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Finance Flashcards

Jenks Personal Finance chapter 3 summary

when you make a decision about how to manage your money, you remove the option to use the money in another way . opportunity costs in all decisions
makes it easier to plan and measure progress, handle routine money matters, know how much money is available, and make effective buying decisions organizing your financial documents:
home files, safe-deposit boxes, computers can organize financial documents in:
so you can manage your money and meet financial goals personal balance sheet helps determine your net worth:
helps determine the amount of cash you receive and how you spend it personal cash flow statements
list the values of all your assets along with liabilities on personal balance sheet:
record income and expenses on personal cash flow statement:
subtract expenses from income net cash flow
1. set financial goals, 2. estimate your income, 3. budget for unexpected expenses and savings, 4. budget for fixed expenses, 5. budget for variable expenses, 6. record what you spend, 7. review your spending and saving patterns To create a budget:
to a sound financial future, enable you to handle unexpected emergencies savings are key
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Finance Flashcards

W!SE Financial Practice Test #2

If a person makes a deposit of $10,000 or more into a bank account, the bank must notify the US Treasury Department.In order to track large deposits, the federal government requires that deposits of $10,000 or more be reported to the Treasury Department. Some concerns may be that a person might be trying to avoid paying taxes on game winnings or perhaps illegal gains.
A bank Certificate of Deposit is a: Savings instrument that requires a deposit for a period of time during which there is a penalty for withdrawals,A certificate of deposit (CD) is a savings instrument that requires a deposit for a period of time (term) during which the saver cannot withdraw money from the plan without a penalty. CDs are issued with terms from 31 days up to eight years. The longer the consumer agrees to loan the money to the bank or credit union, generally the higher the interest rate. It is considered a form of savings because the consumer is paid interest based on the dollar amount and term of the CD. If the consumer does not collect his/her money at the end of the term, the money may be rolled over into another CD.
The phrase used for putting money into a savings account is: Making a deposit, Putting money into an account is “making a deposit” and taking money out is “making a withdrawal.” An account owner can deposit additional money into the account at any time.
“The Fed” is short for: The Federal Reserve System,The Federal Reserve, or “the Fed,” provides banking services to depository institutions, serves as the U.S. Government’s fiscal agent, supervises and regulates most large banks, and formulates and implements monetary policy.
Margaret wants to store a valuable coin collection and important papers. Generally, consumers should: Rent a safe deposit box for their valuables,Bank customers can rent safe deposit boxes from the bank. They are metal boxes kept in the bank vault where customers often keep valuable papers, financial records, jewelry, and collections.
How can individuals be prepared for losing their job or having a large medical expense? Save at least three months of income,People generally need three to six months’ of income in a savings account to cover unknown and unexpected events and expenses.
Which financial product typically pays the highest rate of interest? Certificate of deposit,All of these types of accounts and financial products earn interest except for common stock. They all earn interest at different rates. Generally, certificates of deposit have the highest interest rate and savings accounts the lowest. Some companies declare and pay dividends to their shareholders.
Safe-deposit boxes are Safe and can be accessed only by the owner of the box ,Safe-deposit boxes are metal boxes in a bank’s vault. Taking two keys, one owned by the bank and one by the customer, to open the safe-deposit box provides more safety for the customer. Only the owner can access the box. The bank customer pays a small annual rental fee to the bank for use of the safe-deposit box.
Which financial product has the most predictable income? Certificate of deposit,Most certificates of deposit (CDs) are issued with an interest rate that is fixed at a specified rate for the entire term of the deposit. The main virtue of a fixed-rate CD is its predictability. The investor knows exactly how much interest will be received annually and over the life of the CD.
The National Credit Union Administration (NCUA) insures accounts in: Credit unions,The National Credit Union Association (NCUA) insures each depositor’s accounts up to $100,000 in one credit union. For example, if a customer has a checking account of $1,000 and a savings account of $8,000 in the same credit union, the customer will have total insurance coverage of $9,000.
Troy has $50 a month transferred electronically from his checking account to his savings account. This is an example of: A savings plan,When a consumer requests that his or her bank or credit union electronically transfer money from a checking account to a savings account every month, it is a (forced) savings plan. If you manage your checking account so there are always enough funds to cover the transfer, a forced savings plan is a good option because you avoid the problem of not making regular deposits in your savings account and spending the money instead. Starting a (forced) savings plan with automatic deposits is one way to do what is known as “paying yourself first.”
You have a checking account balance of $100 and you deposit a personal $200 check from your brother in your checking account. When will you be able to withdraw $150 in cash? 3 to 7 days later, depending on your bank’s check clearance policy,Checks deposited into checking accounts need to be on deposit for several days before the money can be withdrawn as cash because the check needs to clear.
Money orders are: A purchased certificate to pay a specified amount to a specific payee,A money order is a purchased certificate used to pay a specified amount to a specific payee. They are a safe, convenient way to send payment through the mail as an alternative to personal checks or cash. Money orders sold and backed by the U.S. Postal Service are called postal money orders. Private companies, such as banks, credit unions, supermarkets, convenience stores, and drug stores, also sell money orders for a fee.
Consumer finance companies, which are often advertised on TV, are also known as: Small loan companies,Consumer finance companies specialize in making small loans to individuals or businesses. They primarily make loans to people who cannot qualify for credit elsewhere because of a poor credit history, low income, or minimal assets. For these reasons, interest rates are usually higher than loans from a bank or credit union.
A person is depositing $20 in cash and a check for $50. On the checking account deposit slip, the person should list the cash deposit separately from the check as well as the total of the deposit.,Deposit slips have columns for the depositor to list cash and each check that is being deposited separately. Aside from this information, the depositor lists the total of the deposits, the date and the account number (if it is not a preprinted slip taken from the individual?s check book) on the deposit slip.
Which is the best example of a way to reduce fees paid for ATM transactions? When making supermarket purchases with a debit card, a person adds $50 in cash to the transaction instead of using an ATM machine.,Most supermarkets have a policy permitting patrons to add a cash withdrawal to a purchase made with a debit card or check without charging a fee. All of the other choices (using store ATMs, banks other than the issuing bank, and using any machine at night or the weekend) will most likely result in the person incurring ATM fees.
Financial services and products generally offered by banks and credit unions include: Savings and loans,The basic financial functions offered by banks and credit unions are checking accounts, savings accounts, and personal and business loans. Insurance is sold only by insurance companies, stocks and bonds are sold by brokerage firms, and legal services are provided by attorneys. Banks can sell financial products if they sell the products on behalf of a partner or affiliate investment firm.
