Personal Finance Exam 1

All of the following are reasons mentioned in the video of why homeowners obtain home equity loans, except:

To pay for family vacations.

According to the video, the quickest way to improve your debt-to-equity ratio is:

To pay off some of your debts.

what is the goal of budgeting?

live within your income, spend money wisely, attain financial goals

Suppose that your monthly net income is $2,980. Your monthly debt payments include your student loan payment and a gas credit card. They total $298. What is your debt payments-to-income ratio?

Debt payments-to-income ratio = Debt payments / Net income = $298 / $2,980 = 0.10, or 10%

The Fram family has liabilities of $210,000 and assets of $458,000. What is their debt ratio?

Debt ratio = Liabilities / Net worth = $210,000 / $458,000 = 0.459

Why is it important to compare auto insurance premiums?

Different insurance companies, even in the same geographic area, can have premiums that vary as much as 100%.

Max and Lucille are currently preparing a personal balance sheet. Their total assets are equal to $159,788 and total liabilities are equal to $64,767. What is Max and Lucille's net worth?

$Net Worth = Total Assets - Total Liabilities = $159,788 - $64,767 = $95,201

What amount would a person with actual cash value (ACV) coverage receive for two-year-old furniture destroyed by a fire? The furniture would cost $8,500 to replace today and had an estimated life of five years.

8,500 / 5 yrs = 1,700 1,700 * 2 = 3,400 8,500 - 3,400 = 5,100

With a 28 percent marginal tax rate, would a tax-free yield of 6 percent or a taxable yield of 8.5 percent give you a better return on your savings?

After-tax yield = Pretax yield × (1 - Tax rate) = 8.50% × (1 - 0.28) = 6.12%

Tran Lee plans to set aside $2,300 a year for the next six years, earning 5 percent. What would be the future value of this savings amount?

FV = PMT × FV annuity table factor = $2,300 × 6.802 = $15,644.60

All of the following are actions that you can take to reduce your auto insurance premiums and qualify for discounts, except:

Keeping poor driving habits

According to the video, all of the following are advantages of pre-paid cards, except:

Unlimited purchasing

How should the assets you own be reported in your personal balance sheet?

At the actual or estimated current value of the asset

a (n) ____________ is the amount by which actual spending exceeds planned spending.

Deficit

Carla Lopez deposits $4,000 a year into her retirement account. If these funds have an average earning of 6 percent over the 40 years until her retirement, what will be the value of her retirement account?

FV = PMT × FV annuity table factor = $4,000 × 154.762 = $619,048

Kurt has 15/30/5 auto insurance coverage. One evening he lost control of his vehicle, hitting a parked car and damaging a storefront along the street. Damage to the parked car was $11,700, and damage to the store was $2,500. (a) What amount will the insurance company pay for the damages? b) what amount will Kurt pay?

a) last number in slashes, 5,000 b) 5000 - (11700 + 2500) = -9,200 --> 9,200

practice problems

a. Net worth = Total assets - Total liabilities = $52,600 - 17,700 = $34,900 b. Total liabilities = Total assets - Net worth = $78,200 - 14,100 = $64,100 c. Net worth = Total assets - Total liabilities = $53,800 - 18,700 = $35,100 d. Total assets = Total liabilites + Net worth = $41,900 + 57,100 = $99,000

graph questioin

refer to graph

Assume your 10-year old home originally cost $300,000 and is expected to have a 50 year life. Unexpectedly, a fire totally destroys your home and the home is now worth $350,000. Under the actual cash value method, what will the insurance company pay you?

$280,000

Carl Lester has liquid assets of $2,890 and current liabilities of $1,990. (a) What is his current ratio? (b) Which comment best describes his financial position?

(a) Current ratio = Liquid assets / Current liabilities = $2,890 / $1,990 = 1.5 (b) A current ratio of 1.5 is generally viewed as less than desirable.

What is the annual opportunity cost of a checking account that requires a $500 minimum balance to avoid service charges? Assume an interest rate of 4 percent.

Annual opportunity cost = Minimum balance × Interest rate = $500 × 0.04 = $20

A payday loan company charges 7.00 percent interest for a two-week period. What is the annual interest rate?

