FIN 2050 Test 2
Invoice (price of a car)
dealers costs to buy a car
suppose Sam's monthly debt payments, not including his mortgage, are $825. His monthly net income is $2,425. Sam has total liabilities of $9,400, and his net worth (not including his home) is $24,750. Calculate Sam's debt-payments-to-income ratio and his debt-to-equity ratio.
debt to payments to income ratio = 825/2425=38% debt to equity ratio= 9400/24750=38%
automobile operation fixed costs
depreciation interest on the loan insurance license, registration and taxes
Series I Bonds
earns fixed rate plus inflation rate
automobile operation variable costs
gas and oil tires maintenance and repairs parking and tolls
enrolled agents
government approved tax experts
single family dwelling
housing unit that is detached from other units
two different types of warranties
implied warranty - warranty of title, merchantability express warranty - usually written, full or limited warranty
sources of quick cash
liquidate savings (savings account, CDs, mutual funds) borrow (credit card advance, personal loan)
Sales Techniques to Avoid
lowballing high balling
buying a car on lease advantages
mall cash outflow Lower monthly payments than buying◦Lease provides detailed records - helps if you use your car for business purposes Able to obtain a more expensive car more often
sticker price (MSRP)
manufacturer's suggested retail price listed on a sticker in a new car's window
buying a car on lease disadvantages
no ownership interest must meet requirements May have additional costs for extra mileage, turning the car in early, or for certain repairs
two ways to make tax payments
payroll withholding estimated quarterly payments
"points"
prepaid interest charged by a lending institution for the mortgage; each discount point is equal to 1 percent of the loan amount
types of financial services
savings - time deposit payment services - checking accounts borrowing - for the long or short term other financial services - insurance investment, real estate purchases
ll is balancing his checkbook. His online balance shows $1,250, and his spreadsheet (where he keeps a running total of his check register) shows $450. He has outstanding checks recorded on the spreadsheet that have not yet cleared, totaling $795.50. His online account shows interest of $0.50 and rewards credits of $4.00. Does his checkbook balance?
st, subtract the uncleared checks from the online balance $1250-795.50=$454.50 Now, add the interest and rewards balance to the spreadsheet total: $450+0.50+4.00=$454.50 Will's checking account balances.
ppose your gross annual income is $52,000, and you have $24,000 to put down on a house. Your lender allows 38% of monthly gross income for PITI. You have other debt payments of $540 per month, and you expect monthly property taxes an insurance to be $480. You can get a 30-year mortgage with an interest rate of 4.5%. You do not want to pay PMI, so you would like to finance 80% of the house. What is your affordable home purchase price?
step 1. determine your monthly gross income - 4,333.33 step 2. multiply by 38% step 3. subtract other debt like property tax and insurance 540 and 480 step 4. use mortagage factor or financial calculator to figure the total amount of the mortgage. step 5. divide affordable mortgage amount by 1-.20= .80
correspondence audit
the IRS sends a letter, asking the taxpayer to respond to specific questions or produce evidence of deductions or other entries on the tax return
residual value
the expected value of a depreciable asset at the end of its useful life
money factor
the financing rate on a lease; similar to the interest rate on a loan
capitalized cost
the price of a car that is being leased average buyer pays 92% of list average leaser pays 96% of list
Prime rate
the rate that the banks charge to large corporations
office audit
the taxpayer sits down with the auditor to answer questions and produce records
Consumer Credit
the use of credit for personal needs. a major force in our economy.
tax avoidance
the use of legitimate methods to reduce one's taxes
Average tax rate
total taxes paid divided by total income
when interest rates are rising you should
use long term loans to take advantage of the current low rates. select short term savings instruments to take advantage of the higher rates when they mature
when the interest rates are falling you should
use short term loans to take advantage of the lower rates when you refinance the loan select long term loans to "lock in" the savings rates
mortgage length
usually 5-30 years
debt to equity ratio
want it less than 1.
irs modifies tax procedures on a
yearly basis
most common filing error
your signature
Series EE bonds
"Patriot bonds" sold at half of the face value 50-500
disadvantages of buying a house
*Substantial financial commitment *Requires a down payment and additional fees such as points and title insurance *Living expenses tend to be higher *Requires time commitment and work *Face the risk of losing money on your investment.
multi-unit dwelling
-Duplex (two homes) -Townhouse (2, 4, or 6 units)
disadvantages of renting a house
-No tax benefits. -Remodeling limitations. -Restrictive Covenants. -Higher utilities than apartment.
