is a smart economic move if your salary goes up by $7,000 per year? Hint: Calculate Net Present Value
$105,324, yes get the masters degree, the net present value of this decision is $80,324.
A couple has two children ages 4 and 7 and only one spouse has income. Using the "non-working" spouse method, they should have ________ of life insurance.
$140,000
Your employer has offered you a choice of a lower cost HMO plan or a higher cost standard health insurance plan. Next year you will need physical therapy and want to compare the cost of the therapy under the two plans. The standard health insurance plan pays 65% of therapy after a $200 deductible, while the HMO will pay the full cost of the therapy as long as you pay a $15 co-payment per visit. Assume you need 10 therapy sessions that will cost $60 each for the high cost plan ($15 for HMO). How much would you save using the HMO vs. the traditional health insurance plan?
$190
A homeowner was robbed and lost $3,500 in jewelry and $3,800 in silverware. The homeowner's policy covers up to $500 of losses for jewelry and up to $1,500 in losses for the silverware with no deductible. How much is homeowner's recovery from the insurance company?
$2,000
A spender UCF graduate likes the prestige of a Lexus IS 250. Saver UCF graduate drives a Corolla. The internet shows that the five year cost of owning a 2010 Lexus IS 250 is $42,814 while the five year cost of owning a 2010 Corolla is $24,607, an $18,207 difference over five years. On an annual basis, this would equate to the Lexus costing $3,641.40 more per year. Assume our UCF saver invests the savings of $3,641.40 per year (end of the year) for 40 years and earns 11% per year (interest compounded annually). How much will the saver have in his/her retirement account as a result of driving lower cost cars throughout his/her lifetime? Note: Check out the cost of owning YOUR car at http://www.internetautoguide.com
$2,118,661.44
Assume the following for a 401-K plan. Annual salary = $72,000 Monthly salary = $6,000 Pay date = End of each month Amount you save in 401-K = 5% of salary Amount of employer match = 3% of salary How much will you have in the 401-K plan after 40 years assuming a 9% investment return? (Round to the nearest dollar)
$2,247,034
What amount would person with actual cash value coverage receive for three year old furniture that was destroyed by a fire? Assume the furniture has a $4,000 replacement cost today and an estimated life of 10 years.
$2,800
A mutual fund has a 1% operating expense ratio, and you just invested $22,000. How much of your investment will go toward paying the operating expenses of the mutual fund this year?
$220
Assume the following: Annual Salary = $65,000 Other monthly debt payments = $250 Estimated monthly property taxes & insurance = $500 Mortgage interest rate = 6.0% Mortgage term = 30 years Down payment = 10% Refer to the Chapter 9 textbook exhibits on housing affordability and mortgage payment factors. Using the formula in the book, what is the affordable home purchase price using the above assumptions?
$242,284
The FDIC and NCUA insure non-retirement accounts in banks, savings & loans, and credit unions for up to__________:
$250,000
If you finance a car with a dealer, most likely you'll pay interest calculated with the "add on interest" or "tack on interest" method (which not surprisingly works in the favor of the dealer). During the life of the loan, interest is paid on the full amount borrowed, even though some principal is paid back each month. A student buys a car as follows: Down payment - $ 2,000 Amount financed - $ 9,000 Total cost of car - $11,000 Finance charge - Add on interest @ 10% per annum over 4 years (48 months) What is the monthly payment and APR of this loan using your HP 10BII?
$262.50/month with an APR of 17.6%
You and your spouse make $28,000 per year, have an $100,000 mortgage, owe $10,000 on auto loans, owe $5,000 on student loans, and owe $3,000 on credit cards. You estimate funeral costs at $5,000. How much life insurance should of of you carry using the DINK method?
$64,000
A family has health coverage that pays 80% of medical expenses after the first $500 of qualifying expenses. If the family incurs $1,300 of medical expenses during the year, how much will their insurance company pay of the total claims incurred?
$640
A UCF graduate writes 22 checks per month and pays $0.05 per check. The bank pays the graduate 1% interest per annum, and he/she maintains an average monthly balance of $600. What is the graduate's net annual cost of maintaining the checking account after giving effect to the interest earned (ignore taxes)?
