Personal Finance Chapter 2 Study Guide

The power of compound interest refers to:

interest being reinvested and earning additional interest.

All of the following are building blocks of financial success, except

lack of experience

Generally, those with the greatest financial knowledge tend to:

make better financial decisions, and take appropriate risks, but also may overestimate their skills

Nicholas is a 30-year-old divorced father of two. He works for a civil engineering firm as a project manager. He currently is unable to save money, although he does not run a monthly budget deficit. The value of his assets barely exceeds the total of his debts and liabilities. Which of the following is an attainable goal for Nicholas

Purchasing a moderately priced new car in 3 years

Who is more likely to amass greater wealth?

Ravi, who earns 8% interest over a 10-year period

Nancy just received a graduation gift of $10,000 from her grandparents. She'd like to invest the money, and once it has doubled in value, use it for graduate school. She believes that she'll be able to earn a 10% rate of return. What tool(s) can Nancy use to calculate how long it will take her money to double?

Rule of 72.

Which of the following is an example of a SMART goal?

Saving $75,000 for the down payment on a home that will be purchased in 4 years

Linda needs to save $50,000 over the next 5 years. If she can save $6,000 per year and earn an 11% rate of return on an annualized basis, by how much (approximately) will she exceed or fall short of her goal?

She will fall short of the goal by $12,633

All of the following are examples of monetary assets, except

Stocks

Which of the following individuals will likely pay the highest rate of interest on borrowed money from a bank?

Terry, who has a stable, high-paying job and is borrowing money to purchase a home.

Marcus has the following financial resources, assets, and liabilities: $4,000 Mazda Miata, $3,000 in computer equipment, $8,000 in earnings, $2,000 in credit card bills, and $1,000 in student loans. What is Marcus's net worth?

$12,000

What is the future value of $100,000 if you can earn 9% on an annual basis for 9 years? (Round your answer.)

$217,189

Nancy would like to purchase a car in 5 years. The car will cost $34,000 at that time. If she can earn 8% on an investment, how much would she need to invest today to make sure that she can afford the car at the end of 5 years? (Round your answer.)

$23,140

John is in the market for a used car. He has found the same sports car at two different dealerships and is now considering from which dealer he should purchase the car. Dealer 1 requires John to get the loan through its lending department. Dealer 1 has told John that, because the dealership does its own financing, it can get John the very best loan possible and John will only have to pay $247 per month for 60 months (5 years). Dealer 2 is selling the car for $12,000. Dealer 2 has told John he can use its financing or get his own lender, so John talked with his bank and learned that he can get a 5-year car loan for 4.9% APR. Dealer 2 has also offered John a 5-year loan for 5.9%. Based on these loan options, is Dealer 1's loan payment offer of $247 per month John's best deal? What is the lowest monthly loan payment John could get if the purchase price of the car is $17,000?

$247 per month for 60 months from Dealer 1

Amy has $3,000 saved to buy a new car. If she can earn a 7% rate of return for 3 years, how much will she have (approximately) at the end of the 3 years?

$3,675

Assume your employer offers a bonus of $7,500. The only catch is that you must wait 6 years to take possession of the money. If you can earn 4% on your savings, what is the minimum you would take today to match the bonus? (Round your answer.)

$5,900

What is Jorge's current net worth

$53,200

Kenneth is contributing to his 401(k) retirement plan. He contributes $3,000 per year. His employer matches 50% of his contribution. If Kenneth can earn a 10% rate of return, how much (approximately) will he have in his account after 10 years?

$71,718

What is Jorge's debt ratio

0.25

What is John's approximate budgeted savings ratio

1%

Buckley has the following assets and liabilities: $3,000 in a savings account, $45,000 in stocks, $2,000 in credit card bills, and a car loan of $33,000. Given this information, what is Buckley's current ratio

1.37

Larry hopes to buy a house in 7 years. He currently has $75,000 saved. How much must he earn in interest, on an annualized basis, to purchase a house valued at $150,000? (Round your answer.)

10.4%.

Approximately how long will it take to double your money if the APY is 6.50%?

