Personal Finance - Chapter 2
Anne has a whole life insurance policy for a face amount of $200,000 and a cash value of $12,500. On her balance sheet, Anne will report an asset of
$12,500.
Mark purchased his Honda Accord last year for $29,000. He financed $20,000 of the purchase with an auto loan that currently has a balance of $15,500. He was thinking about trading it in with the dealer for an SUV and was offered $19,000 for his car. What is the market value of his car on his personal balance sheet?
$19,000
Bonnie made a $325 car loan payment and spent $85 at the grocery store last week. Which of the following is the most appropriate way for Bonnie to classify these transactions for budgeting purposes?
$325 is a fixed expense and $85 is a variable expense.
Which of the following types of time-value-of-money calculation is used for loan amortization?
Future value
Billy wants to know how much his $2,000 would be worth if he purchased a 3 percent certificate of deposit for three years. Which of the following time-value-of-money calculations would you use to compute this?
Future value of a lump sum
Investing funds for future growth is an important aspect of financial planning. If you invest a sum of money today at a certain rate of interest, how do you figure out how much it will be worth at some point in the future?
Future value of a lump sum
You would use which of the following to determine how much you would need to save yearly to finance your child's college education in 10 years?
Future value of an annuity
Tamara paid $240 for groceries, $500 for rent, and $120 for gas during the week. She also received her weekly salary of $650 and an interest payment of $15. Which of the following statements is incorrect?
Grocery expenses should be considered a fixed expense.
Juan is trying to find a secure place to keep his important papers. He has insurance policies and the titles to his car and house. What should Juan do?
He should buy a lockbox and rent a safe deposit box at the bank.
Carl has had negative monthly net cash flow for several months now, which continues to get worse. Which of these is a possible reason that Carl is in financial trouble?
He uses his credit card debt to pay his expenses.
Blake, who has a negative monthly cash flow, has been relying on credit card debt to finance his lifestyle. If Blake does not make any changes, which of the following is most likely to happen?
His monthly shortfall will increase every month.
What does the liquidity ratio measure?
How long one can pay monthly expenses from liquid assets
Which of these questions are able to be answered using time value of money calculations?
How much will my loan payment be?
Cheryl is looking to calculate how much her retirement savings would grow to from her monthly payroll-deducted contribution to her 401(k) plan. Her asset allocation has averaged 7% APY over the past 15 years in the same balanced fund. She has contributed $400 at every paycheck in the past 15 years and plans to continue for 15 more years before retirement. What is the computation?
I = 0.58, N = 360, PMT = −400, PV = 0
Naomi is saving for a down payment on a car she wants to buy in one year. She needs $2,000 for the down payment. If she can earn 12% interest in her investment account, compounded monthly, how would you compute the money she should put aside today to reach her goal in 1 year?
I = 1, N = 12, FV = 2,000
Which of the following variables are required to compute the present value of a lump sum?
I, N, FV
Which of the following variables are required to compute the future value of a lump sum?
I, N, PV
Cory wants to buy a new car and plans to finance some of the cost with a loan. The bank has quoted him a monthly payment of $375 that will include both interest and principal repayment. Cory feels that he will be financially stretched at this payment. Which of the following would result in a lower payment for Cory?
Increase the number of months over which he will pay back the loan
Determining payments on an amortization loan is similar to calculating the present value on an annuity how?
Instead of solving for the present value, you solve for the payment.
Kevin and Julie recently settled their divorce. They evenly split their assets and liabilities. If Kevin's divorce attorney charged him $35,000 in fees while Julie's sister, an attorney, represented her gratis, how did their net worth change?
Kevin's net worth decreased and Julie's remained the same.
Which of these represents the placement of liquid assets on a personal balance sheet?
Liquid assets are listed last, after personal property and debts.
Which financial ratio would be most helpful in determining whether you have enough money in your emergency fund?
Liquidity ratio
Which of these errors in constructing your balance sheet would still result in a correct calculation of net worth?
Listing a savings account as personal property instead of liquid assets.
