Personal Finance MidTerm study guide

If the maximum loan-to-value ratio that a lender will accept on a $100,000 home is 80 percent, then the borrower must make a down payment of at least

$20,000.

Janie Long has checking and savings accounts in a federally insured financial institution. The maximum amount of her insurance coverage is

$250,000

For 2014, each personal exemption reduced taxable income by

$3,950

The average graduating college senior leaves school with about _______ in debt.

$30,000

You have $450 in your checking account when your EFTS card and PIN are stolen. You could lose up to ____ if you report the lost EFTS card within 2 business days.

$50

You have $900 in your checking account when your EFTS card and PIN are stolen. You could lose up to ____ if you report the lost EFTS card within 60 business days.

$500

Barney Smith has only one itemized deduction item, the $4,400 he gave to his church. His standard deduction this year is $6,200, and he is in the 15% marginal tax bracket. How much will his contribution to the church save Barney in taxes this year?

0

Theresa invested $5,000 in an account she expects will earn 7% annually. Approximately how many years will it take for the account to double in value?

10 -rule of 72

You made an error when you filed your tax return last year. You can correct this error by filing Form

1040X

Jamil invested $9,500 in an account he expects will earn 5% annually. Approximately how many years will it take for the account to double in value?

14.4 (rule of 72)

In 2014, the total social security tax was

15.3%

Most lenders do not want mortgage payments to exceed ____ percent of your monthly gross income.

25-30 %

If your total liquid assets equal $50,000 and your total current debts equal $15,000, your liquidity ratio is

30%

Mindy and Lou had total liquid assets of $10,000 and total current debts of $30,000. What is their liquidity ratio?

33%

A taxpayer can file for an automatic extension of ___ months.

6 months

Personal net worth is highest at about what age range?

65-74

Kim's net worth is $85,000 and her total assets are $100,000. What is Kim's solvency ratio?

85%

Itemized deductions are listed on Schedule

A

Which of the following is NOT a common misconception about financial planning?

A second income doesn't add as much as expected to the bottom line.

____ would be considered taxable income.

Alimony received

____ would be an indication of overspending.

All your credit cards are charged up to their limits, collection agencies are calling you frequently, your checks are bouncing, you have no cash reserves and must borrow for incidentals.

Joe Gustafson is a very busy person who likes to handle all his financial service needs with one account if possible. Which of the following types of accounts would best serve this need?

Asset management account

Personal insolvency can be legally satisfied by

Chapter 7 & 13 bankruptcy

Which of the following is a major source of home mortgages?

Commercial banks Thrift institutions Mortgage bankers and brokers Credit unions

Which of the following loan sources is the most expensive?

Consumer finance companies

Which of the following is a measure of inflation based on changes in the cost of a market basket of consumer goods and services?

Consumer price index (CPI)

____ tends to increase and then decrease over the life cycle.

Debt & Income

Which of the following are recommended if you loan money to a friend or relative?

Do it in a business-like fashion. Charge interest if the loan is not to be quickly repaid. Be sure both parties understand it is a loan, not a gift. Lend only money you can afford to give away.

While you are still working, you should be managing your finances for retirement planning. Which of the following is not a goal of your retirement planning?

Effectively passing wealth on to heirs

Tax practitioners that are federally licensed are called

Enrolled Agents

Commercial banks are insured by the

FDIC Federal Deposit Insurance Corporation

____ is a reason for preferring to rent rather than to buy.

Flexibility No maintenance worries Lower monthly cash flows Down payment money better used elsewhere

Which of the following questions should you ask yourself when developing your financial goals?

How important is money to me? Am I a risk taker? What do I like to buy? Does money make me feel secure?

You are preparing your own tax return. The least costly source for answering your questions would be

IRS 800 numbers

Which of the following is true regarding auto loans?

Longer term, higher rate, lower payment

Henry is married to Lillian, and they have two dependent children. Henry can legally file using which of the following filing statuses?

Married filing jointly

Which of the following offer tax preparation services?

National and local tax services Certified public accountants Enrolled agents (EAs) Tax attorneys

Which type of educational loan most likely carries the highest interest charges?

PLUS loan

____ would not be a long-term financial goal.

Paying your phone bill

Which of the following is among the four categories accounting for almost three-quarters of consumer spending?