Banks use savings account deposits to: Give loans to consumers and businesses,The basic functions of banks and credit unions are to be an intermediary between savers and borrowers. Banks and credit unions pay interest on customers’ savings accounts and hold customers’ money through checking accounts and then lend most of that money to other consumers and businesses for a fee (interest).
Joan wants to open a checking account and wonders if checking accounts pay interest. How would you answer her question? Some types of checking accounts pay interest,Regular checking accounts do not earn interest. NOW (negotiable order of withdrawal) accounts do earn interest but tend to have higher minimum balance requirements than regular checking accounts and often limit the number of checks that can be written each month without a fee.
Employees prefer direct deposits because: The money is generally deposited in their checking account sooner than it would be if they had to deposit it in person,Instead of a negotiable check, the wage earner receives a pay stub which lists the amount that was directly deposited and the amounts withheld for taxes, health insurance, etc. Through direct deposit, earnings are transferred electronically into the recipient’s bank account. Direct deposit is more convenient, safer, and usually faster than receiving and manually depositing a paycheck.
A blank endorsement on a check: Creates a check that can be cashed by anyone,A blank endorsement is your signature only and is like cash. Anyone who holds the check can present it for payment at a bank or credit union. Therefore, a blank endorsement should not be used unless you are in the financial institution when you endorse the check. Some banks and credit unions are asking for a picture ID before they will cash a check.
Consumer finance companies, which are often advertised on TV, are also known as: Small loan companies,Consumer finance companies specialize in making small loans to individuals or businesses. They primarily make loans to people who cannot qualify for credit elsewhere because of a poor credit history, low income, or minimal assets. For these reasons, interest rates are usually higher than loans from a bank or credit union.
Which financial product may pay a dividend? Common stock,All of these types of accounts and financial products except for common stock earn interest. Some companies declare and pay dividends to their common stock shareholders.
The most liquid type of investment is: A money market account,The most liquid type of savings is a statement savings account. You can withdraw money from it quickly and easily at any time without penalty. Stocks, bonds, and real estate have less liquidity than statement savings accounts because these investments must first be sold before they can be converted to cash. Typically, the greater the liquidity and flexibility, the lower the interest rate paid. The cost of this flexibility and liquidity is a lower interest rate than is paid on certificates of deposit and other investments.
How can individuals be prepared for losing their job or having a large medical expense? Save at least three months of income,People generally need three to six months’ of income in a savings account to cover unknown and unexpected events and expenses.
The best suggestion you gave a friend who is writing a check for the first time is: Date the check because it is usually proof of payment,Date the check because checks are proof of payment. Checks written in pencil or erasable ink can be changed to pay a different payee or amount than the check writer intended to pay. Keep a record of the check written in the checkbook register or stub and deduct the amount from your checkbook balance so you know how much money you have left and you can reconcile your checking account against the bank statement. In addition, it is harder for a forger to change the dollar amount if, on the second line, it is printed rather than written in cursive.
Travelers checks, often used for vacations: Function as cash and are easily replaced if lost,Traveler’s checks are documents that function as cash, can be replaced if lost or stolen, and are generally accepted throughout the world. For these reasons, they are often used on vacations and other trips. The purchaser signs a traveler’s check immediately after purchasing it and again when paying for a purchase with it.
The financial institution where Ms. Sanchez has her checking account will continue to pay out money for the checks she writes as long as: There is enough money in Ms. Sanchezs account to cover the amount of the checks,The financial institution is not obligated to honor a check if it is written for more money than the current checking account balance. The customer will be charged an insufficient funds penalty for each check not covered by a sufficient balance in the account.
Which financial product has the most predictable income? Certificate of deposit,Most certificates of deposit (CDs) are issued with an interest rate that is fixed at a specified rate for the entire term of the deposit. The main virtue of a fixed-rate CD is its predictability. The investor knows exactly how much interest will be received annually and over the life of the CD.
When James received his paycheck, he planned to cash it at a check cashing store. You advise him to cash it at his own bank if possible. Why? They typically charge high fees,Check-cashing stores usually charge high fees to cash checks and sometimes encourage consumers to take out high interest rate payday loans.
Joan wants to open a checking account and wonders if checking accounts pay interest. How would you answer her question? Some types of checking accounts pay interest,Regular checking accounts do not earn interest. NOW (negotiable order of withdrawal) accounts do earn interest but tend to have higher minimum balance requirements than regular checking accounts and often limit the number of checks that can be written each month without a fee.
The term used to describe the ease and speed with which you can convert savings or an investment to cash is: Liquidity ,The ease and speed with which you can convert savings or an investment to cash is called liquidity. Checking and statement savings accounts are highly liquid because deposits and withdrawals can be made at any time. A certificate of deposit has less liquidity because it has a fixed term – a period during which money must be kept on deposit. There can be substantial penalties for cashing in a certificate of deposit before the end of its term, perhaps losing up to three to six months’ interest.
When a person is reconciling a checking account and notices that the balance in the checkbook does not match the balance on the statement from the bank, which action is it appropriate for the person to take first? Determine that checks already written have cleared.,Quite often, the balance reported on a checking account?s bank statement differs from the balance in the person?s checkbook. Reasons for that difference may be due to checks that have been written, and therefore are in the checkbook?s register, but that have not been cleared (returned to the bank for payment). Therefore, first, the person must looked at the bank?s statement and compare it to his/her checkbook register to see that all checks written have cleared.
Which documents should be stored in a safe-deposit box? Mortgage loan papers,The purpose of having a safe deposit box is to have a fireproof, secure place to store valuables and irreplaceable items including legal documents such as a birth certificate and precious jewelry.
What action should a person take who must make a tuition payment at the end of August each year? Decide how much money will be needed and then place 1/12th of that amount in a separate account each month,This is an example of ?pay yourself first.? The best way to save in order to make a yearly purchase, in this case a tuition payment, is to immediately deposit a portion of the payment in a form of savings account (so it can earn interest throughout the year) as soon as the person is paid each payroll period.
Frankie’s savings account has earned a lot of interest. He wants to know if he must pay taxes on the interest earned. What would the IRS tell him? Savings account interest is taxable,Savings account interest is taxable. If Jerry’s total earnings, including savings account interest, are high enough that he must pay income tax on them, the savings account interest is added to his other income and it is all taxed at the same rate.
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Finance Flashcards

