Personal Finance Midterm

Daniel has saved $2,000 in a savings account that earns 0.5% interest annually. What will most likely happen to the purchasing power of his savings over time?

is purchasing power will DECREASE because the interest rate is lower than the historical rate of inflation

Fill in the blanks with the correct responses. If you follow the 50-30-20 rule of budgeting, you'll be putting 50% of your monthly income toward _______________, 30% of your monthly income toward _____________, and 20% of your monthly income toward ______________.

Needs, wants, savings

You bought 10 shares of stock in StreamingVideoCo for $45 per share. Two months later you sold the 10 shares of stock for $80 per share. What was your profit or loss on StreamingVideoCo stock? (Assume that StreamingVideoCo didn't pay a dividend and that you didn't incur any trading fees during that period.

Profit of $350

Which of these lists ranks the savings options from highest expected interest rate to lowest expected interest rate?

10-year CD, 5-year CD, Online savings account, Savings account at traditional bank

Joelle wants to have an emergency fund to cover 6 months of her expenses. Her monthly gross pay is $4,000 and her monthly expenses are $2,000. If she plans to save 10% of her gross pay each month, how long will it take her to build her emergency fund?

30 months

Sam is 22, just started his first full-time job, and is selecting his investments through his company's 401(k) plan. Why might a target date fund (TDF) be a good option for Sam?

A TDF will automatically adjust his asset allocation based on the retirement year he has chosen

How is a bond different from a stock?

A bond is a loan you give to an organization while a stock is a partial ownership in a company

Which of the following accurately describes the difference between an individual bond compared to a bond fund?

A bond is considered to be a less diversified investment than a bond fund

Amy and Chuck each buy a house in the same neighborhood for $250,000. Amy's monthly mortgage payment is $400 more per month than Chuck's. Which one of the following statements could explain this difference?

Amy chose a shorter term for her mortgage, so her monthly payments are higher

Which of the following is most likely to represent a fixed rate, secured debt?

An auto loan

Which of the following best describes what a cognitive bias is?

An error in the way we think that can influence our decisions

Which of the following could have a NEGATIVE impact on your credit score if done in a short period of time?

Applying for multiple credit cards

Melvin is 19 years old and wants to begin establishing a credit history. Which action should he take to meet that goal?

Ask his parents to cosign a credit card or add him as an authorized user on their credit card

Juan saved $1,000 from his summer job cleaning pools. Which of these account types would work best for him if he doesn't need access to the money for a number of years AND wants to earn the highest interest rate?

Certificate of Deposit

Which of the following statements is TRUE about compound interest?

Compound interest allows you to earn interest not only on the amount you have saved, but also on the intrest you've already earned.

When loans are amortized, monthly payments are _______ , while the amount of your monthly payment applied to interest ________ and the amount of your monthly payment applied to the principal _______ over time.

Constant, Decreases, Increases

Katrina works for Penny's Pickles, which offers a 401(k) match for up to 3% of her salary, which is $65,000 per year. In her budget, she only has $150 per month available to save for retirement. What should she do?

Contribute the full $150/mo to the 401(k) because her company will match that full amount, "doubling" her investment every month

Which of the following statements about Exchange Traded Funds (ETFs) is TRUE?

ETF prices can change throughout the day as they are exchanged on the market

Why is diversification a recommended investment strategy?

Diversifying your portfolio helps reduce risk

What is one question an investor should ask when deciding whether or not they would like to open a Roth IRA or a Traditional IRA?

Do I want to pay taxes now or later?

Which of the following is a characteristic of dollar-cost averaging?

Dollar-cost averaging is a way to decrease your risk

What strategy should you use to pay off multiple sources of debt if you want to pay the lowest amount of interest over time?

High rate method

Fill in the blanks: If inflation is _____________ your savings account interest rate then you will be ______________ purchasing power.

Higher than, losing

All of the following statements about bank accounts are true EXCEPT...

Historically, savings accounts earn higher returns than investments in the stock market

Which of the statements below BEST describes the relationship between risk and return when considering an investment?

Investors expect to earn a higher return when they invest in a high risk asset

An actively managed mutual fund...

Is managed by a fund manager who charges a fee

You are at the checkout counter at the local supermarket and use your debit card to pay for your groceries. Where does the money for this purchase come from?

It is deducted directly from your checking account

What is a brokerage account used for?

It's a type of account used to buy and sell stocks, bonds, and funds

Which of the following scenarios BEST demonstrates FOMO (Fear of Missing Out)?

