Personal Finance Exam 2

The goal of monetary asset management is to maximize interest earnings and minimize fees while keeping funds safe and readily available. True
Liquidity is the speed and ease with which an asset can be converted to cash. True
A stock brokerage firm is a licensed financial institution that specializes in selling and buying stocks, bonds, and other investment alternatives. True
Checks mailed to the bank for deposit should always be endorsed with a restrictive endorsement. True
What is an example of monetary assets? Money market accounts, cash on hand, and certificates of deposit.
Tom and Mindy want to keep $420,000 in cash equivalents that are federally insured. They could accomplish this by: Dividing it equally into two different joint accounts in two different federally insured savings banks.
How can a person transfer money out of his or her checking account? Write a check, use an ATM, or make electronic funds transfers.
What is a reason why you should reconcile your bank accounts regularly? -You or your bank may have made a computational error-Checks you have written may not have cleared your account-Fees may have been assessed lowering your balance below what you think you have on deposit.
An individual checking or savings account can be set up to go automatically to another person when the depositor dies if it is set up as a(n): Payable at death account
Personal income taxes are paid only on ___. Taxable income
What are Progressive taxes? Tax rate increases as taxable income increases
What are regressive taxes? Tax demands a decreasing proportion of a person’s income
Calculate tax liability Applying the appropriate tax rate to the taxable event’s tax base
Calculate adjusted taxes Allowable subtractions from gross income that changes the amount of taxes an individual owes to the IRS
Calculate taxable income Income upon which income taxes are levied. Calculated by subtracting various exclusions, adjustments, exemptions, and deductions from total income.
Calculate adjusted gross income Gross income less any exclusions and adjustments
What are itemized deductions? Tax-deductible expenses/specific items that may be used to directly reduce income
What are exemptions? Legally permitted amount deducted from AGI based on the number of people that the taxpayer’s income supports
What is a tax credit? Dollar-for-dollar decrease in tax liability; also known as credit
What is tax avoidance? Reducing tax liability through legal techniques
What is tax evasion? Deliberately and willfully hiding income from the IRS, falsely claiming deductions, or otherwise cheating the government out of taxes owed; it is illegal
What is the penalty for tax evasion? Subject to forfeiture of property and/or jail time/Up to five years in prison and/or fines up to $250,000
If you itemize deductions, which type of deduction may you not take? Standard deductions
What is a tax shelter? Will it help you avoid taxes forever? A financial agreement made to avoid or minimize taxesNot forever, just for the current year
What is liquidity? Ease with which an asset can be converted to cash
Example of monetary assets Cash on hand, checking accounts, savings accounts and certificates of deposit, and money market accounts
The goal of monetary asset management is to maximize ___. Interest earnings and to minimize fees while keeping funds safe and readily available
Why should you reconcile your bank statement regularly? -You or your bank may have made a computational error-Checks you have written may not have cleared your account-Fees may have been assessed lowering your balance below what you think you have on deposit
What are various ways one can transfer money out of checking account? Write a check, use an ATM, or make electronic funds transfers
Interest earned from a bank saving account is taxable – will you pay federal and state taxes? Yes; both
Difference between a debit and a credit card when it comes to identity theft Protections offered for fraudulent use of debit cards are not as strong as when your credit card is used fraudulently
How does the FDIC insurance coverage work? Maximum paid per individual? Maximum paid per individual is $250,000.
Certified check A personal check drawn on your account on which your financial institution imprints the word certified, signifying that the account has sufficient funds to cover its payment.
Money order A checking instrument bought for a particular amount with a fee assessed based on the amount of order.
Cashier’s check Checks drawn on the account of the financial institution itself and, thus, backed by the institution’s finances
Traveler’s check Issued by large financial institutions
Chapter 13 Bankruptcy Wage earner or regular income plan whereby a portion of your debts are repaid over 3-5 years
Chapter 7 Bankruptcy Straight bankruptcy whereby most of your assets are sold and applied to your debts
What is credit? An arrangement in which goods, services, or money is received in exchange for a promise to repay at a future date
What is interest? The “rent” you pay for using credit
Advantages of using credit Convenience, emergencies, to make reservations, to own expensive products sooner, to take advantage of free credit, for protection against rip-offs and frauds, and to obtain an education
Disadvantages of using credit Use of credit reduces financial flexibility, it is very tempting to spend more money, avoid becoming a “financially overstretched” American, and interest itself is costly
How long can data on bankruptcy be included in your credit file? Chapter 7 and Chapter 13 may stay for 10 years, but it is customary for chapter 13 to be removed after 7 years
Your credit FICA score is made up of five factors. What are they? Payment history, amounts owed, length of credit history, taking on more debt, and types of credit used
Interpret your credit score. High or low—what does it mean for you? The higher the credit score, the better. Difference in rates is modest, except in those below 620. If you have a credit score below that, it is almost impossible to get a loan.
A lender can legally discriminate in granting credit based on age, credit history, marital status or sex? Credit history only
What is the price of credit? Interest – interest, finance charge, annual percentage rate
What is installment credit? Credit arrangement in which the borrower must repay the amount owed plus interest in a specific number of equal payments
What is non-installment credit? Single-payment, open-ended credit, and service credit
Secured loans require ___. A cosigner or collateral
What type of clause addresses you missing several payments and requiring you pay the entire debt in full in most installment loan contracts? Acceleration clause
What is open-ended credit? With open-ended credit, credit is extended in advance of any transaction so that the borrower does not need to reapply each time credit is desired. Credit card, cash advances, personal line of credit, home-equity line of credit, and service credit
Who should set your debt limit? You should
Signs of over-indebtedness? You are overindebted if the ratio is 15% or higher-Not knowing how much you owe-Running out of money-Paying only the minimum amount due-Exceeding debt limits and credit limits-Requesting new credit cards and increase in credit limits-Paying late or skipping credit payments-Taking add-on loans-Using debt-consolidation loans-Experiencing garnishment-Experiencing repossession or foreclosure
What can hurt your credit score? Not paying rent, utilities, etc on timeNot paying bills, credit cards, etc on time
Good uses of credit Convenience, emergencies, reservations, owning expensive items sooner, taking advantage of free credit, for protection against fraud, and to obtain an education.
Bankruptcy: Constitutionally guaranteed right that permits people (and businesses) to ask a court to find them officially unable to meet their debts
Garnishment: Court-sanctioned procedure by which a portion of debtors’ wages are set aside by their employers to pay debts
Debt consolidation: Taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan
Default: Failure to repay a loan
Your total liabilities excluding mortgage debt should not exceed what percentage of your net worth excluding the value of your home if you are to have a manageable level of debt? 33%

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