FINN 1003 (CHAPTER 1)

81. Annual earnings on a $2,000 Certificate of Deposit earning 3.15% would be

B. $63 $2,000 * .0315 = $63

21. A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends a direction for your financial activities is a(n)

B. Financial plan.

61. Tim Calibe received a $500 gift from his grandparents. He wants to invest this money for the down payment of a house he plans to purchase in 3 years. What type of computation should he use?

B. Future value of a single amount

64. The first step of the financial planning process is to

C. Analyze your current personal and financial situation.

57. Future value computations are also referred to as

C. Compounding.

23. An advantage of personal financial planning is:

C. Increased control of financial affairs

27. The consumer price index reflects:

C. The change in prices of products and services of urban consumers

70. The loss of a job is referred to as ____________ risk.

C. income

37. The problem of bankruptcy is associated with poor decisions in the ______________ component of financial planning.

D. Borrowing

28. The inflation rate for a household will be:

D. Either greater than or less than the inflation rate as reported by the CPI depending on the household's "basket" of goods and services purchased

69. The rising of prices that causes changes in buying power is referred to as ____________ risk.

B. inflation

77. If a $10,000 investment increases to $10,090 in one year, what is its rate of return?

A. .9 percent ($10090 - $10000)/$10000 = .009 = 0.9%

39. Which of the following short-term goals is stated most clearly?

A. Buy a car for less than $17,000 within 6 months The only complete short-term goal listed is A. B and E are long-term goals. C is an intermediate goal. D is a short-term goal; however, it is not measurable and does not have a time limit.

58. Present value computations are also referred to as

A. Discounting.

73. Changes in income, values, and family situation make it necessary to

A. Evaluate and revise your actions.

35. Attempts to increase income are part of the _____________ component of financial planning.

A. Obtaining

33. Which of the following would increase the interest rate for a loan?

A. Poor credit rating

44. Many Americans have money problems because of

A. Poor planning and weak money management habits

74. The step in the personal financial planning process that follows "Create and implement your financial action plan" is

A. Review and revise your plan

26. John Jones was laid off of his job two months ago. He just received an offer for a position that pays 2/3 the salary of his old job. Why should he set up a financial plan?

A. To increase the effectiveness of obtaining, using, and protecting his financial resources.

68. The changing cost of money is referred to as ____________ risk.

A. interest-rate Interest-rate risk affects the costs of borrowing and the benefits of saving or investing.

78. If a $10,000 investment earns a 9% annual return, what should its value be after one year?

E. $10,900 $10,000 * (1 + .09) = $10,900

36. The 'borrowing' activity in a financial plan relates to

E. Maintaining control of credit-buying habits

67. The uncertainty associated with decision making is referred to as

E. Risk.

10. Higher inflation usually results in lower interest rates.

FALSE

20. Risks associated with most financial decisions are easy to measure.

FALSE

3. A financial plan is another name for a budget.

FALSE

17. Opportunity costs refer to money already spent.

FALSE An opportunity cost is the time, money, or resource given up when a decision is made.

2. A financial plan is an informal report that analyzes past financial decisions.

FALSE Financial plan is a formal report that summarizes present conditions, analyzes financial needs, and recommends future financial activities.

6. The long-term goals for a young single will probably be the same as those for an older couple with no dependent children at home.

FALSE Inferred answer based on specifics of goals discussed on page 5.

11. Developing a budget is part of the "spending" component of financial planning.

FALSE It is part of the "planning" activity.

4. Financial Plans are only created by financial planners.

FALSE Plans are created by individuals as well as by financial planners.

15. Purchasing a car is an example of a consumable-product goal.

FALSE Purchasing a car is a durable-product goal.

38. A question associated with the saving component of financial planning is:

A. Do you have an adequate emergency fund?

63. Paul Jacoby wants to deposit money today for a vacation he plans to take to Asia after he graduates from Grad School. Which formula should he use to determine the amount of money he will have available for his vacation?

A. Present value of a single amount

47. _________ goals relate to infrequently purchased, expensive items.