$7.20 net cost
A driver has 25/50/10 auto coverage. He/she is in an accident (and at fault) resulting in two bodily injury claims of $60,000 each. How much must the driver pay of the $120,000 in claims?
$70,000
If a student has a net worth of $50,000 and liabilities of $20,000, what are his/her total assets?
$70,000
A $1,000 bond carries a 7.55% coupon. The bond currently trades at $1,100. What would the annual interest payment be on this bond?
$75.50
The mutual fund will be worth $100,900.97, implying that the return on the whole life policy is less than 9%
$8,400
A couple currently spends $40,000 per year for all their living expenses. Only one spouse works while the other spouse stays at home with the children. Upon the death of the working spouse, they want a life insurance policy whereby the proceeds could be invested in a tax-free municipal bond fund that would yield enough tax-free cash each year to pay the entire $40,000 of expenses (i.e. the non-working spouse would not have to return to work, and there would be sufficient funds on his/her death to leave some inheritance to the kids). They assume that the yield on municipal bond funds will be 5%. How much insurance should they purchase?
$800,000
An investor has 220 shares of Exxon/Mobil stock, which pays a quarterly dividend of $0.40 per share. What is his/her quarterly dividend payment?
$88.00
An employee makes $100,000 per year and saves 7% of his/her salary in the company's 401-K plan. The company matches 4% of the salary when the employee saves up to 5%. Further, the employee pays $1,000 per year in health insurance premiums for a family health insurance plan from the employer. What will be the W-2 compensation for this employee?
$92,000
Which of the following was enacted to help pay for the Affordable Care Act?
-An investment tax on high income individuals. -A penalty on large employers who do not offer health insurance to full time workers. -A reduction in the amount of allowed spending in a flexible spending account. -An increase in the limitation on medical expenses on Sch. A for individuals under 65 years old.
What is a disadvantage of using an adjustable rate mortgage (ARM) compared to a fixed rate mortgage?
-If interest rates rise, ARM interest rates will also increase after the lock in date. -Your mortgage payments (principal and interest) are not fixed for the term of the loan with an ARM as they are with a fixed rate mortgage.
What important matter should you always assess before changing jobs?
-Your current vesting status on the company 401-K plan. -Your current vesting status on the company stock option plan. -Your current vesting status on the company defined benefit pension plan.
A fund's after tax return may be influenced by:
-the fund's distribution of capital gains and dividends -the fund's pretax return -the fund's buying and selling of securities
An investor bought a stock for $40 per share. It now trades for $90 per share and pays an annual dividend of $1 per share ($0.25 per quarter). What is the current dividend yield on this stock?
1.11%
Fidelity Investments recently recommended that individuals save at least _____ years of their final salary before retiring.
10
From 1926 to 2013, the average total return per year for large cap U.S. stocks was around:
10%
In general, experts advise that one must save _______ of your salary in order to have sufficient funds to maintain your standard of living in retirement (this % would include both your 401-K savings and the employer match and other savings).
10-15%
A Harvard prof. gave this problem to 400 Harvard employees (many of whom had advanced degrees) and 250 Wharton MBAs. Most got the answer wrong, so let's see how you do. You have $10,000 to invest in your 401-K plan. Here are your only choices: Morgan Stanley S&P 500 Index Fund Vanguard S&P 500 Index Fund Schwab S&P 500 Index Fund Fidelity S&P 500 Index Fund All four funds have the same one year, three year and five year returns. "Life of fund returns" for each fund are as follows: Morgan Stanley = 12.5% Vanguard = 11.9% Schwab = 13.2% Fidelity = 14.9% Annual fees for each fund are as follows: Morgan Stanley = 36 basis points Vanguard = 10 basis points Schwab = 25 basis points Fidelity = 27 basis points What is the best way to invest the $10,000?
