BUSI 1307 - Midterm Exam
The distinction between short-term and long-term capital gains is important because the capital gains tax is a maximum of:
15 percent of the long-term capital gain and the gain may be nontaxable depending on the taxpayer's tax bracket. Short-term capital gains are taxed as ordinary income.
The difference between a debit card and a credit card is:
A credit card allows you to purchase goods and services on credit, within your credit limits. If you do not pay off your entire balance each month, you will incur a finance charge. When you use a debit card, payment comes directly from your checking account. There is no finance charge and you are limited only by the funds available in your bank account.
Some advantages to paying bills online are: (Select all that apply.) A. can be set up to pay your bills automatically so you do not forget to pay a bill on time or miss a payment. B. it is a good way to keep more accurate records since your financial institution maintains electronic records of all transactions. C. can be set up to let you know that you forgot to pay a bill on time. D. eliminates the need to keep accurate records of your transactions. E. saves a lot time since all you have to do is enter an amount after selecting the appropriate recipient. F. it is a good way to keep more accurate records since your financial institution will write out the checks and mail them for you. G. eliminates the need to mail a check so you save on postage and the cost of checks.
A. can be set up to pay your bills automatically so you do not forget to pay a bill on time or miss a payment. B. it is a good way to keep more accurate records since your financial institution maintains electronic records of all transactions. C. can be set up to let you know that you forgot to pay a bill on time. E. saves a lot time since all you have to do is enter an amount after selecting the appropriate recipient. G. eliminates the need to mail a check so you save on postage and the cost of checks.
You should reconcile your account balance: (Select all that apply.) A. to track your spending to determine exactly where you should live and work. B. to verify all transactions, including debit card transactions. C. to find your errors. The sooner you discover the errors, the easier it will be to have the bank refund your money. D. to find a bank error. The sooner you discover the error, the harder it will be to have it corrected. E. to verify only your debit card transactions. F. to find a bank error. The sooner you discover the error, the easier it will be to have it corrected. G. to track your spending to determine exactly where you spend your money.
B. to verify all transactions, including debit card transactions. F. to find a bank error. The sooner you discover the error, the easier it will be to have it corrected. G. to track your spending to determine exactly where you spend your money.
Which of the following is true regarding the differing treatment of dividend and interest income for tax purposes?
Both interest income and dividend income are included in gross income to determine taxable income, but dividend income is taxed at lower rates.
________ is the process of forecasting future expenses and savings.
Budgeting
How are charitable gifts treated for tax purposes?
Charitable gifts or contributions are deductible if you itemize and the organization is a recognized not-for-profit organization.
Which of the following does depict a special service that banks provide? A. Cashier's checks that are useful when the payee is concerned that a personal check may bounce. B. Automatic teller machines that offer convenient access to cash. C. Traveler's checks are a safe way to carry money when you travel. D. Money orders comma which are a safe way to send money E. All of the above.
E. All of the above
Why is FDIC insurance important?
FDIC insurance is needed so the public has faith in the financial system and will therefore deposit money in a financial institution instead of keeping it in a safe or stuffed in a mattress. The funds are then available to be borrowed by others.
A thorough understanding of this personal finance book qualifies you to become a financial adviser.
False
Goals should be set as high as possible regardless of reality because they may eventually be obtainable.
False
If prepared properly, financial plans are set for life and should not need to be adjusted.
False
People do not need to determine how much money to set aside for retirement and how those funds should be invested until they near their retirement age.
False
Various government agencies have conducted surveys that show most people have a good understanding of personal finance.
False
What does FICA stand for and who pays FICA?
Federal Insurance Contributions Act and these taxes are paid equally by the employer and the employee.
List and describe the four main types of nondepository financial institutions.
Finance companies: provide personal loans to individuals. These loans are usually at higher rates to individuals at a higher risk of defaulting on the loan. Securities companies: facilitate the purchase or sale of securities by firms or individuals and also provide brokerage services, helping to make a market for stocks and bonds by matching buyers and sellers. Insurance companies: sell insurance to protect individuals and companies against perils (adverse events), and include life insurance companies, property and casualty insurance companies, and health insurance companies. Mutual funds: provide a means by which investors with only a small amount of money can invest in a portfolio of securities.
Sandra wants to deposit $180 each year for her son. If she places it in an investment account that averages a 44% annual return, what amount will be in the account in 19 years? How much will she have if the account earns 88% a year?