Annual percentage rate = Rate per period × Number of periods per year = 0.0700 × (52 weeks / 2 weeks) = 1.82, or 182.00%

which of the following is not mentioned as a financing opportunity for the unbanked?

Corporate Bonds

Kara Delaney received a $6,000 gift for graduation from her uncle. If she deposits the entire amount in an account paying 2 percent, what will be the value of this gift in 10 years?

FV = PV × FV single sum table factor = $6,000 × 1.219 = $7,314

Factors that insurance companies consider when determining premiums for auto insurance include all of the following, except:

Household income

Drew's monthly net income is $1,400. What is the maximum he should use on debt payments?

Maximum monthly debt payment = 0.20 × Monthly income = 0.20 × $1,400 = $280

Peril is defined as:

The cause of a possible loss, such as accidents, fire, windstorm, robbery, disease, or death

Assume your 10-year old home originally cost $300,000. Unexpectedly, a fire totally destroys your home. Over the past 10 years, your home has increased in value by 20 percent and is now worth $360,000. Under the replacement value coverage, what will the insurance company pay you?

$360,000 - basically the new value is what you get. but you pay 10-20% more

What would be the net annual cost of the following checking accounts? (a) Monthly fee, $3.50; processing fee, $0.25 cents per check; checks written, an average of 18 a month. (b) Interest earnings of 5 percent with a $500 minimum balance; average monthly balance, $800; monthly service charge of $18 for falling below the minimum balance, which occurs three times a year (no interest earned in these months).

(a) Net annual cost = (Monthly fee × 12) + (Fee per check × Number of checks per month × 12) = ($3.50 × 12) + ($0.25 × 18 × 12) = $96.00 (b) Net annual cost = Service charges − Interest earnings = ($18 × 3) - (0.05 × $800 × 9 /12) = $24.00

What would be the annual percentage yield for a savings account that earned $52.20 in interest on $900 over the past 365 days?

APY = 100 (Interest / Principal) = 100 ($52.20 / $900) = 5.80%

Marsha invests $1,350 and earns a $105 return at the end of one year. What is her annual percentage yield (APY)?

APY = 100(Interest/Principal) = 100(105/1,350) = 7.78%

According to the video, all of the following are some additional options to avoid identity theft, except:

Use as few online sources as possible.

Brenda plans to reduce her spending by $90 a month. Calculate the future value of this increase in savings over the next 8 years. (Assume an annual deposit to her savings account, and an annual interest rate of 7 percent.)

Annual savings = Monthly spending reduction × Number of months per year = $90 × 12 = $1,080 FV = PMT × FV annuity table factor = $1,080 × 10.260 = $11,080.80

Landon is looking to obtain a home equity loan. A lender will loan 65% of the home's current market value, which is $200,000. Landon currently owes $90,000 on his original home mortgage. What is his home equity credit limit available?

Approximate Loan Value = Market Value of Home x Lender's Percentage = $200,000 x 0.65 = $130,000 Approximate Credit Limit Available = App. Loan Value - Balance Due on Mortgage = $130,000 - $90,000 = $40,000

Derek has liquid assets of $4,450 and he saves $615 a month. His current liabilities are equal to $1,750 and monthly credit payments of $425. Derek's gross income is $5,900 each month and a take-home pay of $4,775. What is Derek's debt-payments ratio?

Debt-Payments Ratio = Monthly Credit Payments/Take-Home Pay = $425/$4,775 = 8.90%

How would an increase in the interest rate effect the present value of an annuity problem (all other variables remain the same)?

Decrease the present value

After putting your financial plan to work, you should periodically review and revise your plan, especially if you have all of the following, except:

Develop your goals

Lexi currently has a net worth of $110,465 and liabilities equal to $24,735. What does her debt ratio indicate?

For every $1 of net worth, Lexi has 22 cents of liabilities.

If you desire to have $25,000 for a down payment for a house in six years, what amount would you need to deposit today? Assume that your money will earn 1 percent.

PV = FV × PV single sum table factor = $25,000 × 0.942 = $23,550

The first step in the Financial Planning Process is to determine your current financial situation. This includes reviewing all of the following, except:

Personal values

According to the video, which is one of the main advantages of pre-paid cards versus cash?

Pre-paid cards are considered more secure

Meredith saves $575 a month and her gross income is $6,500 each month. Meredith's liquid assets are equal to $4,000 and her current liabilities are equal to $1,200. Her net worth is $65,000. What is Meredith's savings ratio?

