fin2100 exam 2 quizzes

You are shopping for a new cell phone. Your current monthly usages are as follows: Data: 2.5 GB Talk: 300 minutes Text messages: 500 Here are the current offerings: ATT $95/month for 3 GB of data, 250 minutes, and 500 text messages. Additional data is $10/GB and you must buy in 1 GB increments, overages are not prorated. Additional minutes are $0.15 each and additional texts are $0.10 each. Verizon $90/month for 2 GB of data, 500 minutes, and 400 text messages. Additional data is $15/GB and you must buy in 1 GB increments, overages are not prorated. Additional minutes are $0.05 each and additional texts are $0.10 each. Sprint $110/month unlimited data, talk and text Assuming you use exactly the amounts listed above for your historical usage, list the plans in order from lowest price (first) to highest price (last).

ATT, Sprint, Verizon ATT- $95 + $7.50 = $102.50 Verizon- $90 + $15 + $10 = $115 Sprint- $110

How much life insurance would you need using the easy method for a family with $90,000 in gross income?

About $450,000 easy method = 4.9(income) 4.9(90000) = 441,000 so about $450000

Which of the following was enacted to help pay for the Affordable Care Act?

An investment tax on high income individuals. A penalty on large employers who do not offer health insurance to full time workers. A reduction in the amount of allowed spending in a flexible spending account. An increase in the limitation on medical expenses on Sch. A for individuals under 65 years old.

What is a disadvantage of using an adjustable rate mortgage (ARM) compared to a fixed rate mortgage? a. If interest rates rise, ARM interest rates will also increase after the lock in date. b. If interest rates fall, ARM interest rates will decrease after the lock in date. c. Initial interest rates for ARMs are higher than fixed rate mortgages. d. Your mortgage payments (principal and interest) are not fixed for the term of the loan with an ARM as they are with a fixed rate mortgage. e. Answers a and d are both disadvantages.

Answers a and d are both disadvantages. a. If interest rates rise, ARM interest rates will also increase after the lock in date. b. Your mortgage payments (principal and interest) are not fixed for the term of the loan with an ARM as they are with a fixed rate mortgage.

Which of the following monthly payments go to an escrow account? a. principal b. interest c. property taxes d. homeowners insurance e. Answers c and d are correct

Answers c and d are correct c. property taxes d. homeowners insurance

With respect to federal tax law, life insurance proceeds paid to a beneficiary:

Are excluded from taxable income, but included in the taxable estate (unless a life insurance trust has beenestablished)

An investor can reduce both systematic and non-systematic risk in a stock portfolio by increasing the number of individual stocks held in the portfolio.

False

Most group health policies have a coordination of benefits provision, which is a method of integrating the benefits payable under more than one health insurance plan so that benefits are limited to no more than 200% of allowable expenses (e.g. if you and your spouse each have health insurance which covers each other, then you can collect no more than twice the claim since you each are paying premiums).

False

The cost of long term care, such as a prolonged stay (greater than 100 days) at a nursing home, is

Generally not covered by Medicare

Refer to the CNN Money on Life Insurance 101. Life insurance is usually sold not bought, because the life insurance industry has a vested interest in selling you high commission, high cost ____________ policies.

whole life

You have elected to deposit $130 per month in your flexible spending plan next year. Assuming a 35% tax bracket, how much in qualifying medical expenses would you have to incur to break even on your deposits to the flexible spending plan next year?

$1014 130 * 12 = 1560(1-.35) = $1014

A couple has two children ages 5 and 7 and only one spouse has income. Using the "non-working" spouse method, they should have ________ of life insurance.

$130000 Multiply the number of years until the youngest child reaches 18 by $10,000 18 - 5 = 13(10,000) = 130,000

A $1,000 corporate bond has a 9.5% coupon rate. Since issuance, interest rates have fallen for comparable bonds to 7%. What would be the market value of the bond now that interest rates have fallen (i.e. what would you have to pay for this bond today in order to achieve the same yield)?

$1357.14 $1000(0.095)= $95 $95 / 0.07 = $1357.14

A homeowner was robbed and lost $3,500 in jewelry and $3,800 in silverware. The homeowner's policy covers up to $500 of losses for jewelry and up to $1,000 in losses for the silverware with no deductible. How much is homeowner's recovery from the insurance company?

