Personal Finance exam 2

As a percent of take-home pay, monthly consumer credit payments should not exceed:

20%

Which of the following is a nondepository institution?

A consumer finance company

Which of the following statements regarding a consumer loan is true?

A consumer loan is used to finance the purchase of very expensive items.

Credit Union

A nonprofit, member-owned financial cooperative that provides a full range of financial products and services to its members, who must belong to a common occupation, religious or fraternal order, or residential area.

Series EE bond

A savings bond issued in various denominations by the U.S. Treasury.

I Savings bond

A savings bond, issued at face value by the U.S. Treasury, whose partially fixed rate provides some inflation protection

U.S. Treasury bill (T-bill):

A short-term (3- or 6-month maturity) debt instrument issued at a discount by the U.S. Treasury in the ongoing process of funding the national debt.

Certificate of deposit (CD)

A type of savings instrument issued by certain financial institutions in exchange for a deposit; typically requires a minimum deposit and has a maturity ranging from 7 days to as long as 7 or more years.

Which of the following will lead to a poor credit rating?

Applying for a long-term loan and occasionally being late with a payment

Which of the following is an improper use of credit?

Buying a short lived good

•Savings and loan association (S&L)

Channels the savings of depositors primarily into mortgage loans for purchasing and improving homes. Also offers many of the same checking, saving, and lending products as commercial banks.

Which of the following statements regarding loan collateral is true?

Collateral is an item of value used to secure the principal portion of a loan.

Always paying cash helps in establishing a high level of creditworthiness.

False

Credit cards with very low minimum payment requirements are in the consumers' best interest.

False

If your debt safety ratio works out to 10%, you are relying too heavily on credit.

False

Using credit is the ideal way to meet basic living expenses.

False

•An asset is considered liquid only if it is held in the form of cash.

False

•U.S. Series EE and I savings bonds are not a very good way to save.

False

Funds in commercial banks are protected by the:

Federal Deposit Insurance Corporation (FDIC).

A(n) _____ loan is repaid in a series of fixed, scheduled payments rather than in a lump sum.

Installment

Variable Rate

Interest rate and payments change periodically

Fixed

Interest rate and payments remain the same

simple interest

Interest that is paid only on the initial amount of the deposit.

Convenience is a reason for the growth in popularity of:

Internet banks

Cash and near-cash resources are known as:

Liquid assets

Single Payment

Made for a specified period, at the end of which time, full payment [principal plus interest] is due

Credit unions lend money to qualified people who are their:

Members

Which of the following is a major reason to use credit?

Occasionally for convenience

The most common use of consumer loans is to:

Purchase a car

time deposits

Remains on deposit for a longer time than a demand deposit

Installment

Repaid in a series of fixed, scheduled payments, rather than in one lump sum. Payments are part interest and part principal

•Savings bank

Similar to S&Ls, but located primarily in the New England states. Most are mutual associations—their depositors are their owners and thus receive a portion of the profits in the form of interest on their savings.

Which of the following statements regarding loan maturity is true?

The longer the loan maturity, the higher the amount of interest paid

Cash management helps in personal financial planning.

True

Parent Loans for Undergraduate Students (PLUS) loans are made to the parents or legal guardians rather than to the students.

True

You can hold an account with a mutual fund that allows you to write a limited number of checks.

True

•At most banks and other depository institutions, you will be hit with a hefty service charge if your checking account balance falls even just $1 below the stipulated minimum amount for just one day out of the month.

True

•Today's financial marketplace offers consumers a full range of financial products and services, many times all under one roof.

True

•Unlike money market mutual funds, money market deposit accounts are federally insured.

True

compound interest

When interest earned in each subsequent period is determined by applying the nominal (stated) rate of interest to the sum of the initial deposit and the interest earned in each prior period

_____ is a reason that people use credit.

being able to meet a financial emergency

Low interest rates that have persisted since the financial crisis of 2008-2009 have been beneficial to:

big banks

Compared to other depository financial institutions, credit unions:

charge lower rates on loans to their members.

Depository

commercial banks, savings and loan associations, saving banks and credit unions.

Prepaid cards

debit card with a fixed amount available—it does not access checking account

Credit union

limited to members, but low rates

Commercial Banks

loan to customers with good credit

Credit unions are:

member-owned financial cooperatives.

Friends and Relatives

not advisable

Monthly Payment

not be more than 20% of monthly net income

To establish credit, you should first:

open savings and checking accounts.

Adjustable-Rate Mortgages

rate is fixed for a period (say six months or five years) after which the rate may be changed for another term.

Life Insurance Companies

reduces your insurance coverage

Savings and Loan Associations

similar to banks

•Nondepository

stock brokerage firms and mutual funds

Sales Finance Companies

supports sales of products

With a bank credit card, you can often avoid interest charges if:

the account balance is paid in full every month.

•Steps in Opening an account

•1. Credit card application •2. Credit investigation •3. Credit bureau •4. Credit Scoring, FICO Score

Effective rate of interest

•Amount of interest earned / Amount of money invested or deposited

Type (Uses) of Consumer Loans

•Auto loans •Other durable goods loans, such as furniture •Education loans •Personal loans •Consolidation loans

•Why We use Credit

•Avoid paying cash for large outlays •Meet a financial emergency •Convenience •Investment purposes

Five C's of Credit

•Character—Willingness to abide by terms of loan •Capacity—Ability to service the debt •Collateral—Own something of value to support loan •Capital—Unencumbered assets available •Condition—Impact of current economy on loan

Decision Rule

•Cost of borrowing greater than cost of using cash, use cash to purchase item

Retail Charge Cards

•Department stores •Oil companies

•Reward cards

•Frequent flyer programs •Auto rebate programs •Other merchandise rebates

Refinancing mortgages

•If rates drop by about 2 percent, you should compare the rate savings with the refinancing costs. When the savings are greater than the costs, refinance.

Consumer Loans

•Item purchased should have an useful life longer than the term of the loan used to purchase the item.

Improper Uses of Credit

•Meet basic living expenses •Make impulse purchases •Purchase non-durable goods •Consistently paying only minimum payments

Rule of Thumb

•Product should outlive the payment schedule •Watch your increasing use of Credit! •Buy now, pay later can turn into a nightmare

Fixed-Rate Mortgages

•most common is 30-years, but 15-year loan becoming more popular. Normally there is no penalty for early payment of loan, thus you can pay off a 30-year mortgage in 15 years if you wish.

Money market deposit accounts:

are federally insured

emergency fund of liquid assets

equal to 6 to 9 months of after-tax income

Cash is the only kind of liquid asset.

false

Customary ratios

for conventional mortgage stipulate that payment cannot exceed 30 percent of borrower's gross income.

Consumer Finance companies

high rates, easy to get

If a loan has a prepayment penalty, there will be an additional cost to repay the loan early:

if the lender wants to recover part of the full interest that would have been earned.