Personal Finance Final Exam

Risk

- The likelihood that an investment will have a lower return than expected or that it may even lose money - In general, riskier investments have the potential to provide a higher rate of return than guaranteed return investments

Costs associated with college

- Tuitions and Fees - Room and Board - Books and supplies - Personal expenses - Transportation

Foreclosure

The action of taking possession of a mortgaged property when the mortgagor fails to keep up their mortgage payments

Annual Percentage Rate (APR)

The annual rate charged for borrowing money

James is looking at a Treasury Bond, and notices that $50 is written in the corner. What is the term used to describe the $50?

Face value

Which law guarantees that consumers can obtain an annual free credit report from each major credit reporting agency?

Fair and Accurate Credit Transactions Act (2003)

Mutual funds

- A variety of assets such a stocks, bonds, and other financial investments - Are either closed-end or open-end. - Closed-end funds have a limited number of shares available to investors, while open-end funds have an unlimited number of shares available

Katie receives a medical bill for $1500. She has already paid $1000 in medical costs this year, and her deductible is $1500. How much would Katie expect to pay on the $1500 bill?

$500

Vladimir has deposited $500 in the bank. The money is earning 5% interest a year. Using simple interest, how much money will be in Vladimir's account after 1 year. (Assuming he makes no more deposits and does not spend any of the funds.)

$525

Jules has deposited $800 in the bank. The money is earning 5% interest a year. Using the simple interest formula, how much money will be in Jules's account after 2 years. (Assuming she makes no more deposits and does not spend any of the funds.)

$880

Corporate Bond

- A bond issued by a corporation in order to raise financing for a variety of reasons Three types: 1. Debentures - Bonds backed only be the company's reputation and are not secured by any of the company's assets - Individuals are willing to invest in these bonds because they believe that the company is financially solid 2. Convertible Bonds - Can be exchanged for shares of stock in the company - Because of this flexibility, convertible bonds usually receive a lower interest rate than other corporate bonds 3. Mortgage bonds - Backed by a company's assets, which can be solid - Generally safer than debenture bonds because they are secured - Interest rate is generally lower than debentures

Medical Insurance

- A financial plan that covers the cost of hospital and medical care due to illness or injury Four types 1. Health Maintenance Organizations (HMO) - Delivers all health services through a network of healthcare providers and facilities - Least freedom to choose your healthcare providers 2. Preferred Provider Organization (PPO) - Have a network of doctors, hospitals, and other providers who have agreed to charge less for plan members. Members of the health plan have access to a list of providers - Moderate amount of freedom to choose healthcare providers- more than HMO 3. Health Savings Account (HSA) - A type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. 4. Patient Protection and Affordable Care Act (PPACA) - Goals are to make affordable health insurance available to more people and expand Medicaid to cover all adults with income below national poverty level

Credit Score

- A number assigned to a person that indicates to lenders their capacity to repay a loan - People with a higher credit score may be able to get lower interest rates and fees - A lower credit score indicates a greater credit risk for the lender Credit score determining factors: 1. Payment history 2. Amounts owed 3. Lengths of credit history 4. New credit 5. Types of credit

Rule of 72

- A simple way to determine how long an investment will take to double given a fixed annual rate of interest - Formula: 72 / interest rate= years to double a sum of money

Mortgage

- A specific type of loan that is used to buy real estate Two types 1. Fixed rate - Has an interest rate that does not change over the entire loan period 2. Adjustable rate - Has an interest rate that can be adjusted up and down depending on the prime lending rate that banks around the country are changing

Rent

- A tenant's regular payment to a landlord for the use of property or land Two types 1. Month-to-Month agreement - Gives tenant's greater flexibility because the rental does not require a long-term commitment from the renter. - Renters are required to give 30 or 60 days notice when they want to move 2. Fixed Term agreement (Lease agreement) - Requires a longer commitment, usually 6 months or a year - A lease (written contract that states the amount of rent, the period of time a tenant will rent a property, and the additional requirements and restrictions) is signed by the lessor (landlord/ property owner) and lessee (renter or tenant)

Savings Account

- An account at a depository institution that is designed to hold money not spent on current consumption - Pros 1. Fast and easy to set up and to move money to and from 2. Can be conveniently linked to your primary checking account 3. Up to your full balance can be withdrawn at any time 4. Up to 250,000 is federally ensured against bank failure

Certificate of Deposit (CD)

