FIN 2100 Chapter 1
Try to solve this problem without a calculator to help fine tune your financial skills. Assume you have an AMEX card which pays a 2% cash rebate on all purchases, and a VISA card which pays a 1% cash rebate on all purchases. Gas stations A and B both show a price of $2.00 per gallon, but station A does NOT accept AMEX cards while station B does. How much more expensive is the gas at station A assuming you use your VISA card instead of the AMEX card? $0.03/gallon $0.06/gallon $0.02/gallon $0.60/gallon $0.20/gallon
$0.02/gallon
A family spends $40,000 on living expenses. With an annual inflation rate of 3 percent, they can expect to spend approximately _______ in three years. $40,300 $41,200 $42,000 $43,700 $46,000
$43,700
Using simple interest, if you were to deposit $400 into a bank account with an annual interest rate of 5%, how much would be in the account at the end of three years? $420 $460 $400 $500
$460
6 Steps of the Financial Planning Process
1. Determine your current financial situation 2. Develop your financial goals 3. Identify alternative courses of action 4. Evaluate your alternatives 5. Create and Implement your financial action plan 6. Review and revise your financial plan
Assume the following: Pre-tax return = 6.8% Tax rate = 25% Inflation rate = 3% What is your real return? 3% 1.875% 4.875% 6% 2.1%
2.1%
Using the rule of 72, how long would it take your money to double in value if you earn 3% interest. 216 years 3 years 24 years 9 years
24 years
Using the Rule of 72, approximately how long does it take for your money to double in value if you earn an 14% annual return? .069 years 1.89 years 9 years 4.8 years 5.14 years
5.14 years
If the return on an investment is approximately 7.5% annually, and the investor is in the 10% bracket with inflation of 4% for the period, what is the after-tax return for this investment? 2.75% 6.75% 3.50% 6.00%
6.75%
If the pretax return on an investment is 8% and you fall into the 10% tax rate bracket, what would be your after-tax return? 8% 6.8% 6% 7.2%
7.2%
After tax return equation
After tax = pretax return x (1-tax rate)
You just received a copy of an email from an unknown investment advisor to a client recommending the purchase of a stock. The email appears to have been sent to you by mistake. The stock trades for $1.37/share and you could easily afford to buy 300 shares. The broker believes that the company will announce some significant positive news in the near future that will cause the stock to increase. The short-term target price is $2.00/share, and the long-term target price is $4.50/share. What is your best course of action? - Buy 300 shares of the stock. Hold the stock until it reaches $2.00/share, and then sell it - Buy 300 shares of the stock. Hold the stock until it reaches $4.50/share, and then sell it - Borrow enough money to buy 10,000 shares of this stock. Hold the stock until it reaches - $2.00/share, and then sell to minimize your interest cost - Do nothing. This is probably a scam. Do not trust the information in this email. Do not believe the advice from the broker
Do nothing. This is probably a scam. Do not trust the information in this email. Do not believe the advice from the broker
A certified financial planner is the best person to trust with respect to making decisions for your own finances. True or False
False
Higher interest rates can be caused by a higher money supply. True or False
False
The financial planning process is complete once you implement your financial plan. True or False
False
During periods of higher and increasing inflation, all of the following would be expected to occur EXCEPT: A decrease in buying power An increase in overall interest rates due to actions by the Federal Reserve to cool off the economy An expansion of government outlays due to higher costs overall and required inflation adjustments for some programs Higher disposable income for senior citizens on fixed incomes from corporate pensions and annuities
Higher disposable income for senior citizens on fixed incomes from corporate pensions and annuities
Simple Interest Formula
I=PRT (Interest = Principal x Rate x Time)
Interest rates help you understand all the following EXCEPT: When to refinance a mortgage How to make long term investments How the economy may impact your job If you should go to college
If you should go to college
John Gleason is interested in purchasing a 46" rear projection TV for his living room. He knows that right now the TV will cost approximately $1500. However, John is a little concerned about his job. John is a pilot for Delta Airlines and he thinks it is possible that he could be laid off in the near future. What type of risk is John worried about?
Income risk
Recently, the HIGHEST unemployment rates have been for: Individuals with college degrees Individuals with some college education Individuals with a high school education Individuals who did not complete high school
Individuals who did not complete high school
During periods of inflation: Individuals with adjustable rate loans or mortgages would have higher payments The cost of goods becomes cheaper It is a good time to borrow money Individuals with fixed mortgages would have higher payments
Individuals with adjustable rate loans or mortgages would have higher payments
Real Return on Investments Equation
Real return = after tax return - inflation rate
S.M.A.R.T.
Specific Measurable Action-Orientated Realistic Timely
Liquidity
The ability to convert financial resources into cash without a loss in value
Liquidity relates to: The implicit APR on a bank loan The ability to convert financial resources to cash with ease, without a loss in fair market value The benefit that is missed or given up when an investor, individual or business chooses one alternative over another The cost of borrowing money The ability to establish a line of credit
The ability to convert financial resources to cash with ease, without a loss in fair market value
Which of these scenarios results in an increase in purchasing power? The rate of inflation was 4% and is now 6% compared with an after-tax return of 3% The rate of inflation was 2% and is now 1% compared with an after-tax return of 3% The inflation rate was equal to the after-tax return of 3% but is now 4%
The rate of inflation was 2% and is now 1% compared with an after-tax return of 3%
Individuals should generally be careful when considering financial advice from those in the financial services industry since often times there can be a conflict of interest. True or False
True
The recent trend is for the federal government and corporations to shift more responsibility to the individual with respect to providing for their financial future. True or False
True
Younger employees contribute more now to their 401-k than in the past. True or False
True
A major activity in the planning component of financial planning is: selecting insurance coverage evaluating investment alternatives gaining occupational training and experience allocating current resources for spending establishing a line of credit
allocating current resources for spending
The amount of interest is determined by multiplying the amount in savings by the: annual interest rate time period number of months in a year time period and number of months annual interest rate and the time period
annual interest rate and the time period
A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends a direction for your financial activities is a(n): insurance prospectus. financial plan budget investment forecast statement
financial plan