$1500 $500 + $1000 = $1500

A driver has 50/100/15 auto coverage. He/she is in an accident (and at fault) resulting in $10,000 of damage to a parked car and $20,000 damage to a store. How much must the driver pay of the total claims?

$15000 20000 + 10000 - 15000 = 15000

Your employer has offered you a choice of a lower cost HMO plan or a higher cost standard health insurance plan. Next year you will need physical therapy and want to compare the cost of the therapy under the two plans. The standard health insurance plan pays 70% of therapy after a $200 deductible, while the HMO will pay the full cost of the therapy as long as you pay a $15 co-payment per visit. Assume you need 10 therapy sessions that will cost $60 each for the high cost plan ($15 for HMO). How much would you save using the HMO vs. the traditional health insurance plan?

$170 HMO: 10($15) = $150 Traditional Health plan: $60(10) = $600 - $200 = $400 $400(0.7) = $280 $600 - $280 = $320 $320 - $150 = $170

A couple currently spends $80,000 per year for all their living expenses. Only one spouse works while the other spouse stays at home with the children. Upon the death of the working spouse, they want a life insurance policy whereby the proceeds could be invested in a tax-free municipal bond fund that would yield enough tax-free cash each year to pay the entire $80,000 of expenses (i.e. the non-working spouse would not have to return to work, and there would be sufficient funds on his/her death to leave some inheritance to the kids). They assume that the yield on municipal bond funds will be 4%. How much insurance should they purchase?

$2,000,000 =Pmt / interest $80000/0.04 = $2,000,000

A family has health coverage that pays 85% of medical expenses after the first $500 of qualifying expenses. If the family incurs $1,300 of medical expenses during the year, how much will their insurance company pay of the total claims incurred?

$680 $1300 - 500 = 800 800(0.85) = $680

A UCF graduate makes $750 per week and has a disability plan that pays 70% of his/her salary after the first four weeks of disability. If the graduate is disabled for 18 weeks, how much will he/she receive from the insurance company?

$7350 18 - 4 = 14 14(750) = 10,500 10,500(0.7) = 7350

A UCF grad has gross monthly income of $3,200 and net take home pay of $2,900 per month, which approximates his/her monthly living expenses. What is the minimum amount should have in his/her emergency fund?

$8,700 3 month minimum salary emergency fund =take home pay * 3 = $2900(3) = $8700

A driver has 25/50/10 auto coverage. He/she is in an accident (and at fault) resulting in two bodily injury claims of $65,000 each. How much must the driver pay of the $130,000 in claims?

$80,000 $130000 - 50000 = 80000

You and your spouse make $40,000 per year, and have the following joint debts: $150,000 mortgage $15,000 on auto loans $10,000 on student loans $5,000 on credit cards. You estimate funeral costs at $5,000 for each person. How much life insurance should each of you carry using the DINK method?

$95,000 =Total debt/2 + funeral costs $150,000 + $15000 + $10000 + $5000 / 2 = $90000 + 5000 = $95000

What is the annual cost per mile of operating a car given the following information? Annual miles driven: 11,800 Gas cost: Average miles per gallon- 24, Average cost of gas per gallon- $2.79 Annual depreciation: $2500 Interest: $650 Insurance: $680 License: $65 Repairs/oil: $370 Parking: $498

52 cents 1. Calculate gas Average cost of gas per gallon(Annual miles driven/average miles per gallon) $2.79(11800/24) = $1,371.75 2. Calculate cost per mile = (Gas cost + Annual Depreciation + Interest + Insurance + License + Repairs/oil + Parking) / Annual miles driven = ($1371.75 + $2500 + $650 + $680 + $65 + $370 + $498) / 11,800 = 52 cents

Be sure you review the sample problems found in the word doc in Module 9 before attempting the last three questions. A bank offers you a thirty year $150,000 mortgage at 6.5% with two points payable at closing. The monthly payment is $948.10. What is the effective interest rate on this loan?