100% in vanguard
What do each of these numbers represent in an auto insurance policy: 100/300/50
100,000 is the maximum that would be paid to one individual in an accident 300,000 is the maximum that would be paid for all claims in a single accident (incident) 50,000 is the maximum property damage that would be paid for an accident
A $1,000 bond has an annual 9.5% coupon and trades for $860. It has 10 years to maturity. What is the current yield and yield to maturity?
11.05% yield with an 11.98% yield to maturity
A homeowner plans to refinance his/her house. He/she will pay $1,880 to refinance, and the mortgage payment will drop by $65/month. The term of the new mortgage is 20 years. The new interest rate is 5.25% Using TVM, how many months must the homeowner stay in the house to break even on the refinancing?
31.0 months
___% of americans have no retirement savings
36
Medium term notes generally have maturities of?
5-12 years
It's time for another financial calculator problem. A UCF student (who has not taken FIN 2100) decides that he really needs a large screen HD TV for football season. The student goes to a "rent to own" center and agrees to rent a TV for $55 per month (end of month). After 36 months, the student will own the TV. Assuming that the student could buy the same TV today for $1,000, what is the interest rate (APR) of renting the TV?
51%
What is the annual cost per mile of operating a car given the following information? Item Value Annual miles driven 12,300 Gas cost: Average miles per gallon Average cost of gas per gallon 24 $ 3.35 Annual depreciation $2,500 Interest $ 650 Insurance $ 680 License $ 65 Repairs/oil $ 370 Parking $ 498 Hint: Calculate the cost of gas, add all other cost and divide by the miles driven.
53 cents
You currently are spending $50/year renting a pressure washer to clean your house. The cost of a new pressure washer is $300. If you bought the pressure washer, how many years would it take to obtain full payback on your original investment relative to renting (use a simple payback calculation). Note: Payback is a useful, but simplistic way to evaluate a purchasing decision that does not consider the time value of money. A quick payback implies a better deal, while a slower payback is not as good. But what if the pressure washer had to be replaced every 3 years at a cost of $300 each time? Buying would not be a better deal than renting.
6 years
A bank offers you a thirty year $150,000 mortgage at 6.5% with two points payable at closing. The monthly payment is $948.10. What is the effective interest rate on this loan?
6.7%
What is the comparable pre-tax yield on a municipal bond yielding 5.2% assuming a marginal tax bracket of 25%?
6.93%
Using data from the web work, how long will it take to pay off a $10,000 credit card debt at 18% interest per annum with payments of $250/month? (Note: if the website does not work, you can solve this on your HP. Use 12 payments per year)
62 months
Most of the information in your credit file may be reported for only _________ years (if you have not declared bankruptcy).
7
What is the equity risk premium for small company stocks given the following assumptions: Return on small company stocks = 12% Return on Treasury bonds = 5% Inflation rate = 3%
7%
___% of americans under 30 have no savings
70
service warranty contracts are generally considered good deals
false
You have been given a choice of paying $19,000 for a new GM car with a $3,000 cash rebate (net cost of $16,000 which you finance separately), or zero percent financing for 48 months with no cash rebate. What is the implicit rate of interest in this deal?
8.69%
What percentage of the first year premiums on a whole life insurance policy go to the agent's commission?
80%
Using the Rule of 72, approximately how long does it take for your money to double in value if you earn an 8% annual return?
9 years
Your mother gives you 100 shares of ABC stock on Dec. 31, 2006. She paid $1,000 for the shares ($10/share) in 1990 and the stock is now worth $2,500 as of the date of the gift. On Dec. 31, 2015, you sell the ABC stock for $4,500 ($45/share). What is your taxable gain?
A $3,500 long term capital gain
A UCF graduate has a traditional IRA and plans to take the money out prior to age 59 ½ in order to pay off some accumulating credit card debt. The graduate will pay:
A 10% penalty on the total withdrawn, plus will owe taxes on the amount withdrawn based on his/her marginal tax rate.
Zero coupon bonds would be best suited for
A 35 year old woman with a high risk tolerance and no need for current income.
A personal exemption refers to:
A reduction from adjusted gross income for the taxpayer(s) and each dependent listed on the tax return
What is the definition of strict liability?
A situation in which a person is held responsible for intentional or unintentional actions.