Personal finance exam

This course/text will assist you in accomplishing six financial objectives. What are they? 1. Manage the unplanned.2. Accumulate wealth for special expenses. 3. Realistically save for retirement.4. Cover your assets.5. Invest intelligently.6. Minimize your payments to Uncle Sam.
How will a financial plan help you save for retirement? A strong financial plan will help you forecast the costs of retirement and develop a plan that will allow you to live a comfortable life after you retire.
4 Common factors to guide financial plans: Flexibility, liquidity, protection, and minimization of taxes Your financial plan should be flexible enough to respond to changes in your life and unexpected events. Planning must allow some funds to be liquid to allow access to money when you need it quickly. Plan for protecting your assets and yourself with adequate insurance. Finally, your financial plan should take taxes into account to pay as little as legally possible.
Describe the five steps in the personal financial planning process Step 1: Evaluate your financial health by examining your current financial situation.Look at your whole financial picture. Keep records and determine your net worth.Step 2: Define your financial goals by describing what, when, and how much you want to do. Written goals will draw you to them.Step 3: Develop a plan of action to reach your goals. Donʹt just think about goals decide how you will carry them out! Let flexibility, liquidity, protection, and minimization of taxes guide your plan.Step 4: Implement your plan by carrying it out just do it! Stick to your plan.Step 5: Review your progress, reevaluate, and revise your plan periodically and as needed.
What elements are included in a solid financial plan? A solid personal financial plan includes an informed and controlled budget, outlines your investment strategy, and reflects your unique personal and financial goals.
Why do you need to have liquidity? Liquidity allows you to access your money with ease, when you need it. Life happens; at any moment, you could develop an illness, lose a job, or wreck your car. When unforeseen circumstances occur, you need to have access to enough money to make it through.
Describe the three stages of a financial life cycle Stage 1: Wealth Accumlation (18-54)Stage 2: Golden Years (55-64)Stage 3: Retirement (65+)
An economic condition in which rising prices reduce the purchasing power of money is termed A) deflation. Inflation
3 Step Goal Process IdentifyPrioritizeDetermine appropriate cost for each goal
Why is it important to conduct an effective self-assessment? Conducting an effective self-assessment allows you to look honestly at many aspects of your life. After completing the assessment, you will have a valuable understanding of your interests, skills, values, personal traits, and desired lifestyle. Then you can research career options and identify those in which your abilities are valued. Once youʹve narrowed down a list of possibilities, weigh the positive and negative aspects of each profession.
List the ten principles of personal finance. Principle 1: The best protection is knowledge.Principle 2: Nothing happens without a plan.Principle 3: The time value of moneyPrinciple 4: Taxes affect personal finance decisions. Principle 5: Stuff happens, or the importance of liquidity. Principle 6: Waste not, want not–smart spending matters. Principle 7: Protect yourself against major catastrophes. Principle 8: Risk and return go hand in hand.Principle 9: Mind games, your financial personality, and your money Principle 10: Just do it!
Roadblocks to Financial Security o No strategyo Procrastination- start latero Poor savings habitso Massive debt- student debt, plus credit cards, etco Taxeso Interest
Describe the three sections included in a personal balance sheet. A personal balance sheet consists of three parts: assets, liabilities, and net worth. Assets include the value of monetary assets, investments, retirement plans, housing, automobiles, personal property, and other assets. Liabilities consist of current bills, credit card debt, home mortgages, and other long term debts such as automobile loans. Your net worth, determined by subtracting liabilities from assets, is the part of your assets that are free and clear of debt.
Why is the balance sheet a useful tool The balance sheet is a useful tool to examine your current financial position. A financial snapshot, the balance sheet tells you how much wealth you have accumulated as of a certain date.
Describe an income statement and its functions. An income statement consists of three parts: income, expenses, and surplus funds. Income includes revenue from all sources and all parties contributing to the household. Typical expense items are housing, food, clothing and personal care, charitable contributions, recreation, medical expenses, insurance, and transportation. Surplus funds tell if you have any money left over at the end of the month or if you spent more than you earned. An income statement shows an itemized list of expenditures and allows you to isolate areas where you are over-spending. The statement is a good planning tool for budgets and income tax preparation.
What questions do financial ratios help answer? By calculating your current ratio you can answer the question, ʺDo I have adequate liquidity to meet emergencies?ʺ Debt ratios answer, ʺDo I have the ability to meet my debt obligations?ʺ ʺAm I saving as much as I think I am?ʺ is answered by the savings ratio.
How do you calculate the current ratio, debt ratio, and savings ratio? Current ratio is calculated by dividing total current assets by total current liabilities. A ratio of 1.0 will get you by, but a ratio of 2.0 or more is preferred. The debt ratio is determined by dividing total debt or liabilities by total assets. The savings ratio is found by dividing the income available for savings and investments by income available for living expenses.
Explain the relationship between the debt ratio and insolvency? The debt ratio shows the relationship between your assets, or how much you own, and your liabilities, or how much you owe. Your assets minus your liabilities equals your net worth. If your debt ratio is a fraction below 1.0, then your assets are larger than your debt, leaving you solvent with positive net worth. If your debt ratio is larger than 1.0, then your debt is greater than your assets, leaving you insolvent with negative net worth.
According to the Keown book, what are the three primary reasons for maintaining financial records? First, without adequate records, it is extremely difficult to prepare taxes. Second, a strong record-keeping system allows you to track expenses in order to know exactly how much youʹre spending and where youʹre spending it. Without that knowledge, you will not have control over your finances. Third, organized record-keeping makes it easier for someone else to step in during an emergency and understand your financial situation.
Explain the steps in developing a cash budget. First, determine your anticipated income by referring to last yearʹs adjusted income. Next, estimate your level of taxes to determine after-tax income available for living expenses. Add fixed and variable expense estimates together to determine your level of spending. Last, subtract living expenditures from expected take-home pay to calculate income available for savings and investment.
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Finance Flashcards

