Finance Notes Chapter 1

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John Gleason is interested in purchasing a 46" rear projection TV for his living room. He knows that right now the TV will cost approximately $1500. John wants to borrow the money to purchase the TV but is a little concerned because he thinks interest rates are going to fall in the future. He is worried that he might get stuck with a loan at a high interest rate. What type of risk is John worried about?

Interest Rate Risk

One aspect of financial planning is to buy stocks, bonds and mutual funds with the potential for long term growth. Which aspect of financial planning does this deal with?

Investing

As Jean Tyler plans to set aside funds for her young children's college education, she is setting a(n) ____________ goal.

Long Term

One aspect of financial planning is to make sure you maintain adequate insurance coverage for your needs. Which aspect of financial planning does this deal with?

Managing Risk

Brad Johnson has a goal of "saving $50 a month for vacation." Brad's goal lacks:

A Time Frame

Mary Sander's new job is very demanding. She regularly works long hours and on the weekends. As a result, Mary has not had much time for her family and friends. This is an example of:

Personal opportunity cost

Developing and using a budget is part of which component of financial planning?

Planning

Which type of computation would a person use to determine current value of a desired amount for the future?

Present Value of a single account

Which of the following goals would be the easiest to implement and measure its accomplishment?

Save $100 a month to create a $4,000 emergency fund.

One aspect of financial planning is to make wise decisions as to what to purchase and when to purchase it. Which aspect of financial planning does this deal with?

Spending

The main economic influence that determines prices is:

Supply and Demand

The annual price increase for consumer goods and services measured by the Bureau of Labor Statistics is called ________.

The consumer price index

The risk premium you receive as a saver is based in part on:

The uncertainty associated with getting your money back and the expected rate of inflation

A decrease in the demand for a product or service may result in a decrease in wages for people producing that item.

True

Analyzing your current financial position is a part of the first stage of the financial planning process.

True

Inflation reduces the buying power of money.

True

Opportunity costs refer to time, money, and other resources that are given up when a decision is made.

True

Opportunity costs refer to what a person gives up when making a decision.

True

Trade balance is defined as the difference between a country's exports and its imports.

True

The main goal of personal financial planning is:

achieving personal economic satisfaction

The stages that an individual goes through based on age, financial needs, and family situation is called the:

adult life cycle

The first step of the financial planning process is to:

analyze your current personal and financial situation

The problem of bankruptcy is associated with poor decisions in the ______________ component of financial planning.

borrowing

Future value calculations involve:

compounding

Using the services of financial institutions will be most evident in your effort to:

implement the financial plan

Which of the following would cause prices to drop?

increased production by business

Higher prices are likely to result from:

increased spending by consumers without increased production.

The time value of money refers to

increases in amount of money as a result of interest

Higher interest rates can be caused by:

lower money supply

Melanie Walsh likes to go to the movies once a week. When she is at the movies, she generally gets large popcorn and a drink. Melanie wants to be sure that she sets aside money each week so she can continue going to the movies. What type of goal would this be for Melanie?

Consumable products goal

Lynn Roy will retire in the next year and has $675,000 in savings and investments and owns her own home that is worth $250,000. Which step in the financial planning process does this situation demonstrate?

Determining her current Financial situation

Changes in income, values, and family situation make it necessary to:

Evaluate and revise your actions

Lynn Roy knows that if she continues to work full time, it will be difficult for her to get the time off she needs to be able to travel around the world. However, if she continues to work full time she will more easily earn the money she needs to take her trip and still have money left for her living expenses after she gets back from her trip. Which step in the financial planning process does this scenario demonstrate?

Evaluating her alternatives

A financial plan is another name for a budget.

False

Developing financial goals is the first step in the financial planning process.

False

Economics is the study of using money to achieve financial goals.

False

Increased demand for a product or service will usually result in lower prices for the item.

False

Interest on savings is calculated by multiplying the money amount times the opportunity cost times the annual interest rate.

False

Lenders benefit more than borrowers in times of high inflation.

False

Most decisions have only a few alternatives from which to choose.

False

Planning to buy a house is an example of an intangible goal.

False

Present value is also referred to as compounding.

False

Risks associated with most financial decisions are fairly easy to measure.

False

Time value of money refers to changes in consumer spending when inflation occurs.

False

A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends a direction for your financial activities is a(n):

Financial Plan

Increased consumer spending will usually cause:

Higher employment levels

Higher consumer prices are likely to be accompanied by:

Higher interest rates

The success of a financial plan will be determined by:

How resources are used

John Gleason is interested in purchasing a 46" rear projection TV for his living room. He knows that right now the TV will cost approximately $1500. However, John is a little concerned about his job. John is a pilot for Delta Airlines and he thinks it is possible that he could be laid off in the near future. What type of risk is John worried about?

Income Risk

____________ risk refers to the danger of lost buying power during times of rising prices.

Inflation

John Gleason is interested in purchasing a 46" rear projection TV for his living room. John knows that right now the TV will cost approximately $1500. John is not sure he can afford this TV right now but is worried that if he waits, the cost of the TV will rise to $1800. Which type of risk is John worried about?

Inflation Risk

The changing cost of money is referred to as ____________ risk.

Interest Rate

If you desire your money to double in 6 years, what rate of return would you need to earn?

12 percent

More recently, the annual price increase for most goods and services as measured by the consumer price index has been less than ____ percent.

2

If inflation is increasing at 3 percent per year, and your salary increases at the same rate, how long will it take your salary to double?

24 Years

With an inflation rate of 9 percent, prices would double in about ___________ years.

8

John is planning to go to graduate school in a program that will take three years. John wants to have available $10,000 available each year for his school and living expenses. If he earns 6% on his investments, how much must be deposited at the start of his studies for him to withdraw $10,000 a year for three years?

$26,730

A family spends $40,000 on living expenses. With an annual inflation rate of 3 percent, they can expect to spend approximately _______ in three years.

$43,720

The future value of $1,000 deposited a year for 5 years earning 4 percent would be approximately:

$5,400

You are planning to buy a house in five years. How much do you need to deposit today to have a $10,000 down payment if your investment will make 6%?

$7,470

When prices are increasing at a rate of 6 percent, the cost of products would double in about how many years?

12 Years

Paul Carter is 43 years old, married and has three children, ages 13, 10 and 5. Which influence on financial planning does this demonstrate?

Adult Life Cycle

One aspect of financial planning is to control your use of credit. Which aspect of financial planning does this deal with?

Borrowing


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