Which investment would generally be inappropriate for a 25 year old with a traditional IRA invested for his/her retirement?
A substantial and permanent investment in money market mutual funds.
The cost of long term care, such as a prolonged stay (greater than 100 days) at a nursing home, is
generally not covered by medicare
Which of the following investments would have the greatest potential for safety?
government bonds
Refer to the web work. Which of the following companies had the highest return over the last five years?
Apple (AAPL)
A common advantage associated with home ownership is
Appreciation of the house's value over long periods of time
With respect to federal tax law, life insurance proceeds paid to a beneficiary:
Are excluded from taxable income, but included in the taxable estate (unless a life insurance trust has been established)
Using the same information as #2, what is the present value of the annuity assuming you received the $1,200 at the beginning of the year?
Begin Mode Pmt/yr = 1 N = 10 I = 10 Pmt = 1,200 PV = -8,110.83 (this is actually a positive number, but we need + and - for the HP to work the math).
Bill and Hillary each buy a house and take out a $100,000 loan. His house is in New York and her house is in Washington D.C. Bill takes out a conventional 30 year fixed rate mortgage, and Hillary opts for a conventional 15 year fixed rate mortgage. Which of the following correctly summarizes how Bill's mortgage is different from Hillary's (all other things being equal)?
Bill's 30 year mortgage has a higher interest rate, lower monthly payments and higher overall interest payments. It builds equity more slowly than Hillary's mortgage.
With respect to the taxability of corporate dividends paid to individuals and capital gains on stocks and bonds,
Both dividends from corporations and capital gains are taxable to individuals
Which of the following is not an attribute of mutual funds
guaranteed returns
Which of the following is not one of the five Cs of credit?
Climate
Assume the following: Assets = $110,000 Liabilities = $70,000 Net Worth = $35,000 Monthly credit payments = $1,640 Take home pay = $8,200 What is the debt ratio and debt payments ratio for this individual?
Debt ratio = 2.0 Debt payments ratio = 0.20
Which best describes cash dividends paid by corporations?
Dividends generally come from after-tax earnings of the corporation, and qualifying dividends are taxed again when received by an individual at lower rates (generally 15% for most taxpayers).
You just received a copy of an email from an unknown investment advisor to a client recommending the purchase of a stock. The email appears to have been sent to you by mistake. The stock trades for $1.37/share and you could easily afford to buy 300 shares. The broker believes that the company will announce some significant positive news in the near future that will cause the stock to increase. The short term target price is $2.00/share, and the long term target price is $4.50/share. What is your best course of action?
Do nothing. This is probably a scam. Do not trust the information in this email. Do not believe the advice from the broker.
Gold prices are more likely to rise
During wars or other periods of significant geopolitical uncertainty.
Assume you receive $1,200 for 10 years at the end of each year. What is the present value of this annuity assuming a 10% interest rate?
End Mode Pmt/yr = 1 N = 10 I = 10 Pmt = 1,200 PV = -7,373.48 (this is actually a positive number, but we need + and - for the HP to work the math).
What is the implicit rate of interest in the following "zero percent financing" deal:New car cost = $20,000 with 36 months of payments at 0% interest OR Receive a $2,000 cash rebate (i.e. pay $18,000) and either pay cash or provide your own financing.
End Mode Pmt/yr = 12 PV = 20,000-2000 or 18,000 Pmt = 20,000/36 or 555.56 (input as a negative) FV = 0 N = 36 I = 6.97%
What is the future value of $350 invested at the end of each month for 30 years assuming a 9% interest rate?
End Mode Pmt/yr = 12 N = 360 I = 9 Pmt = -350 FV = 640,760.22
A homeowner has 25 years remaining on his/her mortgage. The homeowner can save $50 per month for the next 25 years by refinancing at a lower rate of 6%. If closing costs run $5,000, is this a good deal (hint: compare the PV of the savings to the closing costs)? How long would the homeowner have to stay in the house to make this a good deal (calculate using TVM)?