ch 1

The three mainline functions of any business are operations, marketing, and finance.
Regardless of how departments and functions are individually​ managed, they are always linked together through processes
Which of the following events from the twentieth century defines the history of operations and supply chain​ management?A.The invention of the assembly line for the Model T car by Henry Ford.B.The Toyota Production System for removing wasteful activities from an organization.C.Alfred​ Sloan’s introduction of strategic planning for achieving product proliferation and variety.D.All of the above. D. All of the above
The finance function influences operating decisions about capacity expansion.
What do all processes​ have? inputs and outputs
Which of the following are characteristics of service provider​ operations?A.Perishable outputsYour answer is correct.B.Tangible outputC.Low customer contactD.Low labor requirements A. Perishable outputs
​_______ are the fundamental activities that organizations use to do work and achieve their goals. Processes
If​ “every process and every person in an organization has​ customers,” then some customers are external and some are internal.
A​ ________ process is a set of activities that delivers value to external customers core
Which core process includes the activities required to produce and deliver the service or product to the external​ customer?A. supplier relationship processB. new​ service/product development processC. customer relationship processD. order fulfillment process D.order fulfillment process
Selecting the transportation mode​ (train, ship,​ truck, airplane, or​ pipeline) and scheduling both​ in-bound and outbound shipments is typically accomplished by which supply chain​ process? logistics
Technological change is proceeding at a rapid​ rate, but there are many challenges such asA. employees may resist technological change if it is not managed well.B. robots have not proven useful in manufacturing.C.technology cannot provide a competitive advantage.D. the Internet is too difficult to use. A.employees may resist technological change if it is not managed well.
The foundation for managing processes and value chains is operations strategy.
An effective way of gaining a global presence when one firm has a core competency that another needs but is unwilling​ (or unable) to duplicate is a collaborative effort.
In market​ analysis, the needs assessment step identifies product/service attributes.
Core competencies reflect the collective learning of the organization. Core competencies include a​ well-trained, flexible workforce.
Gymtastic was able to serve large crowds of customers and then adjust operations to serve very few customers thanks to their competitive capability related to flexibility
Which of the following scenarios illustrates an order​ winner?A.As part of her initial​ search, Janice screened mutual funds based on a​ five-year return of twenty percent and the manager tenure of at least ten years. She planned to study the prospectus for each of those funds before investing her nest egg.B.Ken had always been fascinated by shiny​ objects, so he plucked the​ chrome-plated thermos from the shelf and raced to the nearest checkout line.C.A company specifies that they will purchase materials only from suppliers that have achieved a specific certification.D.A safety conscious customer considers only vehicles that have side air bags and​ anti-lock brakes. B.Ken had always been fascinated by shiny​ objects, so he plucked the​ chrome-plated thermos from the shelf and raced to the nearest checkout line.
United States business operations​ (i.e., product​ design) in an international area based on the local standard rather than U.S. standards is an example of a decision based on​ _______ considerations. ethical
A process produces​ 6,000 units of output that yield​ $5.00 per unit. Resources contributed to this output are 200 hours of labor at​ $15.00 per​ hour, materials at​ $750, and overhead at​ $250. What is the labor productivity​ (in units per​ labor-hour)? 30
The Fine Feline Co. produces decorative collars for cats. Last week employees worked 320 hours and produced​ 32,000 cat collars. This week the workers worked the same 320​ hours, but produced​ 33,600 cat collars. Labor productively increased by​ _______ over last week. 5%
Ann’s of Austin produces a premium Passion Fruit sorbet for local restaurants. Ann has unit costs of​ $1.60 per gallon​ (labor, 80​ cents; materials, 70​ cents; and​ overhead, 10​ cents) and she sells the product for​ $2.00 per gallon. What is her multifactor​ productivity? 1.25
The​ low-cost source for service labor for the world is India
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Finance Flashcards