C. Durable-product

32. An investor should expect to receive a risk premium for

C. Higher potential earnings due to uncertainty

43. The goal of investing $50 per month for the next 18 years for your nephew's college fund is a(n) __________ goal.

C. Long-term

55. Because of interest that can be earned, if I can invest a dollar today, it should be worth _________ in the future

C. More

41. Which of the following intermediate goals is stated most clearly?

C. Purchase a house with a mortgage no greater than $150,000 within 3 years The only complete intermediate term goal listed is C. A is a short-term goal; B and E are long-term goals. D is a short-term goal that is not measurable and does not have a time limit.

7. Inflation is most harmful to people with incomes expected to increase.

FALSE Inflation is most harmful to people living on fixed incomes.

19. Interest earned is calculated by multiplying the principle times the opportunity cost.

FALSE Interest earned equals principal × rate × time.

14. Intermediate goals are usually achieved within the next year or so.

FALSE Intermediate goals are to be met in 2 to 5 years.

85. How do the main components of personal financial planning fit together?

The main components of personal financial planning (obtaining, planning, saving, borrowing, spending, managing risk, investing, and retirement and estate planning) fit together because one component can impact another. For instance, if one's main goal is to save for retirement, the money available for spending will be limited.

83. Who can benefit from financial planning? How?

Answers can vary but should consider life situation or lifestyles including factors such as age, income, household size, and personal beliefs. The way that financial planning can benefit individuals or households should reflect the ability to meet goals and to be flexible as life changes.

86. Provide an example of a clear financial goal. Identify if it is a short-term, intermediate, or long-term goal.

Answers will vary by student. Each goal should be realistic, stated in specific, measurable terms, based on a time frame, and action oriented. Short-term goals should be achieved within the next year or so, intermediate goals have a time frame of 2 to 5 years, long-term goals will take more than 5 years to accomplish.

34. Patrick Guitman recently graduated from college with $20,000 in student loans and $5,000 in credit card debt. He usually makes minimum payments on his debt and he has been late with three payments in the last year. He wants to buy a new car but was told that his interest rate on a loan would be very high. What is the most likely reason this might be so?

B. His credit rating is poor because of his late payments

51. Rob Redbird is interested in attending a concert next weekend. Unfortunately, he is scheduled to work. If he finds a substitute for his shift so he can attend the concert, what kind of cost is he incurring?

B. Opportunity

52. Which of the following is an example of opportunity cost?

B. Saving money instead of taking a vacation

50. Opportunity cost refers to

B. The trade-off of a decision.

29. TheRuleof72is:

B. Used to estimate how long it takes for prices to double using a given annual inflation rate

80. If Patty Shoemaker estimates that her $75 weekly grocery bill will increase at an annual inflation rate of 3%, what should her weekly grocery bill be in 5 years?

C. $86.93 Correct answer uses Future Value of $1 table, Exhibit 1-A in the Appendix: $75 * 1.159 = $86.93. This can also be calculated using the FV formula: $75 * (1 + .03)^5 = $86.95.

76. If inflation is expected to be 8 percent, how long will it take for prices to double?

C. 9 years Rule of 72

22. The major function of a financial plan is to

C. Achieve financial goals.

30. Who is most likely to benefit by inflation?

C. Borrowers

89. What types of risks are commonly associated with personal financial decisions? How can these risks be evaluated and minimized to reduce personal and financial difficulties?

Common risks are inflation risk, interest rate risk, income risk, personal risk, and liquidity risk. Risks can be evaluated and minimized by obtaining information, comparing alternatives before making a decision, and obtaining insurance.

79. If a $10,000 investment earns a 9% annual return, what should its value be after 7 years?

D. $18,28 Correct answer uses Future Value of $1 table, Exhibit 1-A in the Appendix: $10,000 * 1.828 = $18,280. This can also be calculated using the FV formula: $10,000 * (1 + .09)^7 = $18,280.

82. Randy Hill wants to retire in 40 years with $2,000,000. If he can earn 10% per year on his investments, how much does he need to deposit each year to reach his goal?