- An interest-earning deposit that requires the funds to remain deposited for a fixed term. Withdrawal of the funds before the term expires results in a financial penalty. - Pros 1. Offers a higher rate than you can earn with a savings or money market account 2. Pays a guaranteed, predictable rate of return, avoiding the volatility and losses that are possible with stocks and bonds 3. Is federally ensured if opened with an FDIC bank or NCUA credit union 4. Can help fend off spending temptations since withdrawing the funds early triggers a penalty - Cons 1. Cannot be liquidated before maturity without incurring an early withdrawal penalty 2. Typically earns less than stocks and bonds can over time 3. Earns a fixed rate of return regardless of whether interest rates rise during the term

Net worth formula

- Assets - Liabilities - Assets: Things you own that have value - Liabilities: a debt or obligation

Free Application for Federal Student Aid (FAFSA)

- Determines a student's eligibility for need-based federal financial aid for college - This aid may include grants, scholarships, work-study, and loans

Cryptocurrency

- Digital currency not backed by real assets or tangible securities - Ex. bitcoin - In the US is defined as property rather than property currency - Overall is unregulated by centralized authority

Debit cards

- Do not provide credit. Instead, the amount of a purchase is automatically deducted from a linked banking account - Similar to paying with cash or a check, because you are paying at the time of the purchase

Auto Insurance

- Financial responsibility laws that require drivers to prove they can pay for an accident if they are at fault - Cover two main classifications: bodily injury insurance and property damage

Simple Interest

- Interest calculated only on the principal (the original amount invested), not on any accrued interest - Formula: I=prt

Compound Interest

- Interest earned on both the principal amount and any interest previously accumulated - Credited daily, monthly, quarterly or semiannually

Money market accounts

- Interest-bearing accounts at a bank or credit union - Pros 1. Receive some of your bank's best rates 2. Access funds more easily than with most savings accounts, which might be helpful in an emergency 3. Have a safe place to keep a large chunk of money, protected by FDIC insurance - Cons 1. Funds might be too easy to spend 2. Some accounts require high minimum balances to open or avoid fees 3. In many cases, savings accounts pay just as much interest

Bankruptcy

- Legal proceeding involving a person or business that is unable to repay outstanding debts 1. Chapter 7 - Debtor pays a fee and submits a petition listing all assets and liabilities to a United States district court - Debts are "forgiven" and assets are sold to pay creditors as directed by the court 2. Chapter 13 - Allows a debtor to keep all or most of his/her assets and develop a plan to repay the debts over three to five years

Federal/government securities

- Local, state, or federal governments use debt securities to borrow money to pay for public projects, such as improving roads or building schools - Federal government issues three main types of securities: 1. Treasury bonds= can earn interest at a fixed rate or variable rate depending on the type of bond; can be issued for up to 30 years 2. Treasury bills= short-term securities that have terms of less than 1 year; are discounted securities, meaning that investors pay less than face value 3. Treasury notes= have terms of 2, 3, 5, or 10 years. Interest is paid every 6 months until maturity - Federal bonds are among the safest investments because the federal government is obligated to repay bonds

Zero Fraud Liability

- Policy implemented by many credit card issuers that removes liability from fraudulent charges - By law, you can one liable for up to $50 of unauthorized charges made before you report a missing credit card. However, zero liability fraud removes liability from fraudulent charges no matter how much is charged

Life Insurance

- Protects survivors from financial loss associated with death, and is designed to help replace the loss of income - The more dependents you have and the higher your standard of living, the more life insurance you need - Beneficiary- individual or entity who will receive the benefits in the event of your death

Commodities

- Raw materials or primary agricultural products that can be bought or sold - Ex. cattle, wheat, soybeans, corn, oranges, gold, cotton, etc. - Investors and traders can buy and sell commodities directly in the cash market or through futures (contracts that obligate investors to buy commodities on a certain date in the future) - These investments do not earn interest

Liquidity

- Refers to how easily an investment can be converted into cash - A savings or checking account is a much more liquid asset than a stock

Truth in Savings Act (1993)

- Requires financial institutions to provide figures such as interest rates in standard forms - Designed to help promote competition between depository institutions and make it easier for consumers to compare interest rates, fees and terms associated with savings institutions' deposit accounts.