Chapter 10 Finances

E. Family need method Francisco and Maria have three children and want to complete a detailed worksheet to determine theamount of life insurance they need to purchase. Which method are they using to determine their lifeinsurance needs?A. Easy methodB. Dual income, no kids methodC. Formal calculation methodD. Nonworking spouse methodE. Family need method
D. Term life Which of the following is NOT a type of permanent insurance?A. Whole lifeB. Straight lifeC. Ordinary lifeD. Term lifeE. Cash value life
C. Your premium will be the same for the duration of your policy If you have a multiyear level term policy,A. You can convert your policy to a permanent type at the end of the term.B. You policy will continue for one year.C. Your premium will be the same for the duration of your policy.D. Your premium will not increase when you renew it.E. None of these is correct.
C. You can convert your term policy to a permanent policy. If you have a conversion term policy,
B. Multiyear level term This term life policy will guarantee that you will pay the same premium for the duration of yourpolicy.
C. The policy will return all premiums if you survive to the end of the policy. Which of the following is NOT a feature of whole life insurance?A. It accumulates cash value.B. It provides both a death benefit and a savings component.C. The policy will return all premiums if you survive to the end of the policy.D. You must pay interest on any outstanding policy loans.E. The policy requires that you pay a specified premium each year for the rest of your life.
D. It builds cash value. Of the following, which one is the most positive feature of whole life insurance?A. You must pay interest on any loans.B. You pay premiums each year for the rest of your life.C. It is more expensive than term insurance.D. It builds cash value.E. It is permanent life insurance.
E. Variable life Megan wants to purchase a life insurance policy that will allow her to invest in stock. Which of thefollowing policies should she buy?A. Adjustable lifeB. Group lifeC. Limited lifeD. Universal lifeE. Variable life
A. Adjustable life Molly is thinking about buying a life insurance policy, but she is not sure about how much she will needin the next few years. She may need to change her coverage as her needs change. Which of the followingpolicies would meet her needs?A. Adjustable lifeB. Group lifeC. Limited lifeD. Universal lifeE. Variable life
D. Universal life Polly wants the opportunity to change the amount she pays for her annual premium through the life of herinsurance policy without changing her coverage. Which of the following policies would meet her needs?A. Adjustable lifeB. Group lifeC. Limited lifeD. Universal lifeE. Variable life
B. Group life Pam just started working at XYZ Widget Company and finally wants to get insurance coverage. She doesnot want to take a medical exam to get coverage because she has some underlying health conditions andis concerned that she might not qualify for a policy. Which of the following life insurance policies shouldshe apply for?A. Adjustable lifeB. Group lifeC. Limited lifeD. Universal lifeE. Variable life
A) Credit life This life insurance is used to pay off certain debts, such as auto loans, in the event that you die before the debts are paid in full. Which of the following is not the best buy for the amount of protection offered for an individual?A) Credit life B) Adjustable lifeC) Group life D) Endowment life E) Term
D) Policy reinstatement Which of the following provisions requires the policyholder to again qualify as an acceptable risk and pay overdue premiums with interest in order to put a lapsed policy back in force?A) Incontestability clauseB) Misstatement of age provisionC) Naming a beneficiaryD) Policy reinstatementE) The grace period
B. Misstatement of age provision Fred bought life insurance when he was 47, although he told the insurance company that he was 42. Hehas since died. Which of the following provisions will affect the amount of money his beneficiaries willreceive?A. Incontestability clauseB. Misstatement of age provisionC. Naming a beneficiaryD. Policy reinstatementE. The grace period
E. The grace period Georgia was supposed to pay her premium by the 15th of the month. Which of the following provisionsallows her to keep her coverage if she is a couple of weeks late with paying her premium?A. Incontestability clauseB. Misstatement of age provisionC. Naming a beneficiaryD. Policy reinstatementE. The grace period
A. Incontestability clause Fred bought life insurance five years ago. He forgot to tell them that he had a heart condition, and, as aresult of that condition, he recently died. Which of the following provisions prevents the life insurancecompany from refusing to pay his beneficiaries because of his original misrepresentation?A. Incontestability clauseB. Misstatement of age provisionC. Naming a beneficiaryD. Policy reinstatementE. The grace period
A. Ben. Amy bought a life insurance policy and named Ben as her beneficiary. She has since died. Who willreceive the benefits from her policy?A. Ben.B. Ben’s beneficiaries.C. Her contingent beneficiaries.D. Her parents.E. None of these.
C. Guaranteed insurability option Bonnie is most concerned about being able to buy additional insurance without undergoing medicalexams. Which of the following riders should she consider?A. Waiver of premium disability benefitB. Accidental death benefitC. Guaranteed insurability optionD. Cost-of-living protectionE. Accelerated benefits
A. Waiver of premium disability benefit Bill is worried about being able to pay his premium if he is totally and permanently disabled before age60. Which of the following riders should he consider?A. Waiver of premium disability benefitB. Accidental death benefitC. Guaranteed insurability optionD. Cost-of-living protectionE. Accelerated benefits
B. Accidental death benefit Frank, age 38, was hit by a car and died. Which of the following riders provided an additional benefit forhis heirs?A. Waiver of premium disability benefitB. Accidental death benefitC. Guaranteed insurability optionD. Cost-of-living protectionE. Accelerated benefits
D. Cost-of-living protection A young employee is buying individual life insurance and is worried about the impact inflation will haveon his life insurance coverage. Which of the following riders should he consider?A. Waiver of premium disability benefitB. Accidental death benefitC. Guaranteed insurability optionD. Cost-of-living protectionE. Accelerated benefits
E. Accelerated benefits Mildred was diagnosed with terminal cancer and knows that she doesn’t have long to live. Which of thefollowing riders would allow her to receive cash now?A. Waiver of premium disability benefitB. Accidental death benefitC. Guaranteed insurability optionD. Cost-of-living protectionE. Accelerated benefits
B. Limited installment payment. The settlement option that pays the life insurance proceeds in equal periodic payments for a specifiednumber of years after your death is calledA. Lump-sum payment.B. Limited installment payment.C. Final life payment.D. Life income option.E. Proceeds left with the company.
D. Life income option. The settlement option that pays the life insurance proceeds to the beneficiary for as long as she or he livesis calledA. Lump-sum payment.B. Limited installment payment.C. Final life payment.D. Life income option.E. Proceeds left with the company.
E. Proceeds left with the company. The settlement option in which the company acts as trustee and pays interest to the beneficiary iscalledA. Lump-sum payment.B. Limited installment payment.C. Final life payment.D. Life income option.E. Proceeds left with the company.
D. Immediate annuity Which of the following products allows an individual to receive payments beginning now?A. Term insuranceB. Deferred annuityC. Whole life insuranceD. Immediate annuityE. Universal life insurance
D.An annuity is more advisable for people in poor health than for those who are likely to live longer than Which of the following statements is incorrect?A. A deferred annuity allows an individual to receive payments from an annuity at some future date.B. An immediate annuity allows an individual to receive payments from an annuity beginning at once.C. A life insurance policy allows the beneficiary to receive proceeds at some future date.D.An annuity is more advisable for people in poor health than for those who are likely to live longer thanaverage.E. An insurance company will calculate the annual amounts to pay each person for an annuity.
A. Fixed annuity Which of the following allows an individual to receive a fixed amount of income over a certain period oftime, or over his or her life?A. Fixed annuityB. Term insuranceC. Whole insuranceD. Variable annuityE. 401(k)
E) It is better to fully fund your IRA, Keogh, or 401(k) before buying an annuity. When considering why to buy annuities, which of the following statements is correct? A) It is better to fund a variable annuity before fully funding your IRA, Keogh, or 401(k).Incorrect ResponseB) It is better to fund a fixed annuity before fully funding your IRA, Keogh, or 401(k). C) The timing for payments of a fixed annuity are variable. D) A fixed annuity is one where the investments put into the annuity are variable.Correct AnswerE) It is better to fully fund your IRA, Keogh, or 401(k) before buying an annuity.
E. All of these. Which of the following is a charge you will pay when you purchase a variable annuity?A. Surrender charge.B. Mortality and expense risk charge.C. Administrative fee.D. Fund expense.E. All of these.
B. $196,000 Stephanie is the wage earner in a “typical family” with $40,000 gross annual income. Use the easymethod to determine how much insurance she should carry.A. $40,000B. $196,000C. $280,000D. $400,000E. $430,000
D. $130,000 Holly and Matt want to use the “nonworking” spouse method to determine the amount of life insurancecoverage they need. If their youngest child is 5 years old, how much do they need?A. $13,000B. $18,000C. $50,000D. $130,000E. $180,000
C. $98,000 Marianne and Roger are in good health and have reasonably secure careers. Each earns $45,000 annually.They own a home with a $125,000 mortgage; they owe $25,000 for their car loans and have $22,000 instudent loans. If one should die, they think that funeral expenses would be $12,000. What is their totalinsurance need using the DINK method?A. $12,000B. $86,000C. $98,000D. $172,000E. $217,000
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Finance Flashcards

