Personal Financial Planning Exam 1

A person making $35,000 and spending $30,800 has an average propensity of...

88%

Rewards (Co-Branded) Card

A bank credit card that combines features of a traditional bank credit card with an additional incentive, such a s rebates and airline mileage.

Checkbook Ledger

A booklet, provided with a supply of checks, used to maintain accurate records of all checking account transactions.

Cash Budget

A budget that takes into account estimated monthly cash receipts and cash expenses for the coming year.

Debit Card

A card used to make transactions for cash rather than aredit; replaces the need for cash or checks by initiating charges agains the checking account

Cashier's Check

A check payable to a third party that is drawn by a bank on itself in exchange for the amount specified plus, in most cases, a service fee (of about $5).

Traveler's Check

A check sold (for a fee of about 1.5%) by many large financial institutions, typically in denominations ranging from $20 to $100, that can be used for making purchases and exchanged for local currencies in most parts of the world.

Negotiable Order of Withdrawal (NOW)

A checking account on which the financial institution pays interest; NOWs have no legal minimum balance.

Asset Management Account (AMA)

A comprehensive deposit account, offered primarily by brokerage houses and mutual funds.

Student Credit Card

A credit card marketed specifically to college students

Budgets

A detailed financial report that looks forward, based on expected income and expenses.

Money Market Deposit Account (MMDA)

A federally insured savings account, offered by banks and other depository institutions, that competes with money market mutual funds.

Balance Sheet

A financial statement that describes a person's financial position at a given point in time.

Income and Expenses Statement

A financial statement that measures financial performance over time.

Annuity

A fixed sum of money that occurs annually

Open Account Credit

A form of credit extended to a consumer in advance of any transaction

Timeline

A graphical presentation of cash flows.

Cash Advance

A loan that can be obtained by a bank credit cardholder at any participating bank or financial institution.

Consumer Price Index (CPI)

A measure of inflation based on changes in the cost of consumer goods and services.

Average Daily Balance (ADB) Method

A method of computing finance charges by applying interest charges to the average daily balance of the account over the billing period.

Cash Basis

A method of preparing financial statements in which only transactions involving actual cash receipts or actual cash outlays are recorded.

Credit Statement

A monthly statement summarizing the transactions, interest charges, fees, and payments in a consumer credit account.

Money Market Mutual Fund (MMMF)

A mutual fund that pools funds of many small investors and purchases high-return, short-term marketable securities.

Certified Check

A personal check that is guaranteed (for a fee of $10 to $15 or more) by the bank on which it is drawn.

Prepaid Card

A plastic card with a magnetic strip or microchip that stores the amount of money the purchaser has to spend and from which is deducted the value of each purchase.

Purchase Option

A price specified in a lease at which the lessee can buy the car at the end of the lease term.

Balance Transfer

A program that enables cardholders to readily transfer credit balances from one card to another.

Automated Teller Machine (ATM)

A remote computer terminal that customers of depository institutions can use to make basic transactions 24 hours a day, 7 days a week.

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.

Time Deposit

A savings deposit at a financial institution; remains on deposit for a longer time than a demand deposit.

Grace Period

A short period of time, usually 20 to 30 days, during which you can pay your credit card bill in full and not incur any interest charges.

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.

Credit Limit

A specified amount beyond which a customer may not borrow or purchase on credit.

Inflation

A state of the economy in which the general price level is increasing.

Budget Control Schedule

A summary that shows how actual income and expenses compare with the various budget categories and where variances (surpluses or deficits) exist.

Personal Financial Planning

A systematic process that considers important elements of an individual's financial affairs in order to fulfill financial goals.

Retail Charge Card

A type of credit card issued by retailers that allows customers to charge goods and services up to a pre-established amount

Secured (Collateralized) Credit Cards

A type of credit card that's secured with some form of collateral, such as a bank CD.

Flexible-benefit (Cafeteria) Plan

A type of employee benefit plan wherein the employer allocates a certain amount of money and then the employee "spends" that money for benefits selected from a menu covering everything from child care to health and life insurance to retirement benefits.

Deposit Insurance

A type of insurance that protects funds on deposit against failure of the institution; can by insured by the FDIC and the NCUA.

Revolving Line of Credit

A type of open account credit offered by banks and other financial institutions that can be accessed by writing checks against demand deposit or specially designated credit line accounts.

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.

Rule of 72

A useful formula for estimating about how long it will take to double a sum at a given interest rate. ( 72 / annual compound interest rate = # of years to double money )

Demand Deposit

An account held at a financial institution form which funds can be withdrawn on demand by the account holder; same as a checking account.

Share Draft Account

An account offered by credit unions that is similar to interest-paying checking accounts offered by other financial institutions.

Sales Contract

An agreement to purchase an automobile that states the offering price and all conditions of the offer; when signed by the buyer and seller, the contract legally binds them to its terms.

Overdraft Protection

An arrangement between the account holder and the depository institution wherein the institution automatically pays a check that overdraws the account.

Lease

An arrangement in which the lessee receives the use of a car (or other asset) in exchange for making monthly lease payments over a specified period.

Open-End (Finance) Lease

An automobile lease under which the estimated residual value of the car is used to determine lease payments; if the car is actually worth less than this value at the end of the lease, the lessee must pay the difference.

Cash Deficit

An excess amount of expenses over income, resulting in insufficient funds as well as in decreased net worth.

Cash Surplus

An excess amount of income over expenses that results in increased net worth.

Professional Financial Planner

An individual or firm that helps clients establish financial goals and develop and implement financial plans to achieve those goals.

Net Worth

An individual's or family's actual wealth; determined by subtracting total liabilities form total assets.

Internet Bank

An online commercial bank.

Stop Payment

An order made by an account holder instructing the depository institution to refuse payment on an already issued check.