Saving vs. Investing

- Saving deals with setting aside your excess income that you do not spend on consumption - Investing deals with interests growth and finding ways to potentially increase your money's value over time

Corporate stock

- Shares of ownership in a corporation Two types: 1. Common stock - Claim to partial ownership or a share of the company's business, but provides no guarantee in dividends 2. Preferred stock - Higher claim to dividends or asset distribution than common stockholders - If a company is liquidated ,the claims of preferred stockholders take precedence over common stockholders

Bodily Injury Insurance

- Type of Auto Insurance - Bodily injury liability covers injuries suffered by people not in the policyholder's car (people in other vehicles or pedestrians) when the policyholder is at fault in an accident. Uninsured Motorist Protection - Covers injuries to people in the policyholder's car if another party is at fault in an accident, but that other party has no insurance or insufficient liability coverage. - Also covers injuries caused by a hit-and-run driver.

Property Damage

- Type of auto insurance - Covers damage to another person's vehicle or other property when the policyholder is at fault Collision insurance - Covers damage to the policyholder's vehicle in an accident resulting from impact Comprehensive insurance - Covers damages to the policyholder's car in non-accident situations, such as theft, fire, hail, or vandalism.

Load funds

- Type of mutual fund - Require investors to pay a sales commission when shares are bought. sold, or at some other time - There are front-end loads and back-end loads - Front-end loads are paid when shares are purchased - Bank-end loads are paid when shares are sold

Installment loans

- Used to finance a specific purchase for a specific amount of time - Mortgages and auto loans are two debts that work on the basis of installments

Financial markets

1. Bear market - When the stock market performs poorly over a period of time and prices decline 2. Bull Market - Investments' values are rising and the public is confident about the future

Five Cs of Credit

1. Character - More specifically refers to credit history: a borrower's reputation or track record for repaying debts 2. Capacity - Your ability to repay the debt when its due - Assesses borrower's debt to income ratio 3. Capital - Indicates the borrower's level of seriousness - Refers to your assets and net worth 4. Collateral - Something you own that is of equal or greater value than the loan amount - Offers the insurance that if the borrower defaults on the loan, the lender can repossess the collateral 5. Conditions - Factors like interest rate and the amount of principal - Also considers how a borrower intends to use the money

Types of Consumer Credit

1. Credit cards - Type of open-end or revolving credit, meaning that cardholders have a line of credit that they can use as needed 2. Rent-to-Own - These businesses collect weekly or monthly payments and, if you make all of these payments, you will own the item at the end of the contract 3. Title Loans - Use paid-off item as a collateral, and you get a small, short-term loan with an interest rate 4. Payday Loans - Cash advance secured by a personal check or paid by electronic transfer

Consumer Protection Laws

1. Fair Credit Billing Act - Lays out consumers' rights to dispute credit card issuers' charge - Typically, charges over $50 are eligible for dispute 2. Fair and Accurate Credit Transactions Act (2003) - Consumers can obtain an annual free credit report from each major credit reporting agency - Is an update to the Fair Credit Reporting Act - Although it entitles you to a free copy of your credit report, does not entitle you to a free copy of credit score

Types of Loans

1. Secured loan debt - Tied to a specific asset that can be used as collateral and repossessed if the borrower doesn't make payments 2. Unsecured loan debt - Not tied to a specific asset, there is no collateral that can be repossessed if the borrower defaults

Types of Goals

1. Short-term - Something that can be accomplished in the near future, such as today, this week, this month, etc. - Ex. saving for a family holiday or buying new clothes 2. Intermediate - Something that will take 1-5 years of saving in order to execute, such as buying or replacing a car, paying off unsecured debts, etc. 3. Long-term - Something that will take more than 5 years to achieve, such as a college education or retirement

According to experts, how much of your annual income should you set aside for long term goals?

10%

Consuela wants to double her savings. She is currently earning 6% interest on her savings account. Using the Rule of 72, how many years will it take for the money to double?

12 years

Credit Card Statement

A detailed list of transactions, fees, payments, and balance figures for a credit card

Cosigner

A person who signs a credit card or loan application agreeing to guarantee payment if the signer its unable to repay the loan

Deductible

Amount that you'll pay out of pocket before the insurance benefits kick in

Credit

An agreement whereby a financial institution agrees to lend a borrower a maximum amount of money over a given time period

Budget Surplus

An excess of tax revenue over government spending

Look at each option below. Choose rather the type of credit is an unsecured or secured debt.

Auto loan- Secured Mortgage- Secured Personal loan (no collateral)- Unsecured

Look at each option below. Choose rather the type of credit is an installment loan or revolving credit.