Future value is the amount to which a series of payments (such as a regular deposit into a savings account) will grow over a period of time when it is placed in an account paying compound interest. The future value of a series of payments can be found using the following formula: FVA=PMT*FVIFA_(i,n) Using a financial table to find the future value interest factor in column i row n of the FVIF table: FVIFA_(i,n)=FVIFA_(4,19) The Future Value Interest Factors for $1 compounded at 44 percent for 19 periods equals 27.671. Therefore, FVA=$180*27.671=$4,980.78 The Future Value Interest Factors for $1 compounded at 88 percent for 1919 periods equals 41.446. Therefore, FVA=$180*41.446=$7,460.28
Kyle has $2,500 in cash received for high school graduation gifts from various relatives. He wants to invest it in a certificate of deposit (CD) so that he will have a down payment on a car when he graduates from college in five years. His bank will pay 1.4% per year, compounded annually, for the five-year CD. How much will Kyle have in five years to put down on his car?
Future value is the amount to which a single sum (such as an investment in a CD) will grow over a period of time at a compound rate of change (such as the rate earned on a CD). Future value is the amount that a present value will be worth once it grows over a period of time when it earns compound interest and can be calculated using the following formula: FV=PV×FVIF_(i,n) Using a financial table to find the future value interest factor in column i row n of the FVIF table: FV=PV*FVIF_(1.4,5) The Future Value Interest Factors for $1 compounded at 1.4 percent for 5 periods (Table C-1) equals 1.072. Therefore, FV=$2,500×1.072=$2,680.00 In five years, the amount Kyle will have to put down on his car is $2,680.00.
How much will you have in 48 months if you invest $145 a month at 66% annual interest?
Future value is the amount to which a single sum (such as an investment in a CD) will grow over a period of time at a compound rate of change (such as the rate earned on a CD). Future value is the amount that a present value will be worth once it grows over a period of time when it earns compound interest. The future value of a single payment can be found using the following formula: Future Value = Deposit×FVIF_(i,n) Using a financial table to find the future value interest factor in column i row n of the FVIF table: Future Value = Deposit×FVIF_(0.500000%,48) The Future Value Interest Factors for $1 compounded at 6 percent for 48 Periods equals 54.098. Therefore, Future Value = $145×54.098=$7,844.21
How does the rate of interest affect future values?
Higher rates of interest will result in higher future values.
How can an understanding of the time value of money motivate you to save more money?
If you realize that early contributions will allow you to amass a large sum of money over time, it can motivate you to begin saving now and also increase the amount you save annually.
Which of the following is an example of money management?
Putting your money in a savings account at your bank
Alys makes $580 per week. How much will be withheld from her weekly check for Social Security taxes? Medicare taxes? Total FICA taxes? (Hint: The Social Security tax rate is 6.20% and the Medicare tax rate is 1.45%.)
Social Security Taxes=0.062×$580=$35.96 Medicare Taxes=0.0145*$580=$8.41 Total FICA=$35.96+$8.41=$44.37
The two portions of FICA are:
Social Security taxes, which are used to make payments to retirees, and Medicare taxes, which are used to provide payments to health care providers in the case of illness.
Which of the following is true?
Stocks are certificates representing partial ownership in a company.
Stephen is in a 12 percent marginal tax bracket. In 2018, he sold stock that he had held for nine months for a gain of $2,300. How much tax must he pay on this capital gain? How much would the tax be if he had held the stock for 13 months?
Tax on Short dash Term Capital Gain=$2,300*0.12=$276 Capital Gains Tax=$2,300*0.00=$0 *Tax is 0% because the long-term capital gains tax is 15% for taxpayers in the 22% and higher tax brackets, but has been eliminated for taxpayers in the 10% and 12% tax brackets.
The FDIC is:
The FDIC is the Federal Deposit Insurance Corporation that ensures bank accounts for up to $250,000.
What two personal financial statements are most important to personal financial planning?
The personal cash flow statement and the personal balance sheet
Juan would like to give his newly born grandson a gift of $10,000 on his eighteenth birthday. Juan can earn 88% annual interest on a certificate of deposit. How much must he deposit now in order to achieve his goal?