problematic financial businesses
-Pawnshops -Check-cashing outlets -Payday loan companies -Rent-to-Own Centers -Car Title Loans
Closing Cost Components
-Title Insurance - boundaries of property -Deed - document that transfers ownership -Escrow Account - money deposited with the lending institution
advantages of buying a house
-pride of ownership -financial benefits -lifestyle flexibility
Practical Purchasing Strategies
-timing purchases (seasonal) -store selection -brand comparison -label information -price comparison
mobile banking drawbacks
0 security 0 fees 0 privacy
4 types of deposit institutions
1. Commercial banks - offer all services 2. savings and loans associations - most services 3. Mutual Savings banks- specialize in savings and mortagage accounts 4. Credit unions - user owned, non profit, lower fees and lower rates
online banking provides services like
1. Direct deposit 2. automatic payment transfer funds 3. atm access 4. debit card
6 types of deposit institutions
1. Life insurance companies - insurance plus savings and retirement 2. investment companies - mutual funds, money market funds 3. Brokerage firms - act as agents in selling and buying 4. credit card companies - specialize in short term loan 5. Finance companies - make short and medium term loans 6. Mortgage companies - mortgage loans
two types of consumer credit
1. closed end credit - one time loans for a specific amount of money for a specific amount of time 2. Open end credit - use as needed until the line max credit is reached
three phases of mortagage
1. complete application 2. lender obtains credit 3. mortgage is approved or denied
home buying five stages
1. determing home ownership needs 2. finding and evaluating a property to purchase 3. pricing the property 4. financing the purchase. 5. closing the real estate transaction.
Five filing status categories
1. single or legally separated 2. married, filing jointly 3. married, filing separately 4.Head of household 5. qualifying widow or widower with dependent (2 years)
type of form to use for taxes
1040
umer credit payments should not exceed BLANK of your net income
20%
suppose you own a home worth $200,000. Your mortgage balance is $125,000. How much can you borrow using a home equity loan if the lender will allow up to 80% loan to value?
80% of $200,000 is $160,000, so you can borrow up to (160,000 -125,000 = $35,000) using a home equity loan.
security deposit
A sum of money usually equal to one month's rent, held by the landlord to cover any damage to the apartment caused by a tenant.
Value added tax (VAT)
A tax on increased value of the product at each stage of production and distribution rather than just at the point of sale.
Reverse Mortgage
An arrangement where the lender agrees to pay money to an elderly homeowner, either regularly or occasionally, and to be repaid from the homeowner's equity when he or she sells the home or obtains other financing.
field audit
An audit conducted by the IRS on the business premises of the taxpayer or in the office of the tax practitioner representing the taxpayer.
condominium
An individually owned housing unit in a building with several such units
Five C's of Credit
Character, Capacity, Capital, Collateral, Conditions
FCBA (Fair Credit Billing Act)
Correct billings errors in a specified time
Alternative Minimum Tax (AMT)
Created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.
payment schedule
Dates on which installments are due and the amount of each installment
advantages of renting a house
Easy to move, low maintenance and responsibility low financial commitment, more space
Credit files
Employer, position, and income. Previous address. Spouse's name, Social Security number, employer, and income. Checks returned for insufficient funds FICO scores and credit information
Fixed rate and fixed payment mortgage
Fixed rate, fixed payment, amortized 5%, 10% or 20% down 15, 20 or 30 years of fixed payments
30-year, 7%, $223,000 mortgage
Monthly payment = 223 × $6.65 = $1,482.95 Payment = Principal repayment + interest PITI = payment + taxes + insurance
Series HH
No longer sold, current income bonds, pays interest every 6 months
Who can obtain a credit report?
Only authorized persons have access to your report for approved legitimate business purposes
PRBC
Payment Reporting Builds Credit
rate of return or yield
Percentage increase in value due to interest Frequency of compounding increases return
Annual percentage yield( APY)
Rate per period x # periods per year
"Truth in savings Act"
This law requires banks to disclose, in writing, such consumer bank account terms as interest rate info, balance requirements, and the circumstances under which fees are charged.
Closing
a meeting of the seller, the buyer, and the lender of funds, or representatives of each party, to complete the transaction
Adjustable Mortgage Rate (ARM)
a type of mortgage loan characterized by interest rates that automatically adjust or fluctuate in concert with certain market indexes. Generally an ARM begins with an introductory or initial interest rate, which then may rise or fall but monthly payments may not exceed ARM loan cap.
flat tax
all tax payers would pay the same amount of money. would increase taxes for many
Second mortgage (home equity loan)
allows a homeowner to borrow on the paid-up value of the property
tax credits
amount subtracted directly from the amount of taxes owed
Fair Credit Reporting Act of 1970
applicant has right to see all the stored information upon which the policy is either approved or denied
time the taxes have to be submitted
april 15th
ppose Scott needs to borrow $6,000. He has the choice of three loans. The first loan charges 6% simple interest, with one repayment at the end of three years. The second charges 6% simple interest on the declining balance with annual payments. The third loan is an add-on interest loan, also with annual payments over three years. Calculate the APR for each loan.
chapter 5
two different types of bankruptcy
chapter 7 - straight bankruptcy chapter 13- wage earner plan
dependent
children under 18 or under 24 who is a full time student with less than 2000 in investments
credit bureau
company that collects information about your credit history and sells it to lenders
three types of audits
correspondence, office, field