Finance

Calculate assets Step 1 of creating balance sheet
Personal financial statement Documents that provide information about your current financial position.
Calculate liabilities Step 2 of creating a balance sheet
Calculate net worth Step 3 of creating balance sheet
Liquid assets, real estate, personal possessions, investments 4 asset categories
Liquid assets Cash or money in the bank
Real estate Land or buildings on that land
Personal posessions Car, electronics, artwork, clothing, etc
Investments Stocks, bonds, mutual funds
Calculate income First step in cash flow statement
Calculate expenses Second step in cash flow statement
Calculate net cash flow Third step in cash flow statement
Calculate assets Step 1 of creating balance sheet
Personal financial statement Documents that provide information about your current financial position.
Calculate liabilities Step 2 of creating a balance sheet
Calculate net worth Step 3 of creating balance sheet
Liquid assets, real estate, personal possessions, investments 4 asset categories
Liquid assets Cash or money in the bank
Real estate Land or buildings on that land
Personal posessions Car, electronics, artwork, clothing, etc
Investments Stocks, bonds, mutual funds
Calculate income First step in cash flow statement
Calculate expenses Second step in cash flow statement
Calculate net cash flow Third step in cash flow statement
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Finance Flashcards

Personal Finance Chapter 7 – Credit Cards and Consumer Loans (AFCPE)

Installment Credit (closed-end credit) Credit arrangement in which the borrower must repay the amount owed plus interest in a specific number of equal payments.
Open-ended (revolving) credit Arrangement in which credit is extended in advance of any transaction so that borrowers do not need to reapply each time they need to use credit.
Credit Limit Maximum outstanding debt that a lender will allow on an open-ended credit account
Minimum Payment Payment that must be made to a credit account each month to cover interest and a portion of the amount owed.
Principal Total amount owed on a credit account not including interest.
Bank Credit Card Account Open-ended credit account with a financial institution that allows the holder to make purchases almost anywhere
Annual Percentage Rate The cost of credit on a yearly basis stated as a percentage rate.
Consumer Credit Non business debt used by consumers for expenditures other than home mortgages.
Two Types of Consumer Credit Installment and NonInstallment
Noninstallment credit Single payment, open-ended credit and service credit.
Credit (Charge) Card Plastic card identifying the holder as a participant in the charge account plan of a lender, retailer or financial institution.
Cash Advances Cash loan from a credit card account
Personal line of credit Form of open ended credit that allows the borrower access to a prearranged revolving line of credit provided by the lender. Includes a credit limit and flexible repayment schedule.
Credit Service Granted to consumers by public utilities, physicians, dentists and other service providers that do not require full payment when services are rendered.
Home-equity line of credit Personal line of credit for which your home equity is the collateral.
Balance Transfer Full or partial on the balance of one credit card using a cash advance from another.
Retail Credit Cards Allow customers to make purchases on credit at any of the outlets of a particular retailer.
Annual Fees Charges levied against cardholders for the privilege of having an open account but that are not included in the advertised APR
Transaction Fee Charge levied against cardholders per use of the card that is not included in the APR advertised
Introductory Rate A temporarily low initial interest rate to entice borrowers to apply for a credit card.
Default Rate A high APR that is assessed whenever a borrower fails to uphold certain rules of the account such as making on-time payments or staying within the specified credit limit.
Variable interest rate cards Cards with rates that change monthly or annually according to general changes in the economy as a whole
Credit Statement The monthly bill on a credit card account showing the charges and payments made, minimum payment required, and due date among other information; also called a periodic statement.
Billing/Closing/Statement Date The last day for which any transactions are reported on the credit statement.
Grace Period Time period between the posting date of a transaction and the payment due date during which no interest accrues.
Minimum payment amount Lowest allowable monthly payment required by the lender.
Credit Receipt Written evidence of any items returned that notes the specific amount and date of the transaction.
Periodic Rate The APR for a charge account divided by the number of billing cycles per year (usually 12)
Average Daily Balance Sum of the outstanding balances owed each day during the billing period divided by the number of days in the period.
Fair Credit Billing Act Helps people who wish to dispute billing errors on revolving accounts.
Chargeback The amount of the transaction is charged back to the business where the transaction originated in the case of a dispute or challenge by the cardholder.
Dunning Letters Notices that make insistent demands for repayment.
Promissory Note Written installment loan contract hat spells out the terms of the loan.
Unsecured loan/Signature Loan Loan granted based solely on borrower’s good creditworthiness.
Secured Loan Loan that is backed by collateral or a cosigner.
Lien A legal right to seize and dispose of (usually sell) property to obtain payment of a claim. Once the loan is paid the lien is removed.
Acceleration Clause Part of a credit contract stating that after a specific number of payments are unpaid (often just one), the loan is considered in default, and all remaining installments are due and payable upon demand of the creditor.
Truth in Lending Act (TILA) Requires lenders to disclose to credit applicants both the interest rate expressed as an annual percentage rate and the finance charge.
Variable-rate (adjustable-rate) loans Loans for which the interest rate varies with the monthly payment going up or down, allowing the loan to be paid off by the original end date.
Declining-Balance Method Interest calculation method in which interest is assessed during each billing period (usually each month) based on the outstanding balance of the installment loan that billing period.
Amortization Loan repayment method in which part of the payment goes to pay interest and part goes to repay principal. Extra payments toward principal shorten the life of the loan and decrease the total amount of interest paid.
Add-on Interest Method Interest is calculated by applying an interest rate to the amount borrowed times the number of years to arrive at the total interest to be charged.
Prepayment Penalty Special charge assessed to the borrower for paying off a loan early.
Rule of 78s method/sum of the digits method for calculating prepayment penalties A common method of calculating the prepayment penalty on a loan that uses the add-on method for calculating the interest.
Discount Method of Calculating Interest Interet is calculated based on a discount rate multiplied by the amount borrowed and by the number of years to repay. Interest is then subtracted from the amount of the loan and the difference is given to the borrower. In this method, interest is paid up front before any part of the payment is applied to the principal.
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Finance Flashcards