How does an annuity due differ from an ordinary annutiy?
An ordinary annuity payment occurs at the end of the period, where an annuity due payment occurs at the beginning.
Which of the following items on the balance sheet will be affected if you take out a loan to buy a new car?
Assets and debts
Which of these situations must exist for a person to report a zero net worth on a balance sheet?
Assets and liabilities must be equal.
Which of the following is a useful application for the present value of an annuity?
Calculate how much you need to have saved to meet future income or payment obligations.
What is the fundamental concept behind the time value of money?
Compound interest
Trudy has several medical issues. Which of these are the best kind of records to be stored in a file cabinet so that they can be protected but easily be accessed?
Medical records
What are the five basic functions of time-value-of-money calculations?
N, I, PV, PMT, FV
In what kind of annuity do payments occur at the end of the period?
Ordinary annuity
Jacob is retiring soon and has saved $1,200,000 in his employer-sponsored retirement account. He would like to make his own pension for $6,000 a month in income. How would he compute, when he would run out of money, if his average annual return on his balanced portfolio has been 4 percent?
PV = −1,200,000, FV = 0, I = 4, PMT = 6,000
Chandra wants to know how much she needs to put away today earning 2 percent APY at her bank to pay for a $6,000 cruise in three years. Which of the following time-value-of-money calculation would you use to compute this?
Present value of a lump sum
Younger people are more likely to have
a higher debt ratio than older individuals.
You have a car worth $40,000 with a car loan of $35,000. How would you best categorize your car and your car loan, respectively, on your personal balance sheet?
The car is a $40,000 asset, and the car loan is a $35,000 liability.
Why is it important to not alter your normal spending behavior when recording inflows and outflows of cash for creating your cash flow statement?
The cash flow statement can help you evaluate your spending realistically, but it must be accurate.
Why is it important to not alter your normal spending behavior when recording inflows and outflows of cash for creating your cash flow statement? Select answer from the options below
The cash flow statement can help you evaluate your spending realistically, but it must be accurate.
What is discounting?
The computation of the present value of a future cash flow
All time-value-of-money calculations are based on which of the these simple concepts?
The longer you leave your money in the account, the greater the dollar interest earnings each year will be.
Of the following, which is true regarding the future value of a $1,000 investment made today?
The lower the interest rate earned on the investment, the lower the future value.
Raj has $22,000 in his savings account and $4,200 in his checking account. Where should he place these numbers on a balance sheet?
They are part of his liquid assets, so they're listed first.
Which of the following is used to calculate personal net worth?
Total assets − Total debts
An annuity in which each payment occurs at the beginning of the period is known as an
annuity due.
To get a realistic picture of actual expenditures, it is recommended that you keep a _____ spending log for at least a ______.
daily; month
A household's total monthly debt payments as a percentage of its after-tax monthly income is called the
debt payment ratio.
When the interest rate at which you are discounting future cash flows increases, the present value
decreases.
When you know the future value and you want to calculate the present value, you use the process of
discounting.
Compounding enables an invester to grow his money faster due to
earning interest on interest.
Compounding enables an investor to grow his money faster due to
earning interest on interest.
Repayments on a loan will generally be
greater than the amount borrowed divided by the number of payments.
The liquidity ratio measures
how many months you could pay your monthly expenses out of your liquid assets.
Repayments on a loan are NOT usually
less than the original borrowed amount.
Jack plans to invest $2,000 for a period of five years earning 8 percent per year, compounded annually. Alternatively, he could reach the same target value by investing at a
lower rate for a longer period of time.
Liquidity ratio tells you how many months you could pay your
monthly expenses from your liquid assets.
Most loans today are paid
monthly.
Money received today is worth _______ than the same dollar amount to be recieved in the future.
more than
Chad Bromley is a student at a university and has accumulated $10,500 in credit card debt. Chad can afford to allocate $250 per month toward repayment of this debt. If he does not charge any more purchases to his credit card, he will be able to completely discharge his credit card obligation in
more than 42 months.