6.7% 1. Find pmt end mode, p/yr = 12 PV = 150000 I = 6.5 N = 360 FV = 0 Pmt = ? Pmt = (948.10) 2. Adjust for points 150000(0.02) = 3000 150000-3000 = 147000 3. Find effective interest rate end mode, p/yr = 12 pmt = -948.102 PV = 147000 FV = 0 N = 360 I = ? I = 6.7%

You have been given a choice of paying $20,000 for a new GM car with a $3,000 cash rebate (net cost of $17,000 which you finance separately), or zero percent financing for 48 months with no cash rebate. What is the implicit rate of interest in this deal?

8.21% Step 1: Find the payment =Cost of item / length of financing = 20000/48 = 416.67 Step 2: Find the implicit rate of interest End mode p/yr = 12 PV = (17000) Pmt = 416.67 N = 48 FV = 0 I = ? I = 8.21%

Refer to the CNN Money on Life Insurance 101. What percentage of the first year premiums on a whole life insurance policy go to the agent's commission?

80%

A spender UCF graduate likes the prestige of a Lexus IS 250. Saver UCF graduate drives a Corolla. The internet shows that the five year cost of owning a 2010 Lexus IS 250 is $42,814 while the five year cost of owning a 2010 Corolla is $24,607, an $18,207 difference over five years. On an annual basis, this would equate to the Lexus costing $3,641.40 more per year. Assume our UCF saver invests the savings of $3,641.40 per year (end of the year) for 40 years and earns 11% per year (interest compounded annually). How much will the saver have in his/her retirement account as a result of driving lower cost cars throughout his/her lifetime?

$2,118,661.44 end mode p/yr = 1 Pmt = -3641.40 N = 40 I = 11% FV = ? FV = $2,118,661.44

What amount would a person with actual cash value coverage receive for four year old furniture that was destroyed by a fire? Assume the furniture has a $4,000 replacement cost today and an estimated life of 10 years.

$2400 Replacement cost - depreciation 4000 - 1600 = 2400

Assume you have 50/100/25 coverage in your auto insurance policy (a standard non-stacking policy). Assume you were at fault in an accident, and two injured parties were awarded the following damages: Person 1: $75,000 Person 2: $25,000 What would your financial liability be in this case (i.e. the amount not insured)?

$25,000 Person 2 is covered, but you can only pay $50000 to each individual so Person 1 has 75000 75000 - 50000 = 25000

If a buyer has a gross monthly income of $8,500, student loans of $150/month, and car payments of $250/month, what is the maximum monthly PITI loan he or she could get if the lender has set a total debt ratio of 38%?

$2830 Total debt ratio = (PITI + LMO) / GMI 0.38 = (PITI + 250 + 150) / 8500 3230 = PITI + 400 PITI = 2830

Assume you drive 12,000 miles per year and that regular gas will cost $2.25/gallon and that premium gas will cost $0.30/gallon more than regular gas. What is the annual difference in gas cost for the following two vehicles? Car 1: 30 miles per gallon on average with regular gas Car 2: 25 miles per gallon on average with premium gas

$324 per year = cost per gallon(miles per year/ miles per gallon) Car 1: $2.25(12000/30) = $900 Car 2: $2.55(12000/25) = $1,224 $1224 - $900 = $324 per year

You currently are spending $80/year renting a pressure washer to clean your house. The cost of a new pressure washer is $800. If you bought the pressure washer, how many years would it take to obtain full payback on your original investment relative to renting (use a simple payback calculation). Note: Simple payback is a useful, but simplistic way to evaluate a purchasing decision that does not consider the time value of money. A quick payback implies a better deal, while a slower payback is not as good.

10 years simple payback = cost of the product/ annual savings $800/$80 = 10 years

Under the rules of COBRA, how long can you continue medical coverage if your employer has more than 20 employees?

18-36 months

A homeowner plans to refinance his/her house. He/she will pay $1,880 to refinance, and the mortgage payment will drop by $65/month. The term of the new mortgage is 20 years. The new interest rate is 5.25% Using TVM break-even, how many months must the homeowner stay in the house to break even on the refinancing?

31 months end mode p/yr = 12 PV = (1880) FV = 0 Pmt = 65 I = 5.25 N = ? N = 31

Bill and Hillary each buy a house and take out a $100,000 loan. His house is in New York and her house is in Washington D.C. Bill takes out a conventional 30 year fixed rate mortgage, and Hillary opts for a conventional 15 year fixed rate mortgage. Which of the following correctly summarizes how Bill's mortgage is different from Hillary's (all other things being equal)?