The present value of a single cash flow today is a single cash flow, FV, discounted back to the present value, PV, at the annual discount rate. To calculate the present value of a future sum, use the following formula: PV equals FV times PVIF Subscript i comma nPV=FV×PVIFi,n Using a Appendix C to find the present value interest factor in column i row n of the PVIF table: PVIF Subscript i comma nPVIFi, n = PVIF Subscript 8 % comma 18PVIF8%,18 The Present Value Interest Factors for $1 compounded at 88 percent for 1818 periods equals 0.2500.250. Therefore, PV equals $ 10 comma 000 times 0.250PV=$10,000×0.250 In order to given his grandson $10 comma 00010,000 on his eighteenth birthday, Juan needs to deposit $2 comma 500.002,500.00.
What is the risk premium of Metallica Financial Company's 2-year interest rate of 12% given the local FDIC-insured bank only offers a 5% return for 2-year CDs? Why is Metallica offering a higher interest rate?
The risk premium is 7% Metallica is offering a higher interest rate: to attract the needed funds and the high risk premium indicates that Metallica has a high risk of default.
What is withholding tax?
The withholding tax is the portion of your paycheck that is withheld by the employer and sent to the IRS.
DeMarcus wants to retire with $1 million in savings by the time he turns 60. He is currently 18 years old. How much will he need to save each year, assuming he can get a 9% annual return on his investments?
To calculate the amount DeMarcus will need to save each year, use the following formula: Annual Payment equals StartFraction Future Value Over FVIFA Subscript i comma n EndFractionAnnual Payment=Future ValueFVIFAi,n DeMarcus wants to retire a millionaire, therefore, the FV is $1 comma 000 comma 0001,000,000. Since DeMarcus is just starting to save, the PV is $0. The annual return he can earn on his investment, I, is 99%. To calculate the number of years DeMarcus will save for, N, use the following formula: Number of Years until Retirement equals Retirement Age minus Current AgeNumber of Years until Retirement=Retirement Age−Current Age Therefore, Number of Years until Retirement equals 60 minus 18 equals 42Number of Years until Retirement=60−18=42 The number of years DeMarcus will save for, N, is 4242 years. Therefore, Annual Payment equals StartFraction $ 1 comma 000 comma 000 Over FVIFA Subscript 9 % comma 42 EndFractionAnnual Payment=$1,000,000FVIFA9%,42 Annual Payment equals StartFraction $ 1 comma 000 comma 000 Over 403.528 EndFraction equals $ 2 comma 478.14Annual Payment=$1,000,000403.528=$2,478.14 The amount DeMarcus will need to save each year, PMT, is $2 comma 478.142,478.14.
Winners of the Georgia Lotto drawing are given the choice of receiving the winning amount divided equally over 22 years or as a lump-sum cash option amount. The cash option amount is determined by discounting the annual winning payment at 88% over 22 years. This week the lottery is worth $18 million to a single winner. What would the cash option payout be?
To determine the cash option payout, use the present value of a future annuity sum formula: PVA equals PMT times PVIFA Subscript i comma nPVA=PMT×PVIFAi,n To calculate the annual payment, PMT, use the following formula: Annual Payment equals StartFraction $ 18 comma 000 comma 000 Over 22 EndFraction equals $ 818 comma 182Annual Payment=$18,000,00022=$818,182 The annual payment is $818 comma 182818,182. Using a Appendix C to find the present value interest factor in column i row n of the PVIF table: PVIFA Subscript i comma nPVIFAi, n = PVIFA Subscript 8 % comma 22PVIFA8%,22 The Present Value Interest Factors for $1 compounded at 88 percent for 2222 periods equals 10.20110.201. Therefore, PVA equals $ 818 comma 182 times 10.201 equals $ 8 comma 346 comma 272.73PVA=$818,182×10.201=$8,346,272.73 The cash option payout would be $8 comma 346 comma 272.738,346,272.73.
One of the considerations that determines your investment choices is the level of risk you are willing to tolerate.
True
The current market value of what you own minus the value of what you owe is called your net worth.
True
The simple objective of financial planning is to make the best use of your resources to achieve your financial goals.
True
An annuity is:
a stream of equal payments that are received or paid at a determined time interval.
The difference between a tax deduction and a tax credit is:
a tax deduction reduces the amount of taxable income, while a tax credit directly reduces the amount of tax owed.
In questions a through d, indicate whether you would use the table for determining the future value of a single sum (FVIF), the present value of a single sum (PVIF), the future value of an annuity (FVIFA), or the present value of an annuity (PVIFA). a. You want to know how much you must deposit today to have $5,000 in five years. b. You plan to contribute $300 per month to your company's retirement plan and want to know how much you will have at retirement. c. You receive $500 as a gift for graduation, and want to know how much it will be worth in three years if you deposit it in a savings account. d. You must decide between accepting a lump-sum settlement an annual payments.
a. present value of a single sum (PVIF). b. future value of an annuity (FVIFA). c. future value of a single sum (FVIF). d. present value of an annuity (PVIFA).