Repayments on a loan are usually
more than the overall amount borrowed multiplied by the current rate of interest.
It is important to _________when recording inflows and outflows of cash for the cash flow statement.
not alter your normal spending behavior
Nate has erroneously listed his loans of $22,500 as an asset. The effect of this error will be to
overstate Nate's net worth by $45,000.
A ____________ reflects transactions that occur over a period of time whereas a __________ shows only a single point in time.
personal cash flow statement; personal balance sheet
The computation of the ____________ of a future cash flow is discounting.
present value
If you want to take $20,000 per year from an account for 10 years you don't need to start with $200,000. Instead, you need to deposit a smaller amount that together with compound interest will be sufficient to allow you to withdraw the $20,000 per year, leaving you with a zero balance at the end of the tenth year. You need to calculate the ________________, which is the amount you would need to deposit.
present value of an annuity
Tax records should be kept for
seven years of the filing of the return because IRS audits can occur within that time.
enny has a lot of credit card debt with 20 percent annual interest. She will not use credit cards until the balance is paid off. If she is able to transfer the balance to another card that has 12 percent rate,
she will be able to pay off the debt quicker if she continues to make the same monthly payment.
A personal cash flow statement
shows income and expenditures over a period of time.
An important starting point for improving your financial situation is to carefully evaluate your
spending and saving.
Joe Fontana is collecting his important documents for safekeeping. After sorting his documents, it would be smart of Joe to
store his insurance policies in a lockbox and his titles to assets such as real estate and securities in a safe deposit box.
Mike and Tricia recently discovered their net worth dropped by 20 percent. Their largest asset is their home, which they purchased 10 years ago with a fixed-rate mortgage and a 20 percent down payment. Although they've made regular mortgage payments, the house might have contributed to their reduced net worth because
the current value of the house is less than what they paid for it.
The debt payment ratio measures
the percentage of household after-tax monthly income that is needed to cover all required monthly debt payments.
The debt ratio measures
the percentage of your total assets that you have financed with debt.
Michelle earns 5 percent in her savings account which pays interest monthly. She started with $100 initially and added $25 more on the first anniversary of the opening of the account. The total amount in her savings account
will be more than $130.
The value of a dollar today is _____________ the same dollar to be received one year from now.
worth more than
What is the formula used when finding the present value of an annuity when using a spreadsheet solution?
= PV(rate,nper,pmt,fv,type)
Which of these things would be considered an asset?
A savings account
The first rule of organization is that there should be a particular purpose for everything you save and file. Which of the following is a reason for keeping particular documents?
All the choices are correct.
Which is a source of cash flow?
All the choices are correct.
Which of the following is a good argument for saving money in an interest-bearing account at a bank?
All the choices are correct.
Ellen has a 30-year, fixed-rate mortgage with an $850 fixed payment that includes both interest and repayment of principal that will fully pay off at maturity. What type of loan payment is this?
Amortization
What is the financial term used to describe the process of paying interest on a declining loan balance in addition to repaying some of the face value of the loan with each payment?
Amortization
When storing records for ease of access and safekeeping, usually medical receipts and checking account statements should
be stored in a filing cabinet.
Hank is used to carrying cash in his pocket and pays for most of his purchases in cash. As a result, he does not remember where he spent his money and often feels that he is missing cash. Which of the following would be the best way for Hank to track his cash flow to maintain an accurate budget?
Recording each purchase in a spending log
Which of the following is not an unexpected change in life circumstances that can also cause your net worth to decline?
Rise in interest rates
Which of the following ratios measures the percentage of your after-tax income that is being allocated to savings?
Savings ratio
What is the recommended amount of time for one to keep his or her tax records?
Seven years
You lease a car worth $40,000 with remaining lease payments of $15,000. How would you best categorize your car on your personal balance sheet?
The $15,000 lease obligation is a liability.
The cash flow statement is prepared on a(n)
cash basis.
Annual _______ means that the interest on the balance is calculated once per year at the end of the year.
compounding