Bill's 30 year mortgage has a higher interest rate, lower monthly payments and higher overall interest payments. It builds equity more slowly than Hillary's mortgage.

Now let's assume that the pressure washer cost $400 had to be replaced every 10 years. So your decision is to rent each year at $80, or spend $400 now, which would save you $80 per year for 10 years ($800 gross dollars). Assume the appropriate discount rate (interest rate or i) is 8%. Calculate the PV of the savings (Begin mode) and compare to the cost of buying, The same type of analysis used by corporations to evaluate capital investments would also apply to this buy/rent decision. Be sure you are in the right mode. Calculate the present value of a stream of payments of $80 at the beginning of the year for 10 years at 8% and compare it to the $400 cost. (Note you could also do an NPV analysis, but be sure you net the initial cash flows for time period 0 i.e. $400 minus $80 = $320 and then use 9 Ns for the 80 payment) Your analysis shows:

It is better to buy now, with a net savings of $179.75 Beg mode p/yr = 1 pmt = -80 I = 8% N = 10 PV = 579.751 579.51 - 400 = $179.75

Which health insurance plan is administered by each state within certain broad federal requirements and guidelines?

Medicaid

Assume you receive the following mortgage: Amount borrowed = 175,000 Annual interest rate = 6.5% Term = 30 years What is the monthly payment and how much of the payments in year 5 go toward interest?

Monthly payment = $1,106.12 Interest in year 5 = $10,738.39 Monthly payment- end mode, p/yr = 12 PV = -175000 FV = 0 I = 6.5 N = 360 Pmt = ? Pmt = 1106.12 Interest in year 5 Keep pmt up, shift amort 5 times, hit = until you get to interest and you get $10,738.39

Corporate bonds

Must be legally paid at maturity

You are considering the purchase of a hybrid Honda Civic. Assume that you drive 12,000 per year, and will keep the auto for 10 years, at which time the car will have zero trade-in value. Assume the cost of gas is $2.49/gallon. The "normal" model gets 34 miles per gallon, while the "hybrid" model gets 50 miles per gallon. The hybrid model cost $21,850 while the normal model costs $18,260. All other operating costs are the same. You can invest your money at a 6% interest rate (i.e. use a 6% discount rate). Given these assumptions, is it a good economic decision to purchase the hybrid? Hint: Calculate the annual gas cost for each car then take the difference (or savings) per year. Next calculate the PV of the annual savings (END MODE) and compare the gas cost savings in today's dollars to the cost difference for the two vehicles. You could also do a NPV analysis, with the car cost difference being used for cash out time period 0, and the savings entered in the CFj key for ten years.

No, don't buy the hybrid. The PV of the savings is $2,070 which is less than the cost difference.You need a greater savings to economically justify the purchase of this hybrid (i.e. the NPV is negative). 1. Calculate gas for each car hybrid = 12000/50 = 240(2.49) = $597.6 normal = 12000/34 = 352.94(2.49) = $878.82 2. Calculate PV for both pmts Hybrid- end mode, p/yr = 1 I = 6 N = 10 Pmt = $597.60 PV = ? PV = -4398.39 Normal - end mode, p/yr = 1 I = 6 N = 10 Pmt = $878.82 PV = ? PV = -6468.19 Take the difference. $6468.19 - $4398.39 = $2070 Cost difference = $21,850 - $18,260 = $3590 You would save $2070 in gas if you bought the hybrid, but you would save $3950 in cost if you bought the normal car. So buy the normal car, you save more.

Which life insurance provision ensures that you will not have to forfeit all accrued benefits?

Non-forfeiture clause

A parent is evaluating a $250,000 term life policy vs. a $250,000 whole life policy. Over the next 25 years, the term policy will cost $10 month, and build no cash values. The insurance agent informs the parent that the whole life policy will cost $100 per month, but will build guaranteed cash values of $75,000 at the end of 25 years. The parent assumes that he/she can invest the $90 per month difference in a mutual fund and earn 10% per year for the next 25 years. What is the future value of the mutual fund at the end of 25 years assuming end of the period deposits of $90 per month at a 10% interest rate; and how does it compare to the whole life cash value investment return (ignoring taxes)?