11 years

Assume that you can earn 1% interest monthly on your savings. What is the annual percentage yield (APY)?

12.68%

You have been offered a credit card. The monthly interest rate is 1.9%. What's the card's APR?

22.80%.

Assuming Maria has $1,000 today, approximately how long will it take Maria to double her money if she can earn a 3% return on her investment?

23.5 years

What is Jorge's current ratio

4.08

Which of the following is a short-term debt

A balance owed on a credit card statement

What is the formula for net worth

Assets - Liabilities

A goal should be:

All the answer choices are correct

Alexis is considering taking out a loan to purchase a car. She'd like to know how much her payment would be if she borrowed $10,000 for 5 years at 4% interest. What TVM tool should Alexis use?

Amortization schedule

What form is used by financial planners to estimate someone's net worth

Balance sheet

Despite all good advice, Susan played the lottery and won $100,000. She can choose to receive the money all at once today or receive monthly payments of $1,000 for 15 years. Susan could earn a 6% rate of return on her investment. Susan could compare these options by doing which of the following?

Calculate the present value of the annuity payments and compare it the $100,000 lump-sum option

Which of the following is a better deal if you want to maximize the return on your savings?

Earning a periodic interest rate of 1.25% compounded semiannually.

Tara's budget shows a projected deficit. What does this mean for Tara

Either it means that she will need to borrow money to fund the deficit or she will need to sell assets to fund the deficit

What expense was John least accurate in projecting for the month

Food away from home

Davis has received a college scholarship and can choose whether to receive it as an immediate one-time payment of $10,000 or as a series of four equal payments (at the end of each year), each totaling $3,000. Assume that Davis secures a discount rate of 9%. Only considering TVM principles, which option is most valuable to Davis?

He should take an immediate payment of $10,000

Place the following resource management steps in order

III, II, IV, and I

Which of the following statements is true

John is doing a good job managing his resources according to his budget

Given John's monthly budget and his actual income and expense information, which of the following statements is true

John ran a $75 surplus for the month

Which of the following statements is true

The greater the debt ratio, the worse the financial situation

Which of the following statements is true about compound growth?

The longer you let your money grow, the more it will produce

Haley owns a Honda Civic. She is creating her balance sheet and needs to input a value for the car. Which of the following is an indication of the car's fair market value

The trade-in value of the car

James is wondering how much money he needs to have to receive an annuity payment of $10,000 per month for 30 years, after which time the payments will stop and his investment will be used up. James believes he can earn 6% on his investments. How many TVM inputs does James need to solve this problem?

Three inputs (the interest rate, time period, and payment amount).

The difference between an annuity and an annuity due is that an annuity due is:

a series of payments occurring at the beginning of the month

The advantage of having a high-risk capacity is that it:

allows someone to take more risk to meet a goal

When comparing loan offers, you should use the

annual percentage rate

Ginger has been given the option to receive a series of equal payments. This is referred to as a(n):

annuity

Car loans and mortgages are examples of

annuity-due payments

A tool that helps you determine where you actually spent your income is known as a

budget

Given the choice, it is preferable to earn interest that is compounded

daily

The financial plan element(s) that fluctuates over time and may change based on the situation or goal is:

financial capacity

Levi currently has $10,000 for a home down payment and would like to know how much it will be worth in 5 years if he earns 4% interest. Levi is looking for the:

future value of a lump sum

Sharon wants to know how much money she will have saved for retirement if she saves $300 per month for the next 20 years and earns 8% interest each year. Sharon is looking for the:

future value of an annuity.

Because of the TVM concepts learned in this topic, you should _________ receiving $1,000 in 1 year if given the opportunity to receive $1,000 in 2 years from today.

prefer

Your ability to withstand the negative effects of financial shocks is called:

risk tolerance

A deficit in a budget means you are:

spending more than you are earning

Amy's goal is to save $50,000 in 10 years. To know how much she should be saving now on a regular basis to reach this goal, Amy would use:

time value of money calculations

All of the following are fixed expenses, except

travel and entertainment expenses

When Uma thinks about risk, the first thing that comes to mind is excitement. Uma is likely

very risk-tolerant