Personal Finance
Definition of speculative risk
potential for gain as well as for loss
Definition of pure risk
potential only for the possibility of loss
Definition of inflation
rise in the general level of prices
Effect of inflation on long-term and short-term interest rates
risk premium increases with expected inflation
Relation of interest rate to time
risk premium increases with increased length of time that the funds are in use
Which of the following investments typically has the largest potential growth?
stocks
Disposable income equals
the amount a person or household has to spend
Who is responsible for a loan repayment?
the cosigner and/or the borrower
Definition of appreciation
the value of the home appreciates (increases in value)
A salary-reduction plan is also known as a
401(k) plan
How are amount for balance sheets determined?
Assets: items of value (what you own) Liabilities: amounts owed (what you owe) Net worth: your wealth
What is the preferred phase of the economic cycle?
Expansion: increasing production and consumption
Which of the following is NOT correct
Traditional financial guidelines suggest that your home should cost about five times your annual income
At the end of the year, employees receive a _____ form that reports annual earnings and the amounts deducted for taxes from their employers.
W-2
Which of the following electronically subtracts money from your savings or checking account to pay for goods and services?
a debit card
Amanda wants to be part of the most basic form of ownership for a corporation. She should invest in
common stock
Definition of recession
decline in total output, income, employment, and trade
A personal balance sheet reports
Items owned and amounts owed
The rate used to calculate the tax due on the next dollar of income is referred to as the
Marginal tax rate
The current financial position of an individual or family is best presented with the use of a
balance sheet
Which of the following is NOT a strategy for wise buying?
buying items on impulse
The use of property or savings to secure a loan relates to
collateral
Consumer attitudes during recession
consumers are pessimistic about future buying plans
If overall interest rates in the economy rise, a corporate bond with a fixed interest rate will generally
decrease in value
Which of the following will increase the net worth of a household?
decrease spending by $5 per day
A distribution of money, stock, or other property that is paid to the stockholders of a company is called a
dividend
Definition of equity in a home
dollar value of the home in excess of the amount owed on it
Calculate take-home pay
$1,000.00 (gross) - $118 (federal income tax - 25% marginal tax rate) - $76.50 (social security & medicare tax - 7.65%) - $48.00 (state income tax - 6%) ------------- $757.50 net
The average used car costs about ____ less than the average new car.
$10,000
Given the information here, what should Jason's adjusted bank balance for his bank reconciliation be? Bank balance: $300 Outstanding checks: $129 Deposit in transit: $50 ATM fees: $26 Interest earned: $5 Checkbook balance: $242
$221
The insurance coverage provided by the FDIC for a savings account is ____ per depositor per insured financial institution.
$250,000
How do you withdraw money from a checking account?
- Write checks - Debit cards - Automatic drafts and direct deposits
Which of the following are major reasons that investors purchase mutual funds
A and B only: - Diversification - Professional management
Which of the following is an example of open-end credit?
A department store credit card
Which of the following is an example of closed-end credit?
A mortgage loan
Definition of "as is"
Buyer takes all risk of nonperformance or other problems despite any salesperson's verbal assurances.
The set amount that you must pay toward medical expenses before the insurance company pays benefits is called
Deductible
All of the following are examples of defined contribution plans except
Defined-benefit plan
Jacob is concerned that his out-of-pocket health care expenses will be quite high, so he is considering adding contributions to a tax-free account that he can use with high-deductible policy to cover catastrophic expenses. What kind of plan does he have?
HAS
A saver or an investor should expect to receive a risk premium for
Higher uncertainty about getting his/her money back
Jill is 45 years old and thinks that her future tax rate will be lower than what she currently pays, so she wants to defer her taxes on her contributions of up to $5,500 in 2014. Which plan would allow her to
Regular IRA
Julian's annual contributions to his retirement are not tax-deductible, but his earnings accumulate tax-free. He is investing in a
Roth IRA
Taxes on earning that fund old age, survivor, and disability insurance benefits are called
Social Security taxes
Items with monetary value are referred to as
assets
The equation to calculate net worth is
assets - liabilities = net worth
Definition of escrow
escrow account: money deposited with lending institution for payment of taxes and insurance - special reserve account at a financial institution in which funds are held until they are paid to a third party - in this case, for home insurance and for property taxes
Most products come with some guarantee of quality. This type of warranty states that a detective product can be fixed or replaced during a reasonable amount of time.
full warranty
The appearance of a used car can be deceptive. When purchasing a used vehicle, it is a good idea to
have a trained and trusted mechanic of your choice check out the vehicle
If you miss payments on a home equity loan, you can lose your
house
The time value of money refers to
Increases in an amount of money as a result of interest earned
A family with $100,000 in assets and $60,000 of liabilities would have a net worth of (you will be given certain financial information from which to calculate net worth).