End Mode Pmt/yr = 12 Pmt = 50 N = 25 x 12 I = 6 PV = 7,760.34 verses 5,000 in closing cost End Mode Pmt/yr = 12 Pmt = 50 PV = (5000.00) Interest = 6 N = 139 Simple payback = 5000/50 = 100 months
What is the future value of $500 today invested at a 5% interest rate, compounded daily for 12 years.
End Mode Pmt/yr = 365 N = 12 x 365 = 4380 I = 5 PV = -500 FV = 911.02
What is the present value of $12,000 received in 5 years from now, assuming quarterly compounding at a 7% interest rate?
End Mode Pmt/yr = 4 N = 20 FV = 12,000 I = 7 PV = -8,481.89 (this is actually a positive number, but we need + and - for the HP to work the math).
Most group health policies have a coordination of benefits provision, which is a method of integrating the benefits payable under more than one health insurance plan so that benefits are limited to no more than 200% of allowable expenses (e.g. if you and your spouse each have health insurance which covers each other, then you can collect no more than twice the claim since you each are paying premiums).
False
T/F: Points paid on a refinancing are fully deductible in the year incurred
False
T/F: You should solicit the help of a reliable and qualified mechanic to inspect the car after purchase.
False
An example of an adjustment that is subtracted from gross income to compute "adjusted gross income" or "AGI" is:
IRA contributions (traditional IRA)
Which of the following is true with respect to wills?
If your state allows holographic wills, you don't need witnesses. The will must be signed by at least two witnesses (for states that do not allow holographic wills). In most states, witnesses can not be heirs. You must date and sign the will.
An example of tax-exempt income is
Interest or mutual fund dividends derived from municipal bonds or municipal bond mutual funds.
In the event that an individual believes that interest rates are likely to move DOWN in the next year or two, what actions should he/she take?
Invest long (such as long term CDs); borrow short term at variable rates
Using the same information as question 1, assume that the pressure washer had to be replaced every 10 years. So your decision is to rent each year at $50 per year, or spend $300 now, which would save you $50 per year for 10 years. Assume the appropriate discount rate (interest rate or i) is 8%. The same type of analysis used by corporations to evaluate capital investments would also apply to this buy/rent decision. Be sure you are in the right mode. Calculate the present value of a stream of payments of $50 at the beginning of the year for 10 years at 8% and compare it to the $300 cost. By doing so you conclude: (Note you could also do an NPV analysis, but be sure you net the initial cash flows for time period 0 i.e. $300 minus $50 = $250 and then use 9 Ns for the 50 payment)
It is better buy now, with a net savings of $62.34
A UCF graduate has two job offers. Job 1 pays $36,500 with a $5,500 non-taxable benefit, while Job 2 pays $35,000 and has a $6,200 non-taxable benefit. What is the PRE-TAX value of each job assuming the graduate is in a 15% marginal tax bracket? (Round to the nearest dollar)
Job 1: $42,971 Job 2: $42,294
Assume you receive the following mortgage: Amount borrowed = 150,000 Annual interest rate = 7% Term = 30 years What is the monthly payment and how much of the payments in year 5 go toward interest?
Monthly payment = $997.95 Amount of interest year 5 = $9,961.03
You have net passive activity losses of $10,000 related to an investment in a real estate partnership. Which statement is true with respect to your federal tax return?
Net passive activity losses are carried forward to future tax returns and available to offset future passive activity gains.
You are considering the purchase of a hybrid Honda Civic. Assume that you drive 12,000 per year, and will keep the auto for 10 years, at which time the car will have zero trade-in value. Assume the cost of gas is $2.49/gallon. The "normal" model gets 34 miles per gallon, while the "hybrid" model gets 50 miles per gallon. The hybrid model cost $21,850 while the normal model costs $18,260. All other operating costs are the same. You can invest your money at a 6% interest rate (i.e. use a 6% discount rate). Given these assumptions, is it a good economic decision to purchase the hybrid? Hint: Calculate the annual gas cost for each car then take the difference (or savings) per year. Next calculate the PV of the annual savings (END MODE) and compare the gas cost savings in today's dollars to the cost difference for the two vehicles. You could also do a NPV analysis, with the car cost difference being used for cash out time period 0, and the savings entered in the CFj key for ten years.