Personal insurance and pensions

____ is a reason for owning your own home.

Pride of ownership A feeling of permanence A sense of stability A tax shelter

The act requiring mortgage lenders to give borrowers HUD booklets and good faith estimates of the closing costs is called the

Real Estate Settlement Procedures Act.

Which of the following are true regarding credit scoring systems?

Scoring systems are based on statistical studies.

____ loans do not have to be repaid until after you graduate from college.

Stafford and Perkins

____ is a benefit of using credit.

The ability to buy expensive goods while spreading the payments over time Providing payments that fit into a budget Having a permanent record of transactions Being able to purchase goods and services when checks are not acceptable

On which of the following types of income would you normally have income tax withheld?

Tips

The personal balance sheet equation is

Total Assets − Total Liabilities = Net Worth.

When you receive title to an individual unit and joint ownership of any common areas and facilities, you have purchased

a condominium

When you lease your apartment from the corporation that owns the building and your lease is an ownership share, your apartment is

a cooperative

____ cards offer the cardholder a way to contribute to a worthy cause, sometimes described as "painless philanthropy."

affinity

You should not record ____ on an income and expense statement covering January 1 to June 30.

an $800 refrigerator bought on credit June 2 for which payment is not due until July

Christina works at a company that offers direct deposit of her paycheck. This service is called

an EFT service

All of the following are useful ways to build a strong credit rating except

apply for a long term loan and occasionally be late with the payment

A characteristic of consumer loans is that they

are all of these

Compared to other depository financial institutions, credit unions

are run to benefit their members. pay higher interest on savings. charge lower rates on loans.

Ideally, retirement planning should begin

as soon as one starts earning

The personal balance sheet describes a family's wealth

at a certain point in time

One can arrange auto loans through

auto dealers, banks, credit unions, consumer finance companies

____ are not a type of open account credit.

bank debit cards

In order to minimize the difficulty associated with meeting monthly loan payments, the debt service ratio should be

below 35%

Vicki Vasquez owns a six-month treasury bill that is four months from maturity. She recently encountered medical problems and needs the money now. She

can sell the T-bill in the open market.

The down payment on the car you are leasing is called the

capital cost reduction

The most important financial planning for young people concerns

career.

Historically, the primary purpose of savings and loan associations was to

channel savings into mortgages.

The lender uses a credit application to determine whether the borrower has the ____ to handle the debt.

character and capacity

____ is(are) an up-front, one-time cost of home ownership.

closing costs

Effective financial plans should

consider your wants and needs. consider your financial resources. reflect your personality. reflect your emotional reactions to money.

Estate planning involves

considering how your wealth can be most effectively passed on to heirs

Consumers whose debt burden has become very heavy might apply for a(n)

consolidation loan

The highest interest rate installment loans are usually made by

consumer finance companies.

Factors typically influencing the choice of where to maintain a checking account are

convenience, services, and cost

If you needed a loan to buy furniture, the lowest interest rate would usually be available from a

credit union

Personal balance sheet liabilities should be recorded at their

current outstanding ballance

Theresa is a bit of a spendthrift. She has trouble saying no when it comes to buying things. Which of the following cards would keep her out of debt?

debit

Generally, as income rises, the average propensity to consume

decreases.

To qualify for a Stafford loan, you must

demonstrate financial need and make satisfactory academic progress

When an S&L is a mutual association, it means that it is owned by the

depositors

Chapter 7 bankruptcy will typically

eliminate most debt obligations

It is not a good idea to use credit

for consumable items

budgets are

forward-looking

Businesses provide

goods and services

The three key groups in the economic environment are

government, consumers, and business.

A strong economy leads to

higher employment

If interest on a savings account is compounded monthly, the effective rate of interest will be

higher than the nominal rate.

Interest rates on ____ are typically lower than on any other form of consumer credit.

home equity lines of credit

The federal government gets the majority of its revenue from the ____ tax.

income

Your income tax withholding is dependent on

income level and number of withholding allowances

The income and expense statement includes

income, expenses, and cash surplus or deficit.

