Intro to Personal Finance Chapter 1 and 2

Most financial planners will advise you to have at least _______________ in liquid assets to cover emergency expenditures.

3 to 6 months living expenses

One recent survey found that more than __________ of working Americans have less than $10,000 saves for retirement.

50%

Which of the following statements about amortizing a loan is true?

Although the payment is the same each month, the interest that accrues each month decreases

What is the value of a bond that never matures that will generate an annual coupon payment of $100 assuming your required return is 12%?

CF/i CF: $100 i: .12 $833.33

Discounting cash flows refers to:

Calculating the present value of cash flows to be received at some point in the future

__________ refers to earning interest on interest.

Compound Interest

The phrase, "Don't put all your eggs in one basket," illustrates the financial principle of:

Diversification

An annuity refers to a series of:

Equal cash flows occurring at equal intervals for a finite period

When we plan for the future we need to consider the impact of inflation since it:

Erodes the purchasing power of income

Planning for the passage of your wealth to your heirs upon your death is known as:

Estate planning

Compounding is the process of:

Finding the future value of some amount when interest is reinvented

One basic principle in finance is that money:

Has a time value

The decision regarding how many children to have:

Has enormous financial implications

Which of the statements about retirement is most accurate?

If you begin saving for retirement at a young age you should be able to easily amass more than $1 million

In general, a dollar received today:

Is worth more than a dollar received tomorrow

The ability to rapidly convert an asset into cash without significant loss of value is known as:

Liquidity

Financial problems can be a major cause of:

Marital problems

A good financial plan should:

Maximize after-tax income

Tony he taken out a $15,000 student loan. If the interest rate on this loan is 5%, compounded monthly, the term of the loan is 10 years, how much will be Tony's monthly payments on the student loan?

N: 120 I/Y: .4166% PV: -$15,000 PMT: ? FV: $0 PMT: $159.10

What is the present value of $4000 that you expect to receive in two years assuming a discount rate of 8%?

N: 2 I/Y: 8% PV: ? PMT: $0 FV: $4,000 PV: -$3,429.36

Elizabeth wants to have $500,000 saved for retirement in 20 years. Assuming she can earn an 8% annual return on her investments how much will she need to save at the end of each of the next 20 years to accomplish her goal?

N: 20 I/Y: 8% PV: $0 PMT: ? FV: $500,000 PMT: -$10,926.10

Your parents want to place money in an account so that you can withdraw $200 a week for the next four years while you finish college and graduate school. If they place the money in an account that earns 4% interest, compounded weekly, how much do they need to place in the account so that the funds will be depleted in four years? (Assume that you would make the first withdrawal one week from today.)

N: 208 I/Y: .0769% PV: $0 PMT: -$200 FV: ? FV: $38,429

How much will Zeke have at the end of 7 years if he can earn 6% compound quarterly on his initial $5,000 investment?

N: 28 I/Y: 1.5% PV: -$5,000 PMT: 0 FV: ? FV: $7,586.11

What is the future value of $2,000 in three years if you deposit it today in an account earning 4% per year?

N: 3 I/Y: 4% PV: -$2,000 PMT: $0 FV: ? FV: $2,249.73

What is the present value of $2,000 that you can expect to receive in three years assuming you could invest the money today and earn a 5% annual return?

N: 3 I/Y: 5% PV: ? PMT: $0 FV: $2,000 PV: -$1,727.68

What is the value three years from now of $3,200 deposited today that will earn an annual return of 7%?

N: 3 I/Y: 7% PV: -$3,200 PMT: 0 FV: ? FV: $3,920.14

How much will your monthly payment be if you purchase a home for $221,000 and you finance $200,000 for 30 years at 4.8%?

N: 360 I/Y: .4% PV: -$200,000 PMT: ? FV: 0 PMT: $1,049.33

How much will you accumulate in account where you deposit $800 a year at the end of the next 4 years if you can earn 3% annually?

N: 4 I/Y: 3% PV: $0 PMT: -$800 FV: ? FV: $3,346.90

Lekeba decided to begin investing $100 a month in a mutual fund that has generated a 12% annual return for the past 10 years. Assuming Lekeba is 22 years old now and the fund generates the same returns, how much will she have in 45 years when she intends to retire at age 67? Use an annual contribution of $1200 to make your calculations.

N: 45 I/Y: 12% PV: 0 PMT: -$1,200 FV: ? FV: $1,629,876

What is the present value of an ordinary annuity of $500 a year for 6 years assuming an interest rate of 9%?

N: 6 I/Y: 9% PV: ? PMT: -$500 FV: 0 PV: $2,242.96

If you can invest $1000 today and it will grow to be worth $1350 over the next six years, what is the compound annual return that you will earn on this investment?

N: 6 I/Y: ? PV: -$1,000 PMT: $0 FV: $1,350 I/Y: 5.1289%

Jim is considering buying a car that cost $20,000 I can be financed for 5 years at 6% interest with no down payment. How much will James payment be per month?

N: 60 I/Y: .5% PV: -$20,000 PMT: ? FV: $0 PM: $386.65

Candi is saving for retirement by placing $1,000 in a savings account twice a year. The savings account pays 12% interest compounded semiannually. If Candi continues to do this for 30 years, how much will she have saved?

N: 60 I/Y: 6% PV: $0 PMT: -$1,000 FV: ? FV: $533,128

How many years will it take you to accumulate $30,000 for a down payment on a house if you deposit $12,000 today and you expect to earn 10% annual return on your investment?

N: ? I/Y: 10% PV: -$12,000 PMT: $0 FV: $30,000 N: 9.6

Short-term financial goals can be accomplished in:

One year or less

A financial plan can help you:

Prepare for unexpected events

The term, "cover your assets," refers to:

Purchasing adequate levels of insurance

The __________ can be a useful rule of thumb when trying to determine how long it takes for some amount to double.

Rule of 72

Which of these is an example of an intermediate-term goal for a person that is 22 years old?

Saving a down payment on a house you intend to buy in 8 years

The concept of paying yourself first involves:

Setting aside your savings before making other expenditures

What is the opportunity cost associated with not receiving a lump sum of money today, but instead receiving it one year from now?

The amount of interest you could have earned placing the money in a savings account

The behavioral tendency to consider previous costs or cash outlays when making a decision about whether to incur additional costs is called:

The sunk cost effect

The concept that a dollar received today is worth more than a dollar received at some point in the future is known as:

The time value of money

The present value is equivalent to:

The value of cash flow today

The first step in making a smart purchase is to determine:

Whether it is a need or a want