Auto- Installment Credit card- Revolving Mortgage- Installment Payday- Revolving

James has a life insurance policy. Who will receive the benefits in the event of his death?

Beneficiary

What are the two main classifications of auto insurance policies?

Bodily injury insurance and property damage

Which type of investment would have the lowest amount of risk?

Cash

Which type of bankruptcy restructures debt but does not forgive it?

Chapter 13

Creditors are interested in whether you have used credit wisely in the past. Which of the 5Cs of Credit does this statement represent?

Character

What is the best method of choosing a (financial) counseling service?

Choose one that is recognized by a state's Attorney's General

Tim likes to see his money make money. What type of spender is he?

Collector

Interest rate and amount of principal influence the lender's desire to finance the borrower. Which of the 5Cs of Credit does this statement represent?

Conditions

Which of the following is not protected under a homeowner's insurance?

Damage to someone's car parked in the street in front of your house

Sally has repeatedly violated the rental agreement and failed to pay rent as agreed. What action may her landlord take?

Eviction

Jose wants to invest in an instrument that he knows carries a specific rate of return. What type of rate should he consider?

Fixed interest rate

Why would homeowner's insurance be more costly in Florida as compared to Wisconsin?

Florida may have more natural disasters and/or a higher cost of living

Kathleen is interested in buying beef and wheat in two months from a specific vendor. What type of contracts would Kathleen have?

Futures

A relatively new phenomenon, what term describes a labor market characterized by the prevalence of short-term contracts or freelance work as opposed to permanent jobs?

Gig economy

Which of the following items is an example of a short-term goal?

Going to a concert with friends over the next break.

Which type of health insurance provides the least freedom in choosing health care providers?

Health Maintenance Organizations (HMO)

How does inflation affect price?

Inflation increases prices over time

Devante wants to purchase a new video, and cannot wait until it goes on sale tomorrow. What type of behavior is Devante demonstrating?

Instant gratification

Which type of asset provides the greatest amount of return over the long-term?

Investment

What happens to purchasing power when inflation increases?

It decreases

Why does real estate have low liquidity?

It's not easily turned into cash

Sam's dog bites someone or harms another animal, even though he was restrained on Sam's property. What type of insurance would most likely cover this event?

Liability insurance

If you are unable to work for a period of time due to illness, what type of insurance will help protect your income?

Long-term disability

Limits on Insurance

Maximum amount that will be reimbursed to you for a covered loss

Which type of rental agreement gives the tenant more flexibility?

Month-to-month lease agreement

If a company goes bankrupt and liquidates, who would have first claims to any assets?

Preferred stockholders

Debt Securities

Refers to money borrowed that must be repaid, that has a fixed amount, maturity date(s), and usually a specific rate of interest

Jose is a college student at Mizzou. He notices that there is a charge for his meal plan on his bill. Under what category would this charge most likely be listed?

Room and Board

Sam has a FICO score between 575-625. As his credit counselor, what recommendations would you make to Sam to improve his credit score?

Set up automatic, online bill payments

If you are shopping, how could a criminal most likely steal your credit and debit card number?

Skimming

Maturity Date

The date on which a bond is to be repaid or an investment agreement ends and a payment is made

What impact do you think grade point average (GPA) might have on the college you attend and how much you will have to pay?

The higher the GPA, the more likely you are to obtain a scholarship

Eviction

The legal process of removing a tenant from rental property

Credit Limit

The maximum dollar amount that can be borrowed

Minimum Interest Charge

The minimum amount of interest you will be charged if you carry a balance

How does a fixed-rate mortgage affect payments?

The mortgage payments remain the same after each month

What happens if a person withdraws money from a certificate of deposit before its maturity date?

The person may be required to pay a penalty

When looking at creditworthiness, what is one benefit of having a higher score, such as 800?

The person will have access to lower interest rates and fees

What is risk?

The possibility of incurring a loss

Interest rates

The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

Annual Percentage Yield (APY)

The real rate of return earned on a savings deposit or investment taking into account the effect of compounding interest

Inflation

The tendency of the prices of goods and services to increase over time, which reduces purchasing power.

Face Value

The value or cost shown on the front of something

Which government security has the shortest maturity date?

Treasury Bills (T-bills)

Which law guarantees that consumers must be fully informed of all costs and conditions associated with loans and borrowing?

Truth in Lending Act (1968)

Why do corporations sell corporate bonds?

to borrow money