The mutual fund return will be worth $119,415.01, implying that the return on the whole life policy is less than 10%. end mode p/yr = 12 Pmt = -90 I = 10 N = 25 FV = ? FV = $119,415.01

You subscribe to Sirius XM Radio and pay $12 at the end of each month (which equates to $144 per year). You plan to keep this service for the next five years. Assume you have plenty of cash in your emergency reserve fund, which is in a bank account earning 4% interest per annum. XM Radio offers you a deal whereby you can prepay two years worth of service for $230, payable today. Given these assumptions and relative to the interest you will earn by keeping the money in interest bearing bank account.

You are better off to prepay XM for the next two years. end mode p/yr = 12 PV = -138.24 Pmt = 12 N = 12 FV = 0 I = 7.604% accept prepay if you are investing money at a lower rate and have enough cash, since you are investing 4% and thats lower than 7.604%, accept prepayment

A common advantage associated with home ownership is a. Appreciation of the house's value over long periods of time b. ease of mobility c. limited financial risk d. low initial costs

a. Appreciation of the house's value over long periods of time

Over the long term, which form of investment has yielded the highest returns? a. Stocks b. Corporate bonds c. Government bonds d. Money market accounts

a. Stocks

Which of the following statements is TRUE? a. Rental income is taxed as a long-term capital gain b. The holding period for short-term capital gains is 12 months (1 year) or less c. It is not necessary to monitor the value of your investments if you hire a financial planner d. The holding period for long-term capital gains is 12 months (1 year) or more.

b. The holding period for short-term capital gains is 12 months (1 year) or less

Refer to the web work article on buying a car from a private individual. Which of the following statements is FALSE? a. You should know if your car is covered by some type of warranty. b. You should solicit the help of a reliable and qualified mechanic to inspect the car after the purchase. c. In most cases, you would not buy a Certified Pre-owned car from an individual d. Start by making a low offer, most times the seller will counteroffer with a higher price e. All of the above answers are true.

b. You should solicit the help of a reliable and qualified mechanic to inspect the car after the purchase.

Which of the following statements is FALSE? a. Mortgage interest on a primary residence is fully deductible for new mortgages up to $750,000 b. Points paid on a new mortgage are fully deductible in the year incurred c. Points paid on a refinancing are fully deductible in the year incurred d. In most cases, interest on home equity loan is fully deductible in the year incurred

c. Points paid on a refinancing are fully deductible in the year incurred

Refer to the FAQs reviewed during the web work. Which of the following would NOT typically be associated with a high risk driver? a. A young driver with no record. b. A 35 year old pizza delivery man. c. The driver of a Honda Civic d. Someone with a bad credit score

c. the driver of a honda civic

Regarding potential changes in the Affordable Care Act (ACA), which of the following statements is FALSE according to the article? a. If subsidies are eliminated, fewer people will have insurance and markets would become unstable. The Urban Institute estimates that 22.5 million people might lose insurance. b. An estimated 12.9 million might lose Medicaid insurance and Republicans are discussing reforms to Medicaid that would give more autonomy to the states. c. Republicans would likely eliminate rules that require a minimum package of benefits, and the President would like change rules to allow insurance to be sold across state lines. d. More people will be moved to Medicare rather than private insurance in order to save money. e. Less contentious provisions of the ACA such as requiring restaurants to disclose calorie counts on their menus are likely to remain unchanged.

d. More people will be moved to Medicare rather than private insurance in order to save money.

Which of the following investments would have the greatest potential for risk? a. government bonds b. stocks c. bank accounts d. options and commodities

d. options or commodities

Refer to the CNN Money site on Life Insurance 101. Which policies provide term insurance with a money market type investment feature?

universal life

A situation in which one person is held responsible for the actions of another is:

vicarious liability

Driver classification includes information on a person's ________ and is used to set auto insurance rates.

driving habits

Which of the following investments would have the greatest potential for safety? a. government bonds b. stocks c. commodities d. options

government bonds

Renter's property insurance would include coverage for:

personal belongings