Who would be most likely to have to pay estimated taxes?

independent consultant

For the first 15 years of a 30-year mortgage, the majority of each monthly payment goes to

interest

Home equity loans are similar to other installment loans except

interest paid is generally tax deductible your home is used as collateral

A(n) ____ would not be listed as an asset on your balance sheet.

leased automobile

The capital cost reduction on a vehicle lease is

like the down payment on a loan

Using personal balance sheet information, the ____ ratio indicates your ability to meet current debt payments.

liquidity

It is not a good idea to use credit to

live beyond one's means

Personal financial management is important because it

makes personal financial goals easier to achieve.

Credit unions lend money to qualified people who are

members

The financing rate on the car you are leasing is called the

money factor

The main purpose of a budget is to

monitor and control financial outcomes

The majority of loans made by savings and loan associations are ____ loans.

mortgage

Credit unions are:

mutual associations.

If you borrow money with a single-payment loan and discover you cannot pay it back when it is due you should

negotiate a loan rollover

Anna uses her credit card regularly, but she pays the total balance monthly. Anna should look for a credit account with

no annual fee long grace period

You have owned and lived in your home for 8 years. Now you have received an excellent promotion, but you will have to sell your home and move to another community. You expect to realize a capital gain of $100,000 on the home's sale. The capital gain will

not be taxable because the home was your principal residence.

The least expensive method for banks to interact with their customers is

online

To establish creditworthiness you probably should first

open savings and checking accounts

A check you wrote to buy shoes last week has not yet been processed by the bank. It is said to be

outstanding.

A credit card can provide an interest-free loan if you

pay the entire balance on or before the due date

The average propensity to consume refers to the

percentage of income spent for current consumption

The federal income tax is

progressive

____ can be deducted on your federal tax return.

property taxes

The most popular use of consumer loans is to

purchase a car

At the end of the lease period, you are never required to

purchase the vehicle at its residual value

The financial crisis of 2008 and 2009 is best characterized as a

recession.

Low interest rates are helpful in

reducing the service cost on the national debt.

A(n) ____ is not an interest-bearing account.

regular checking account

All of the following are key items lenders look at in granting credit except

religious affiliations

Phil and Christina are recently married and unsure of where they will be relocated after Christina finishes her residency in 9 months. Based on this information, which of the following housing recommendations would be most appropriate for them?

rent an apartment

A check you issued has been stolen. You can prevent it from being withdrawn from your account by an unauthorized person by

requesting a stop payment order

In which of the following situations would you have to pay additional money when returning a vehicle using an open-end lease?

residual value is less than expected mileage limits were exceeded

Sam and Lele are in their late 20s with 3 young children. Their most important financial planning concerns would probably include all of the following except

retirement and estate planning.

The primary reason people use financial advisors is

retirement needs.

Inflation refers to

rising prices

Persons with very poor credit ratings can still get ____ credit cards.

secured

Lower interest rates on certificates of deposit are associated with

shorter time periods

Molly and Jason were married. Their only "dependent" was Spot, their black standard poodle. Jason died in 2013. Assuming she does not remarry, in 2014 the only legal filing status for Molly would be

single

If you do not wish to itemize deductions, you can use the

standard deduction.

The Robertsons, a couple with an AGI of $28,500, decided to contribute the maximum amount possible towards their IRAs even though Mr. Robertson had a pension plan at work. He named his wife as beneficiary of the IRA. What is such a tax strategy called?

tax deferral since he'll have to pay taxes later when he withdraws the money

A problem with home equity loans is the

temptation to spread payments over a long term

With open account credit, one can often avoid interest charges if

the account balance is paid in full every month

A real estate sales contract will include

the amount you are willing to pay for the property

Sometimes it may be better to use savings rather than credit to make a purchase. This would be recommended when

the cost of borrowing is greater than the interest earned on the savings.

Utility refers to

the satisfaction you receive from purchasing something.

Regarding student loans, which of the following is true?

there is a limit on how much can be borrowed with each loan

Commercial banks generally charge lower interest rates than other lending institutions because

they usually only take the best credit risks

Which of the following is a potential advantage of online bill payment systems?

time and postage savings

single payment loan

usually matures in one year or less

Which of the following is not among the four categories accounting for almost three-quarters of consumer spending?

utilities

Which of the following are not among the four categories accounting for three-quarters of consumer spending?

utilities and clothing

Purchasing credit life or disability insurance protection is usually

very costly