José wants to go see a movie that all of his friends have seen and are raving about

Which best describes the Debt Snowball method for paying off debt?

Make the monthly minimum payments on all your debts, and then put any extra cash toward the debt with the lowest balance

Select the statement below that accurately describes a characteristic of a credit card.

Making full payments on-time every month is the only way to avoid interest charges

Sebastian began day trading stocks at the beginning of the summer. After a month, he made a profit of $200. Due to his short-term success and his belief that he is a highly skilled trader, Sebastian puts his entire savings into the market. This is an example of...

Overconfidence Bias

Geraldo reviews his brokerage statement and sees the following two mutual fund investments that he made a year ago. ActiveFund20 had an average return (before fees) of 7.0% per year and an annual fee of 1%. PassiveFund500 had an average return (before fees) of 6.5% per year and an annual fee of 0.1%. Which investment had a better return for Geraldo (net of fees)?

PassiveFund500: It had an overall return of 6.4% while ActiveFund20 had an overall return of 6.0%

What are the two most important factors in calculating your credit score?

Payment history and total debt

Unlike traditional economics, behavioral economics believes that...

People do not always behave in a rational way when making economic decisions

Nancy is new to investing and is eager to get started. All of the following are things she should do EXCEPT...

Pick individual stocks to see if she can beat the market

Taylor is about to go car shopping, and she has $5000 saved that she can use for a down payment while still having extra cash in her emergency fund. She expects the exact model car she's looking for to cost $35,000. If her top priority is having the lowest monthly payments possible, which advice should she follow?

Put in $5000 for your down payment, and choose a loan with a long term length

Which of the following actions is the BEST way to counteract loss aversion when making a decision?

Reframing the decision to focus on the potential gains instead of the potential losses

Which of the following is an effective strategy for personal saving?

Save a certain percentage of each paycheck and deposit it directly into a savings account

When signing up for a new checking account you answer "No" and opt out of overdraft protection. On this day, you have $10 in your account and go out and use your debit card to buy lunch for $12, a movie ticket for $12, and dinner for $15. What is likely to be the outcome resulting from these transactions?

Since you declined overdraft protection, the bank will not allow you to overdraw your account so your debit card will be denied

What is the general timeline to establish your first credit score?

Six months after you first actively use your credit

Which of these statements best explains why it's often a good idea to pay more than the monthly amount due on an amortized loan?

The extra payment will be applied to the principal amount you owe, which will pay down your debt more quickly

You buy a bond with a fixed coupon rate of 5%. A year later, similar bonds that are issued have a coupon rate of 3%. Which of the following is TRUE?

The price of your bond will increase

Why are Index Funds such a popular investing option?

They provide a low-cost, diversified investment option that closely matches the overall return of a given index, such as the S&P 500

You have a credit card that you use regularly for small purchases with the goal of improving your credit score. Which strategy would have the GREATEST positive impact?

Use less than 30% of the credit limit and pay it off in full every month by the due date

Which of these represents a potential consequence of neglecting to pay your federal student loans?

Wages or tax refunds can be garnished

Which of the following statements comparing credit and debit cards is TRUE?

With debit cards, you're spending your own money at point of sale, but with credit cards, you're getting a loan that you need to pay later.

What is an advantage of using a credit card?

You can make an emergency purchase that you otherwise don't have the money to pay for right now

What benefits do you receive by taking out a loan with a cosigner?

You have a better chance of getting approved and getting a lower interest rate if the cosigner has good credit

As a shareholder in a public company, what are the benefits available to you?

You may receive dividends from the company if the company pays them, and you have ownership of a portion of the company

Why is it important for you to understand your risk tolerance before you start investing?

You should tailor your investment portfolio so that it assumes an amount of risk you are comfortable with

When signing up for a new checking account, you answer "Yes" to receive overdraft protection. On this day, you have $10 in your account and go out and use your debit card to buy lunch for $12, a movie ticket for $12, and dinner for $15. What is likely to be the outcome resulting from these transactions?

You will likely be charged an overdraft fee for one or more of the transactions and also will need to repay the bank for the amount overdrawn

Which response best completes the sentence "It's best to begin establishing credit when you're young because ________" ?

You will likely need a credit history to rent your first apartment, finance your first car, or open an unsecured credit card

A loan with a shorter term length will have __________ monthly payments, and you will pay __________ in total interest.

higher, less

Experts recommend that you accumulate enough to cover 3 to 6 __________________ of expenses in your emergency fund.

months

Investments of time, effort, and money that cannot be recovered are...

sunk costs