Personal Finance: Chapter 1 Review

True or False: Purchasing a car is an example of a durable-product goal.

True.

True or False: Inflation is a rise in the general level of prices and it reduces the buying power of the dollar.

True.

True or False: Personal financial planning is the process of managing your money to achieve personal economic satisfaction.

True.

True or False: When prices are increasing at a rate of 4 percent, the cost of products will double in about 18 years.

True.

True or False: Purchasing an appliance is an example of a consumable-product goal.

False.

True or False: Risks associated with many financial decisions are easy to identify and evaluate.

False.

True or False: The financial activities for a young, single person will probably be the same as those for an older couple with no dependent children at home.

False.

True or False: There are only 3 possible courses of action when developing alternatives for decision making.

False.

If you borrow $9,000 with an interest rate of 7 percent to be repaid in five equal payments at the next 5 years, what would be the amount of each payment?

$2,195.12 $9,000 / 4,100 = $2,195

Calculate the amount a person would have to deposit today to be able to take out $500 a year for 8 years from an account earning 8 percent

$2,873.50 $500 x 5.747 = $2,873.50

Using the Rule of 72: If the value of land in an area is increasing 4.5 percent a year, how long will it take for property values to double?

16 years 72 / 4.5 = 16

Using the Rule of 72: If you earn 12 percent on your investments, how long will it take you for your money to double?

6 years 72 / 12 = 6

To calculate time value of money for savings, the following items are needed: A. reason for saving B. length of time C. annual interest rate D. net worth E. principal amount

B, C, and E

Simon will be receiving $200 per year for the next five years. The interest on the account is 6%, compounded annually. What is the present value of this annuity? Answers are rounded to whole dollars. A. $1,127 B. $842 C. $994 D. $1,000

B. $842

A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities is a(n) A. Insurance prospectus. B. Financial plan. C. Budget. D. Investment forecast. E. Statement.

B. Financial plan.

What is the current value of a future amount based on a certain interest rate and a certain time period? A. Annuity plan B. Present value C. Future value

B. Present value

Compounding is also referred to as _____ value computations. A. present B. future

B. future

Changes in the cost of money is referred to as _____ risk. A. interest-rate B. inflation C. income D. personal E. liquidity

B. inflation

Place the following steps for a personal financial plan in the proper order: 1. Review and revise the financial plan 2. Identify alternative courses of action 3. Create and implement your financial action 4. Determine your current financial situation 5. Evaluate alternatives 6. Develop your financial goals A. 6, 1, 2, 5, 3, 4 B. 4, 2, 6, 5, 3, 1 C. 3, 6, 4, 2, 5, 1 D. 4, 6, 2, 5, 3, 1 E. 6, 2, 5, 4, 1, 3

D. 4, 6, 2, 5, 3, 1

Increased consumer saving and investing is likely to be accompanied by A. Lower union wages. B. Higher interest rates. C. Lower production costs. D. Lower interest rates. E. Higher inflation.

D. Lower interest rates.

Why do Americans have money problems?

Poor management and advertising encouraging high spending.

An important personal opportunity cost involves ___.

time

Using the Rule of 72: At an annual interest rate of 6 percent, how long will it take for your savings to double?

12 years 72 / 6 = 12

Calculate the amount a person would have to deposit today (present value) at a 9 percent rate to have $2,100 five years from now.

$1,365 $2,100 x 0.650 = $1,365

Carla Lopez deposits $1,700 a year into her retirement account. If these funds have an average earnings of 5 percent over the 40 years until her retirement, what will be the value of her retirement account?

$205,360 $1,700 x 120.800 = $205,360

Ben Collins plans to buy a house for $178,000. If the real estate in his area is expected to increase in value by 3 percent each year, what will be its approximate value 8 years from now?

$225,526 $178,000 x 1.267 = $225,526

Pete Morton is planning to go to graduate school in a program of study that will take three years. Pete wants to have $11,000 available each year for various school and living expenses. If he earns 4 percent on his money, how much must he deposit at the start of his studies to be able to withdraw $11,000 a year for three years?

$30,525 $11,000 x 2.775 = $30,525

If a person spends $10 a week on coffee (assume $500 a year), what would the future value of that amount over 7 years if the funds were deposited in an account earning 7 percent?

$4,327 $500 x 8.654 = $4,327

Calculate the future value of $350 saved each year for 10 years at 8 percent

$5,070.45 $350 x 14.487 = $5,070.45

A family spends $50,000 a year for living expenses. If prices increase 2 percent a year for the next 3 years, what amount will the family need for their annual living expenses in three years?

$53,060.40 $50,000 x 1.061 = $53,050

A financial company that advertises on television will pay you $55,000 now for annual payments of $10,000 that you are expected to receive for a legal settlement over the next 8 years. Should you accept this offer?

$53,350 $10,000 x 5.335 = $53,350 Since you are being offered $55,000 for an annuity that is only worth $53,350 to you, you should accept this offer.

Calculate the future value of $430 six years from now at 4 percent.

$543.95 $430 x 1.265 = $543.95

In 2005, selected automobiles had an average cost of $17,000. The average cost of those same automobiles is now $20,400. What was the rate of increase for these automobiles between the two time periods?

20% ($20,400 - $17,000) / $17,000 = 20%

Examples of opportunity costs include: A. delaying investment while waiting for the time value of money to increase the pay received B. not getting a high yield because you have set aside funds in a low risk investment C. not having as much money in savings because you purchased new appliances to save energy costs D. trading in a large car with poor gas mileage for a small car that is fuel-efficient E. having enough money to save for retirement and to pay for current expenses

A, B, C, D

Which of the following short-term goals is state most clearly using the SMART approach? A. Buy a car for less than $15,000 within 6 months. B. Retire in 10 years at age 65 with $2,000,000 in my 401(k) account. C. Purchase a house with a mortgage no greater than $150,000 within 5 years. D. Set up an emergency fund. E. Invest $50 per month for the next 12 years for my nephew's college fund.