Managerial Finance Chapter 9

1. An amount of money to be received in the future is worth less today than the stated amount True
2. Discounting refers to the growth process that turns $1 today into a greater value several periods in the future False
3. Compounding refers to the growth process that turns $1 today into a greater value several periods in the future True
4. The interest factor for the future value of a single sum is equal to (1+n)^i False
5. The time value of money is not a useful concept in determining the value of a bond or in capital investment decisions False
6. If a single amount were put on deposit at a given interest rate and allowed to grow, its future value could be determined by reference to a “future value of $1” table True
7. The time value of money concept is fundamental to the analysis of cash inflow and outflow decisions covering multiple periods of time. True
8. The future value is the same concept as the way money grows in a bank account True
9. Cash flow decisions that ignore the time value of money will probably not be as accurate as those decisions that do rely on the time value of money. True
10. The present value of a positive future inflow can become negative as discount rates become higher and higher False
11. The interest factor for a future value (FVF) is equal to (1+I)^n True
12. The formula PV = FV(1+n)^I will determine the present value of $1 False
13. In determining the interest factor (IF) for the present value of $1, one could use the reciprocal of that IF for the future value of $1 at the same rate and time period True
14. To determine the current worth of four annual payments of $1,000 at 4%, one would refer to a table for the present value of $1. False
15. As the interest rate increases, the interest factor (IF) for the present value of $1 increases False
16. The interest factor for the present value of a single amount is the reciprocal of the future value interest factor True
17. The interest factor for the present value of a single sum is equal to (1+i)/i False
18. Higher interest rates (discount rates) reduce the present value of amounts to be received in the future. True
19. In determining the future value of an ordinary annuity, the final payment is not compounded at all. True
20. The future value of an ordinary annuity assumes that the payments are received at the end of the year and that the last payment does not compound. True
21. The future value of an annuity table provides a “shortcut” for calculating the future value of a steady stream of payments, denoted as A. The same value can be calculated directly from the following equation: False
22. The present value of an annuity table provides a “shortcut” for calculating the future value of a steady stream of payments, denoted as A. The same value can be calculated directly from the following equation: True
23. The amount of annual payments necessary to accumulate a desired total can be found by reference to the present value of an annuity table False
24. If an individual’s cost of capital were 6%, the person would prefer to receive $110 at the end of one year rather than $100 right now. TruePV = FVxPV110*0.943 = $104
25. In evaluating capital investment projects, current outlays must be judged against the current value of future benefits True
26. The farther into the future any given amount is received, the larger it’s present value False
27. The interest factor for the future value of an annuity is simply the sum of interest factors for the future value using the same number or periods False
28. An annuity is a series of consecutive payments of equal amount True
29. Using semi-annual compounding rather than annual compounding will increase the future value of an annuity True
30. When the inflation rate is zero, the present value of $1 is identical to the future value of $1 False
31. The amount of annual payments necessary to repay a mortgage loan can be found by reference to the present value of an annuity table True
32. In paying off a mortgage loan, the amount of the periodic payment that goes toward the reduction of principle increases over the life of the mortgage True
33. The time value of money concept becomes less critical as the prime rate of lending increases False
34. Discounted at 6%, $1,000 received three years from now is worth less than $800 received today False $1,000*.840 = $840
35. Discounted at 10%, $1,000 received at the end of each year for three years is worth less than $2,700 received today True 1,000*2.487 = $2,487
36. When adjusting for semi-annual compounding of an annuity, the adjustments include multiplying the periods and annuity payment amount by 2. False
37. Calculation of the yield of an investment provides the total return over multiple years False
38. To calculate Future or Present Values of an “Annuity Due,” we must assume that payments happen twice as often False
39. Under what conditions must a distinction be made between money to be received today and money to be received in the future? B. When idle money can earn a positive return
40. As the compounding rate becomes lower and lower, the future value of inflows approaches B. the present value of the inflows.
41. If you invest $1,000 today at 10% interest, how much will you have in 10 years? B. $24,940$10,000*2.594 = $25,940
42. In determining the future value of a single amount, one measures C. The future value of an amount allowed to grow at a given interest rate
43. The concept of time value of money is important to financial decision making because D. all of these options
44. As the discount rate becomes higher and higher, the present value of inflows approaches A. 0
45. How much must you invest at 8% interest in order to see your investment grow to $8,000 in 10 years B. $3,704$8,000*0.463
46. An annuity may best be defined as D. A series of consecutive payments of equal amounts
47. You are to receive $12,000 at the end of five years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today? C. Present value of $1
48. As the interest rate increases, the present value of an amount to be received at the end of a fixed period B. decreases
49. As the time period until receipt increases, the present value of an amount at fixed interest rate A. decreases
50. To find the yield on investment that requires the payment of a single amount initially, and which then return a single amount some time in the future, the most efficient table one could use is A. the present value of $1
51. Ali Shah sets aside $2,000 each year for five years. He then withdraws the funds on an equal annual basis for the next four years. If Ali wishes to determine the amount of the annuity to be withdrawn in years 6 through 9, he should use the following two tables in this order B. future value of an annuity of $1, present value of an annuity of $1
52. To save her newborn son’s college education, Lea Wilson will invest $1,000 at the beginning of each year for the next 18 years. The interest rate is 12%. What is the future value? D. $62,440=1,000*(63.440-1)
53. If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, which table would you use to find the ending balance in your account D. Future value of an annuity of $1
54. The interest factor (IF) for the future value of an ordinary annuity is 4.641 at 10% for four years. If we wish to accumulate $8,000 by the end of four years, how much should the annual payments be? C. $1,724=8000/4.641
55. Mr. Blochirt is creating a college investment fund for his daughter. He will put in $1,000 per year for the next 15 years beginning one year from now and expects to earn a 6% annual rate of return. How much money will his daughter have when she starts college? D. $23,276 =1000*23.276