$40,000
An insurance company will
Insure pure risk, but not speculative risk
Given the information here, what should Jason's adjusted checkbook balance be? Bank balance: $600 Outstanding checks: $260 Deposit in transit: $100 ATM fees: $50 Interest earned: $10 Checkbook balance: $480
$440
Evan had three accounts as listed below. In 2014, how much was his total insurance coverage by the FDIC? - Bank A: $150,000 - Bank B: $50,000 - Bank C: $350,000
$450,000
How does a CD work?
- invester commits to a specified term - highest interest rate
A _______ is an employer-sponsored retirement account, and participating in one is one of the easiest ways to begin an investment program.
401(k) account
If a $10,000 investment earns interest of $500 in one year, what is its rate of return?
5%
The periodic charge for the use of credit is called
Interest
General rule for deductibility of expenses
All expenses are deductible unless specified by the federal government
General rule for taxability of income
All income is taxable unless exempt by the federal government
If you buy common stock, you may receive income from
All of these are correct: - Dividends - Dollar appreciation of stock value - Possible increases in value from stock splits
How do mutual funds provide returns to their shareholders?
All of these: - Income dividends - Capital gain distributions - Capital gains
Which of the following can result from a failure to repay a loan?
All of these: - Loss of a good reputation - Damage to family relationships - Bankruptcy - Loss of income or valuable property
Ricky has a conventional mortgage. He can monitor the reduction of his loan balance through his payments by using _____ information.
Amortization
Dependent exemption
An individual may be a dependent on only one tax return
Definition of a mutual fund
An investment vehicle offered by investment companies to those who wish to: - Pool money from many investors - Buy stocks, bonds, and other financial securities - Have buy/sell decisions made by a fund manager An investment company that combines the funds of investors who have purchased shares of ownership in it and then invests that money in a diversified portfolio of stocks and bonds issued by other corporations or governments
Which of the following is an account used to pay property taxes and homeowner's insurance?
Escrow
What is the primary purpose of medical expense insurance?
Pay actual medical costs for illness or injury
Which of the following would increase the interest rate for a loan?
Poor credit rating
Which of the following is a deduction to determine take-home pay?
Social Security taxes
The formula for calculating Federal taxable income
Step 1: Total income Step 2: Gross income (subtract exclusions (tax-exempt income)) Step 3: Adjusted gross income (subtract adjustments to income) Step 4: Subtotal (Subtract standard deduction or total itemized deductions) Step 5: Taxable income (subtract value of exemptions) Step 6: Apply tax table or tax-rate schedule to determine tax liability Step 7: Final tax liability (subtract tax credits) Step 8: Calculate balance owed or refund
If Brenda wants to pay her fair share of taxes, no more and no less, she should practice
Tax avoidance
Which of the following is a disadvantage of renting?
Tenants cannot take tax deductions for mortgage interest and property taxes.
The consumer price index measures
The average change in prices of goods and services of urban consumers
If you hold mutual fund shares in your Roth individual retirement account, the taxes on reinvested income with be
eliminated
Which of the following features is a benefit for investors of municipal bonds?
interest may be tax-exempt at the federal level
Definition of adjustable rate mortgages
interest rate varies over the life of the loan
Most products come with some guarantee of quality. This type of warranty covers only certain aspects of the product, such as parts.
limited warranty
Definition of mortgage
loan to purchase real estate in which the property itself serves as collateral
The amount you would have left if all assets were sold and all debts were paid in full is called your
net worth
Which of the following investments typically has the most risk?
stocks
Definition of progressive tax rate
tax rate increases as income increases
Income that is taxed at a later date is
tax-deferred income
Income that is not subject to tax is called
tax-exempt income
This is a written guarantee from the manufacturer that specifies the conditions under which the product can be returned, replaced, or repaired
warranty
The APR is the percentage cost of credit on a(n) _______ basis.
yearly