Savings Ratio = Monthly Savings/Gross Income = $575/$6,500 = 8.85%

The "Paralysis of Analysis" means:

Spending so much time creating a plan that you never put it into action.

Will is currently in a 22% tax bracket and has a 7.2% savings rate of return. What is his after-tax savings rate of return?

Step 1: Determine your top (marginal) tax rate = 22% Step 2: Subtract your tax rate from 1.0 = 1.0 - 0.22 = 0.78 Step 3: Multiply the yield on your savings account with step 2 answer. = 0.072 x 0.78 = 5.62%

How would a decrease in the interest rate effect the present value of a lump sum, single amount problem (all other variables remain the same)?

Increase the present calue

If you borrow $7,000 with an interest rate of 3 percent, to be repaid in five equal yearly payments at the end of the next five years, what would be the amount of each payment?

PMT = PV / PV annuity table factor = $7,000 / 4.580 = $1,528.38

Which of the following is not a method discussed in the video as a way to deal with risk?

Risk Exchange

Bailey is currently learning about the proper places to keep personal financial records in one of her classes in college. Where should Bailey tell her parents to keep her birth certificate, their marriage license, and mortgage documents for their house?

Safe deposit box or fireproof safe

A goal that would be considered measurable would be:

Saving $200 a month

a) Wind damage of $905; the insured has a $200 deductible.

905 - 200 = 705

Becky has 20/50/25 automobile insurance coverage. If two other people are awarded $30,000 each for injuries in an auto accident in which Becky was judged at fault, how much of this judgment would the insurance cover?

40,000 not sure how to get that

Most home insurance policies cover jewelry for $1,000 and silverware for $2,500 unless items are covered with additional insurance. If $4,450 worth of jewelry and $3,700 worth of silverware were stolen from a family, what amount of the claim would not be covered by insurance?

4450+3700 -1000 - 2500 = $4,650

What would be the yearly earnings for a person with $5,000 in savings at an annual interest rate of 6.0 percent?

= Savings amount × Annual interest rate = $5,000 × 0.060 = $300

Which of the following is an example of closed-end credit mentioned in the video?

Automobile loans

____________________________ is more common and has a _______________ interest rate charged by most lenders.

Closed-end credit; lower

According to the video, what should you do if your identity is stolen?

Contact the creditors for any accounts that have been tampered with or opened fraudulently and Contact the fraud department of each of the three major credit bureaus.

The __________________ ratio compares your liquid assets to your current liabilities.

Current

How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables remain the same)?

Decrease the future value

Carl's house payment is $1,155 per month and his car payment is $420 per month. If Carl's take-home pay is $3,000 per month, what percentage does Carl spend on his home?

Loan payments-to-income ratio = Loan payments / Net income = $1,155 / $3,000 = 0.385, or 38.5%

Carl's house payment is $2,002 per month and his car payment is $693 per month. If Carl's take-home pay is $4,400 per month, what percentage does Carl spend on his car payment?

Loan payments-to-income ratio = Loan payments / Net income = $693 / $4,400 = 0.1575, or 15.75%

In split limit coverage, the second number represents:

The limit for claims that can be paid to all individuals involved in an accident where you are liable.

Medical payments insurance provides medical benefits or the cost of health care to:

You and individuals injured in your automobile.

Uninsured and underinsured motorist's protection provides protection for you and your family against all of the following, except:

You are in an accident caused by a person with high premium auto insurance.

When Carolina's house burned down, she lost household items worth a total of $122,000. Her house was insured for $200,000 and her homeowner's policy provided coverage for personal belongings up to 55 percent of the insured value of the house. (a) Calculate how much insurance coverage Carolina's policy provides for her personal possessions. b) Will she be fully insured?

a) .55 * 200,000 = 110,000 b) NO

(a) The future value of $500 six years from now at 5 percent. (b) The future value of $600 saved each year for 10 years at 7 percent. (c) The amount a person would have to deposit today (present value) at an interest rate of 7 percent to have $800 five years from now. (d) The amount a person would have to deposit today to be able to take out $400 a year for 8 years from an account earning 7 percent.

a) 670.05 b) 8,289.87 c) 570.39 d) 2,388.52