No, don't buy the hybrid. The PV of the savings is $2,070 which is less than the cost difference. You need a greater savings to economically justify the purchase of this hybrid (i.e. the NPV is negative).
You plan to invest $100 per month in an S&P 500 index fund for the next 40 years, and are trying to decide whether to use an ETF or an open ended mutual fund. Which option would be the most advisable? (assume that the ETF and open ended index mutual fund have the same expense ratio, but the broker will charge you a $5 commission for each trade, while the mutual fund will not charge you a commission if purchased directly from the mutual fund)
Opening an account with a mutual fund family, then investing in an open ended S&P 500 index mutual fund each month.
A $1,000 bond was issued five years ago with an 8% coupon. If interest rates fall for comparable bonds, you would expect the fair market value of the bond to
increase
A professional athlete has been offered two choices: a. $1,000,000 signing bonus today and $500,000 per year (paid at the end of the year) for five years. Total gross offer = $3,500,000 b. $100,000 signing bonus today and $100,000 per year (paid at the end of the year) for 60 years. Total gross offer = $6,100,000 What is the best deal assuming the athlete can invest his/her money at a 7% interest rate.
Option a End mode Pmt/yr = 1 N = 5 Pmt = -500,000 Int = 7 PV = 2,050,098.72 PLUS the bonus today of 1,000,000 = 3,050,098.72 Option b End mode Pmt/yr = 1 N = 60 Pmt = -100,000 Int = 7 PV = 1,403,918.12 PLUS bonus today of 100,000 = 1,503,918.12
What does PITI stand for, and which of these four items are "escrowed" each month?
Principal & interest (paid to mortgage company), property taxes (escrowed) and homeowners insurance (escrowed)
With respect to Roth IRAs and Traditional IRAs, which statement is true?
Roth IRA contributions are non-deductible, but earnings grow tax free.
A taxpayer has $10,000 in charitable contributions and will be using Schedule A with no limitations. The taxpayer is in the 15% marginal tax bracket. The charitable contribution reduced taxable income and his/her taxes by:
Taxable income is $10,000 lower; taxes reduced by $1,500.
Your bank has two checking account options, one pays tax-free interest at a rate of 2% per annum and the other pays taxable interest at a rate of 3% per annum. You are currently in a 35% marginal tax bracket. If you converted the tax-free interest rate to the comparable taxable interest rate you would find that:
The comparable taxable rate is 3.08%, thus you would select the tax free account
Which of the following is a disadvantage of direct investments in real estate, such as rental property?
The investment can be illiquid
An investor has 360 shares of Walmart, which just declared a 2 for 1 stock split. On the day before the stock split, the shares were trading at $80 per share. The day after the split,
The investor will have 720 shares trading at around $40 per share.
A parent is evaluating a $250,000 term life policy vs. a $250,000 whole life policy. Over the next 25 years, the term policy will cost $10 month, and build no cash values. The insurance agent informs the parent that the whole life policy will cost $100 per month, but will build guaranteed cash values of $75,000 at the end of 25 years. The parent assumes that he/she can invest the $90 per month difference in a mutual fund and earn 9% per year for the next 25 years. What is the future value of the mutual fund at the end of 25 years assuming end of the period deposits of $90 per month at a 9% interest rate; and how does it compare to the whole life cash value investment return (ignoring taxes)? If you get this right, I guarantee you will run circles around any life insurance agent you meet!!!
The mutual fund will be worth $100,900.97, implying that the return on the whole life policy is less than 9%
Refer to question 4 above. With respect to the investor's stock transaction assuming all dividends received were "qualifying":
The separate gain on the stock is treated as a long-term capital gain, and both the capital gain and qualifying dividend income are now taxed at lower favorable rates.
Higher inflation will lead to an ________ in interest rates, which cools the inflated economy and possibly causes a recession (and loss of jobs)
increase
T/F: More and more employers are using credit reports as hiring tools and Federal law requires that job applicants must be told if credit histories are being used in the hiring process
True
T/F: A $1,000 tax deduction is more valuable than a $100 tax credit (assuming the taxpayer is in a 15% tax bracket).