Long-term Liability

Any debt due 1 year or more from the date of the balance sheet.

Current (Short-Term) Liability

Any debt due within 1 year of the date of the balance sheet.

Investments

Assets such as stocks, bonds, mutual funds, and real estate that are acquired in order to earn a return rather than provide a service.

Liquid Assets

Assets that are held in the form of cash or that can readily be converted to cash with little or no loss in value.

Personal Financial Statements

Balance sheets and income and expense sheets that serve as essential planning tools for developing and monitoring personal financial plans.

Savings Ratio

Cash surplus divided by net income (after tax); indicates relative amount of cash surplus achieved during a given period.

Fixed Expenses

Contractual, predetermined expenses involving equal payments each period.

Open Account Credit Obligations

Current liabilities that represent the balances outstanding against established credit lines.

Liabilities

Debts, such as credit card charges, loans, and mortgages.

Income

Earnings received as wages, salaries, bonuses, commissions, interest and dividends, or proceeds from the sale of assets.

Variable Expenses

Expenses involving payment amounts that change form one time period to the next.

A budget is a detailed statement of the income and expenses that occurred over a past period (T/F)

False

Financial Assets

Intangible assets, such as savings accounts and securities, that are acquired for some promised future return.

Simple Interest

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

Assets

Items that one owns.

Expenses

Money spent on living expenses and to pay taxes, purchase assets, or repay debt.

Tangible Assets

Physical assets, such as real estate and automobiles, that can be held for either consumption or investment purposes.

Financial Goals

Results that an individual wants to attain, such as buying a home, building a college fund, or achieving financial independence.

Debit Cards

Specially coded plastic cards used to transfer funds from a customer's bank account to the recipient's account to pay for goods or services.

Electronic Funds Transfer Systems (EFTSs)

Systems using the latest telecommunications and computer technology to electronically transfer funds into and out of customers' accounts.

Real Property

Tangible assets that are immovable: land and anything fixed to it, such as a house.

Personal Property

Tangible assets that are movable and used in everyday life

Goal Dates

Target dates in the future when certain financial objectives are expected to be completed.

Annual Percentage Rate (APR)

The actual or true rate of interest paid over the life of a loan; includes all fees and costs.

Equity

The actual ownership interest in a specific asset or group of assets.

Fair Market Value

The actual value of an asset, or the price for which it can reasonably be expected to sell in the open market.

Purchasing Power

The amount of goods and services each dollar buys at a given time.

Utility

The amount of satisfaction received from purchasing certain types or quantities of goods and services.

Effective Rate of Interest

The annual rate of return that is actually earned (or charged) during the period the funds are held (or borrowed).

Time Value of Money

The concept that a dollar today is worth more than a dollar received in the future.

Insolvency

The financial state in which net worth is less than zero.

Money Factor

The financing rate on a lease; similar to the interest rate on a loan.

Depreciation

The loss in the value of an asset, such as an automobile, that occurs over its period of ownership; calculated as the difference between the price initially paid and the subsequent sale price.

Line of Credit

The maximum amount of credit a customer is allowed to have outstanding a t any point in time.

Money

The medium of exchange used as a measure of value in financial transactions.

Closed-End Lease

The most popular form of automobile lease; often called a walk-away lease, because at the end of its term the lessee simply turns in the car (assuming the preset mileage limit has not been exceeded and the car hasn't been abused).

Standard of Living

The necessities, comforts, and luxuries enjoyed or desired by an individual or family.

Average Propensity to Consume

The percentage of each dollar of income, on average, that a person spends for current needs rather than savings.

Expansion

The phase of the economic cycle when levels of employment and production are high and the economy is growing, generally accompanied by rising prices for goods and services.

Recovery

The phase of the economic cycle when levels of employment and production are improving and the economy is growing.

Depression

The phase of the economic cycle when levels of employment and production are low and economic growth is at a virtual standstill or even negative.

Recession

The phase of the economic cycle when levels of employment and production fall and the growth of the economy slows.

Capitalized cost

The price of a car that is being leased.

Discounting

The process of finding present value; the inverse of compounding to find future value.

Nominal (stated) Rate of Interest

The promised rate of interest paid on a savings deposit or charged on a loan.

Debt Safety Ratio

The proportion of total monthly consumer credit obligations to monthly take-home pay

Base Rate

The rate of interest a bank uses as a base for loans to individuals and small to midsize businesses.

Residual Value

The remaining value of a leased car at the end of the lease term.

Overdraft

The result of writing a check for an amount greater than the current account balance

Cash Management

The routine, day-to-day administration of cash and near-cash resources, also known as liquid assets, by an individual or family.

Gross Domestic Product (GDP)

The total of all goods and services produced in a country; used to monitor economic growth.

Wealth

The total value of all items owned by an individual, such as savings accounts, stocks, bonds, home, and automobiles.

Future Value

The value to which an amount today will grow if it earns a specific rate of interest over a given period.

Present Value

The value today of an amount to be received in the future; it's the amount that would have to be invested today at a given interest rate over a specified time period to accumulate the future amount

Liquidity Ratio

Total liquid assets divided by total current debts; measures the ability to pay current debts.

Debt Service Ratio

Total monthly loan payments divided by monthly gross (before-tax) income; provides a measure of the ability to pay debts promptly.

Solvency Ratio

Total net worth divided by total assets; measures the degree of exposure to insolvency.

The most effective way to achieve financial objectives is through financial planning (T/F)

True

Account Reconciliation

Verifying the accuracy of your checking account balance in relation to the bank's records as reflected in the bank statement, which is an itemized listing of all transactions in the checking account.

Compounding

When interest earned each year is left in an account and becomes part of the balance (or principal) on which interest is earned in subsequent years.

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.