A. Buy a car for less than $15,000 within 6 months

Attempts to increase income through employment are part of the _____ component of financial planning. A. Obtaining B. Planning C. Saving D. Borrowing E. Spending

A. Obtaining

Jim Johnson was laid off from his job two months ago. He just received an offer for a position that pays 3/4 the salary of his old job. Why should he set up a financial plan? A. To increase the effectiveness of obtaining, using, and protecting his financial resources. B. To decrease control of his financial affairs regarding debt. C. To accept the loss of freedom from financial worries due to his new position. D. To learn how to manage depending more on others. E. To find out why he was laid off.

A. To increase the effectiveness of obtaining, using, and protecting his financial resources.

What is the typical time frame for an intermediate goal? A. Two to five years B. Six months to five years C. One to two years D. Three to five years

A. Two to five years

The loss of a job or encountering an illness results in _____ risk. A. interest-rate B. inflation C. income D. liquidity E. personal

A. interest-rate

The Rule of 72 is: A. A tool to determine the number of years until retirement for an employee. B. Used to estimate how fast prices will double using a given annual inflation rate. C. The legal code for requiring companies to provide a match on retirement savings. D. Used to calculate interest rates for savings. E. The number of steps required to complete a financial plan.

B. Used to estimate how fast prices will double using a given annual inflation rate.

Every financial decision has a trade-off, also known as a(n): A. deciding factor B. opportunity cost C. financial plan D. planned option

B. opportunity cost

Paula needs to have $400 in three years. The interest earned on the account is 6%, compounded annually. How much does she need to invest today? A. #368 B. $316 C. $336 D. $400

C. $336

If inflation is expected to be 8 percent, how long will it take for prices to double? A. 6 years B. 7 years C. 9 years D. 12 years E. 18 years

C. 9 years

The major function of personal financial planning is to A. Reduce taxes. B. Increase savings. C. Achieve personal economic satisfaction. D. Improve your credit rating. E. Obtain adequate insurance protection.

C. Achieve personal economic satisfaction.

Which of the following intermediate goals is stated most clearly using the SMART approach? A. Buy a car for less than $15,000 within 6 months. B. Retire in 10 years at age 65 with $2,000,000 in my 401(k) account. C. Purchase a house with a mortgage no greater than $150,000 within 5 years. D. Set up an emergency fund. E. Invest $50 per month for the next 12 years for my nephew's college fund.

C. Purchase a house with a mortgage no greater than $150,000 within 5 years.

What measures the increase in an amount of money as a result of interest earned? A. Inflation rate B. Personal opportunity costs C. Time value of money D. Trade balance

C. Time value of money

Phillip has an investment of $200 that is expected to earn 10% annually. How much will the investment be worth at the end of the second year if the investment earns interest compounded annually? A. $212 B. $220 C. $200 D. $242

D. $242 $200 x 0.10 x 1 = $20 $220 x 0.10 x 1 = $22 $220 + $22 = $242

Using the services of financial institutions or financial specialists (such as insurance agents or investment advisers) to seek relevant information is done in which step in the financial planning process? A. Develop your financial goals. B. Review and revise your financial plan. C. Determine your current financial situation. D. Evaluate your alternatives. E. Create your financial plan of action.

D. Evaluate your alternatives.

Which of the following goals would be the easiest to implement and measure? A. Put money into an investment fund. B. Reduce credit card debt. C. Save funds for an annual vacation. D. Save $100 a month to create a $2,400 emergency fund in 2 years. E. Spend less each month.

D. Save $100 a month to create a $2,400 emergency fund in 2 years

What is the definition of the adult life cycle? A. The portion of the life cycle of a person's life that begins the adult portion of the life cycle. B. The stage of life when a person becomes an adult. C. The portion of the life cycle that is an adult. D. The stages in the family, situation, and financial needs of an adult.

D. The stages in the family, situation, and financial needs of an adult.

An example of a personal opportunity cost would be A. Interest lost by using savings to make a purchase. B. Higher earnings on savings that must be kept on deposit a minimum of six months. C. Lost wages due to continuing as a full-time student. D. Time comparing several brands of personal computers. E. Having to pay a tax penalty due to not having enough withheld from your monthly salary.

D. Time comparing several brands of personal computers.

A series of equal deposits or payments is called a(n): A. present value plan B. financial plan C. future value plan D. annuity

D. annuity

The amount to which current savings will increase based on a certain interest rate and a certain time period is called: A. present value B. discount value C. deflation rate D. future value

D. future value

A cause of inflation is a decrease in supply of products when there is: A. decreased wage and salary levels B. volatile interest rates C. decreased demand D. increased spending-increased demand

D. increased spending-increased demand

Jennifer Rodriguez plans to attend graduate school in 5 years. She thinks she will need a total of $32,000 to pay for school, and she wants to save money each month to reach her goal. What type of computation should she use? A. Present value of a single amount. B. Future value of a single amount. C. Simple interest. D. Present value of an annuity. E. Future value of an annuity.

E. Future value of an annuity.

The tangible and intangible factors that create a less than desirable situation is referred to as _____ risk. A. interest-rate B. inflation C. income D. liquidity E. personal

E. personal

The ___ premium represents the "extra" amount that you can expect to receive for investing in an instrument due to factors such as expected inflation and the uncertainty of getting your money back.

risk