D. $50,000 Correct answer uses 10% for 40 periods Exhibit 1-B table: Future value = annual deposit * factor = $2,000,000 = annual deposit * 442.490 Annual deposit = $2,000,000/442.490 = $4,518. This can also be solved using computer or calculator functions using the following variables: N = 40, I = 10, PV = 0, FV = 2,000,000. Solve for PMT: $4,518.83

66. Place the following steps for a personal financial plan in the proper order: 1. Review and revise your plan 2. Identify alternative courses of action 3. Create and implement your financial action plan 4. Determine your current financial situation 5. Evaluate your alternatives 6. Develop your financial goals

D. 4,6,2,5,3,1

49. The goal of purchasing a long-term care insurance policy would be most appropriate for

D. A single adult nearing retirement age.

24. The stages that an individual goes through based on stages in the family and financial needs is called the

D. Adult life cycle

31. Higher consumer prices are likely to be accompanied by

D. Higher interest rates

48. To develop a financial plan, one should

D. Identify specific, realistic goals along with the time frame and an action plan

75. Using the services of financial institutions or specialists (such as insurance agents or investment brokers) will be most evident in your effort to

D. Implement the financial plan.

54. The time value of money refers to

D. Increases in an amount of money as a result of interest earned.

60. Wanda Green wants to take out a 4 year loan to purchase a car. What type of computation would she use to calculate her monthly payments?

D. Present value of an annuity

25. Sally Smith's friends have told her that they think she should consider a visit to a personal financial planner. Why do you think her friends made the suggestion?

D. Sally plans to quit her job and volunteer for local organizations.

42.Which of the following goals would be the easiest to implement and measure?

D. Save $100 a month to create a $4,000 emergency fund.

65. Financial decisions related to income include all except the following

D. Taking

53. An example of a personal opportunity cost would be

D. Time comparing several brands of personal computers.

56. To calculate the time value of money, we need to consider all except the

D. Type of investment.

45. Fran Gardner has a goal of "saving $25 per month for a TV." Fran's goal lacks

E. A time frame

46. Which of the following is correct?

E. Food and clothing are consumable-product goals

59. Jake Jones wants to deposit $100 per month into an account earning 5 percent for the next 4 years so he can purchase a used car at that time. What type of computation would he use to determine the amount he will have for his purchase?

E. Future value of an annuity

62. Rebecca Gladyn plans to attend graduate school in 5 years. She thinks that she will need a total of $32,000 to pay for school and she wants to save money each month to reach her goal. What type of computation should she use?

E. Future value of an annuity

40. Which of the following long-term goals is stated most clearly?

E. Invest $50 per month for the next 18 years for my nephew's college fund The only complete long-term goal listed is E. A is a short-term goal, B is a long-term goal, however, it is not measurable and does not have a time limit, C is an intermediate goal. D is a short-term goal that is not measurable and does not have a time limit.

72. The potential for difficulty to convert an investment to cash is referred to as ____________ risk.

E. liquidity

71. The tangible and intangible factors that create a less than desirable situation is referred to as ____________ risk.

E. personal

87. What are the guidelines one can use to set effective financial goals?

Each goal should be realistic, stated in specific, measurable terms, based on a time frame, and action oriented.

5. The life situation of a household has little influence on personal financial planning decisions.

FALSE

88. Each goal should be realistic, stated in specific, measurable terms, based on a time frame, and action oriented.

Leisure goals, such as developing a hobby, have financial and time implications. For instance, a leisure goal of becoming a pilot may affect the components of planning, saving, borrowing, spending, and managing risk.

90. Hope Appleton is trying to decide whether to keep her money in a savings account or in a mutual fund. What would you tell her to help her analyze her decision?

Students answers will vary. Suggested responses might mention gathering information, comparing alternatives, analyzing risks, assessing personal goals, and contacting financial planning experts.

12. Retirement planning includes thinking about your housing situation, recreational activities, and possible volunteer or part-time work.

TRUE

13. Short-term goals are usually achieved within the next year or so.

TRUE

16. Purchasing a car is an example of a durable-product goal.

TRUE

18. Opportunity costs refer to time, money, and other resources that are given up when a decision is made.

TRUE

8. Inflation reduces the buying power of money.

TRUE

1. Personal financial planning is the process of managing your money to achieve personal economic satisfaction.

TRUE Definition

9. When prices are increasing at a rate of 6 percent, the cost of products would double in about 12 years.

TRUE Use the Rule of 72

84. What are the main components of personal financial planning?

The main components of personal financial planning are obtaining, planning, saving, borrowing, spending, managing risk, investing, and retirement and estate planning.