True
T/F: A living will or advance health care directive documents your wishes in the event that you become so physically or mentally disabled that you are unable to act on your own.
True
T/F: A long term bond held in a taxable brokerage account is a liquid asset
True
T/F: Individuals should generally be careful when considering financial advice from those in the financial services industry since often times there can be a conflict of interest.
True
A UCF graduate saves $450 at the end of each month in a Roth IRA for 40 years (retirement date), earning 8% annually. How much money will be in the account at the end of 40 years, and how long will the money last if the graduate withdraws $15,000 at the end of each month at the retirement date, assuming the investments continue to earn 8% annually? HINT: Once you calculate the FV of the savings, this will be your PV for the second part of the problem where you solve for n.
Value of account in 40 years = $1,570,954: Account will run out of money in 180 months.
A situation in which one person is held responsible for the actions of another is:
Vicarious liability
What life insurance policies build "Cash value"? Whole, variable, universal, term
Whole life, variable life, universal life
Calculate the first and second year ANNUAL payment that you could withdraw for a "growing annuity" using the following assumptions: Interest rate = 5% Inflation rate = 3% Remaining life expectancy = 35 years Amount invested at retirement date = $500,000 First withdrawal taken at the beginning of the year Hint Real Rate: ((1 + interest rate) divided by (1 + inflation rate)) - 1. Round real rate to two decimal places.
Year 1 = $19,436 Year 2 = $19,813
You subscribe to Sirius XM Radio and pay $12 at the end of each month (which equates to $144 per year). You plan to keep this service for the next five years. Assume you have plenty of cash in your emergency reserve fund, which is in a bank account earning 4% interest per annum. XM Radio offers you a deal whereby you can prepay two years worth of service for $230, payable today. Given these assumptions,
You are better off to prepay XM for the next two years.
When you sell shares of a mutual fund, how do you determine the basis of the shares held?
You may use either the specific identification or average cost method.
Generally, a portfolio that has 80% invested in common stocks would be best suited for:
a 35 year old saving for retirement
What do you call a check that a bank writes on its own account made payable to a third party on your behalf?
a cashier's check
What document is generally used to name the guardian of your minor children in the event that both you and your spouse should die?
a last will and testament
Which type of trust would be used for young adult children, where the deceased parents wish to ensure that the principal of the trust is maintained for a long period of time?
a spendthrift thrust
How much life insurance would you need using the easy method for a family with $40,000 in gross income?
about $200,000
Dollar cost averaging is
an approach in which you invest the same amount of money in a fund at regular intervals
Payments made to a fund's shareholders that result from the sales of securities in the fund's portfolio are called
capital gain distributions (either short or long term)
What kind of risk involves falling prices, discourages borrowing and spending, sending a bad economy even lower?
deflation risk
What is the first step in the financial planning process?
determine your current financial condition
Which of the following would NOT typically be associated with a high risk driver?
driver of a honda civic
Driver classification includes information on a person's ________ and is used to set auto insurance rates.
driving habits
Which type of REIT invests directly in properties?
equity
By the time you turn 60, a large percentage of your net worth will likely consist of
equity in your primary residence
Common stocks always provide higher returns than bonds and money market investments.
false
Mutual funds are insured by the FDIC
false
Real estate agent commissions are generally paid by the buyer
false
Social security payments are always tax free since they are primarily a return of your money, which was previously deducted from your paycheck.
false
T/F- Many state pension plans are overfunded
false
T/F: An investor can reduce both systematic and non-systematic risk in a stock portfolio by increasing the number of individual stocks held in the portfolio.
false
T/F: Dividends and capital gains distributions from mutual funds holding common stocks in a taxable account are not taxable if they are reinvested in additional fund shares at the time of distribution.
false
T/F: If you invest in a long-term bond fund with an average maturity of 10 years, you must hold the fund shares for at least 10 years.
false
T/F: The most ideal time to buy a mutual fund in a taxable account is late in the calendar year in order to capture pending capital gain distributions.
false