Financial institutions obtain funds for loans by:
accepting deposits from individuals.
You can assess the accuracy of your budget by comparing your:
actual cash inflows and cash outflows with your budgeted amounts.
Heather purchased a new car for $18,000 three years ago and listed the new car as an asset with the value of $18,000 on her personal balance sheet. She was able to borrow the entire $18,000 to purchase the car and listed the car loan as a liability with a value of $18,000. She just made the last payment on the car loan, so the liability is no longer on her personal balance sheet. However, the asset value of the car is still listed as $18,000. What adjustments should Heather make to the value of her assets in order to make her personal balance sheet more accurate? In order to make her personal balance sheet more accurate, Heather should:
adjust the value of the car down to its current market value.
Finding forecasting errors in your budget can allow you to:
adjust your spending to stay within your budgeted outflows.
Taxable income is calculated as:
adjusted gross income less the standard deduction or itemized deductions.
Current interest rates:
affect the amount of interest you would receive on deposits and the amount of interest you would pay on borrowing. affect both your cash inflows and cash outflows. *both of these answers are correct*
Retirement planning should begin
as early as possible in order that you accumulate sufficient funds for retirement.
You will find that you typically have unexpected expenses every year. Knowing that fact you should:
build an emergency reserve that is liquid enough for you to cover your unexpected expenses.
Using credit cards:
can create the illusion of zero cost and ultimately result in higher levels of spending.
According to the IRS, gross income is all reportable income from any source including:
captial gains, scholarships that exceed tuition fees and book costs, and income from a business (Quiz #5, Question 4)
A tax credit:
directly reduces the amount of tax owed
The first step in developing your financial plan is
establish your financial goals.
A budget is a:
forecast of cash inflows and cash outflows developed to determine whether your anticipated cash inflows are sufficient to meet your cash outflows.
Compounding can help you:
forecast the funds that will be available to you at retirement.
The two methods that can be used to calculate future values are:
future value interest factors or a financial calculator.
Determining the present value of an amount is useful when you want to:
have $ 20,000 for a down payment on a house in three years.
Justin's stock portfolio increased in value during the year, and the balance on his mortgage declined. What happened to his net worth over the course of the year? Justin's net worth:
increased since his asset values increased and his liabilities decreased.
Interest income comes from:
interest on investments such as bonds and CDs.
A short-term capital gain occurs when the asset is held for ____ than a year.
less
Potential investments include all of the following instruments, except
lottery tickets.
Some investors pursue higher-risk investments in a weak economy to:
make up for limited income.
Compounding is the:
process by which the money you are holding accumulates interest over time.
Capital gains occur when individuals:
purchase financial assets (such as stocks or bonds) or real estate and then sell them for a gain.
A tax deduction:
reduces the amount of taxable income
"Big savers" focus their budget decisions on
saving as much of their income as possible.
When a period's budget indicates a cash:
shortage, you can plan to borrow needed cash for the period.
"Big spenders" focus their budgeting decisions on
spending most of their income.
Dividend Income comes from:
stock ownership
Discounting is the process of determining:
the amount needed today (i.e., the present value) to accumulate a specified amount in the future.
Jerry would like to save the same amount every month until he turns 40. Which time value of money concept should he use to compute the value of his savings at that time? Jerry should use:
the future value of an annuity to compute the expected future value of his equal monthly payments.
The fault with this strategy is that:
the higher returns are due to the higher risk.
Winston will receive $100,000 on his 25th birthday. Which time value of money concept would you use to compute the value of his future inheritance? The time value of money concept you would use is:
the present value of a single sum.
Your cash inflows are primarily impacted by:
the stage of your career path and your chosen profession.
It is important to understand the tax consequences of your financial decisions because it can help you:
to minimize your tax liability and ultimately increase your level of wealth.
The interest rate for loans is determined by adding:
varying percentage points to the rate paid on deposits.
Some types of payments that you might receive that would not be included in gross income are:
veteran's benefits, health and casualty insurance reimbursements, and interest income.
The personal balance sheet summarizes:
what you own, what you owe, and your net worth.
Interest rates:
will be higher for loans that are exposed to higher default risk.