56. Mr. Nailor invests $5,000 in a money market account at his local bank. He receives annual interest of 8% for seven years. How much total return will his investment earn during this time period? B. $3,570 =5000*1.714=85708570-5000=3570
57. Lou Lewis borrows $10,000 to be repaid over 10 years at 9%. Repayment of principal in the first year is B. $658
58. Sharon Smith will receive $1 million in 50 years. The discount rate is 14%. As an alternative, she can receive $1,000 today. Which should she choose? C. She should be indifferent between the two choices
59. Pedro Gonzales will invest $5,000 at the beginning of each year for the next nine years. The interest rate is 8%. What is the future value? C. $67,435=5000*(14.487-1)
60. Ambrin Corp. expects to receive $2,000 per year for 10 years starting one year from now, and $3,500 per year for the next 10 years at the end of each year. What is the approximate present value of this 20-year cash flow? Use an 11% discount rate. A. $19,034
61. Dr. J wants to buy a Dell computer that will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn an 8% annual return. How much should he set aside beginning a year from now? C. $924=3000/3.246
62. Mr. Fish wants to build a house in eight years. He estimates that the total cost will be $150,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed? A. Between 17% and 18%
63. Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years. What table would you use to calculate the value of this contract in today’s dollars? A. Present value of an annuity
64. Football player Walter Johnson signs a contract calling for payments of $250,000 per year, to begin 10 years from now and then continue for five more years. To find the present value of this contract, which table or tables should you use? C. The present value of an annuity of $1 and the future value of $1
65. Mike Carlson will receive $12,000 a year from the end of the third year to the end of the 12th year ( 10 payments ). The discount rate is 10%. The present value today of this deferred annuity is ______. D. $60,909
66. The shorter the length of time between a present value and its corresponding future value, B. The higher the present value, relative to the future value
67. A dollar today is worth more than a dollar to be received in the future because B. The dollar can be invested today and earn interest
68. The higher the interest rate used in determining the future value of a $1 annuity, B. the greater the future value at the end of a period
69. Mr. Darden is selling his house for $200,000. He bought it for $164,000 10 years ago. What is the annual return on his investment? A. 2%164000/200000 = 0.82, return = 2
70. Increasing the number of periods will increase all of the following except B. the present value of $1
71. Joe Nautilus has $210,000 and wants to retire. What approximate return must his money earn so he may receive annual benefits of $30,000 for the next 10 years? C. About 7%=210,000/30,000 = 7
72. You will deposit $2,000 today. It will grow for six years at 10% interest compounded semi-annually. The annual interest rate is 8%. Your annual withdrawal will be approximately ___________. D. $1,8053598/3.312
73. Carol Thomas will pay out $6,000 at the end of year 2, $8,000 at the end of year 3, and receive $10,000 at the end of year 4. With an interest rate of 13%, what is the net value of the payments versus receipts in today’s dollars? C. $4,112
74. John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. How much are the annual payments? D. $15,445=150,000/9.712
75. John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. What is the principal outstanding after the first loan payment? A. $143,555=150,000/9.712=15,44515445-(.06*150000)=6445150000-6445
76. A home buyer signed a 20 year, 8% mortgage for $72,500. Given the following information, how much should the annual loan payments be?see test bank for info B. $7,384=72500/9.818
77. A retirement play guarantees to pay to you or your estate a fixed amount for 20 years. At the time of retirement, you will have $73,425 to your credit in the plan. The plan anticipates earning 9% interest. Given the following information, how much will your annual benefits be?see test bank for info C. $8,04373,425/9.129
78. After 10 years, 100 shares of stock originally purchased for $500 were sold for $900. What was the yield on investment? Choose the closest answer. D. 6%=500/900
79. Dr. Stein has just invested $10,000 for his son (age 7). The money will be used for his son’s education 15 years from now. He calculates that he will need $100,000 for his son’s education by the time the boy goes to school. What rate of return will Dr. Stein need to achieve this goal? B. Between 16% and 17%=10,000/100,000
80. The future value of a $500 investment today at 10% annual interest compounded semiannually for five years is _______. B. $814=500*1.629
81. Dan would like to save $1,500,000 by the time he retires in 25 years and believes he can earn an annual return of 8%. How much does he need to invest in each of the following years to achieve his goal? A. $20,518=1500000/73.106
82. Sydney saved $10,000 during her first year of work after college and plans to invest it for her retirement in 40 years. How much will she have available for retirement if she can make 8% on her investment? D. $217,250
83. Luke believes that he can invest $5,000 per year for his retirement in 30 years. How much will he have available for retirement if he can earn 8% on his investment and begins investing one year from now? A. $566,4005000*113.28
84. Ian would like to save $2,000,000 by the time he retires in 40 years. If he believes that he can achieve a 7% rate of return, how much does he need to deposit each year, starting one year from now, to achieve his goal? D. $10,0182000000/199.64
85. Jeff believes he will need a $60,000 annual income during retirement. If he can achieve a 6% return during retirement and believes he will live 20 years after retirement, how much does he need to save by the time he retires, assuming he’ll start drawing his money out one year after his retirement? C. $688,200=60,000*11.470
86. If Allison has saved $1,000,000 upon retirement, how much can she live on each year if she can earn 6% per year and will end with $0 when she expects to die 25 years after retirement? D. $78,229=1000000/12.783
87. Kathy has $50,000 to invest today and would like to determine whether it is realistic for her to achiever her goal of buying a home for $150,000 in 10 years with this investment. What return must she achieve in order to buy her home in 10 years? A. About 12%=50,000/150,000
88. If Gerry makes a deposit of $1,500 at the end of each quarter for five years, how much will he have at the end of the five years assuming a 12% annual return and quarterly compounding? A. $40,305=1500*26.870
89. Sara would like to evaluate the performance of her portfolio over the past 10 years. What compound annual rate of return has she achieved if she invested $12,000 10 years ago and now has $25,000? D. Between 7% and 8%
90. MATCHINGYield The interest rate that equates a future value of an annuity to a given present value
90. MATCHINGDiscount rate The percentage rate at which future sums or annuities are brought back to their present value
90. MATCHINGAnnuity A series of consecutive payments or receipts of an equal amount
90. MATCHINGFuture value of an annuity The payment of an equal stream of cash into a fund that increases in size (depending on the interest rate received) up to a future point in time
90. MATCHING Future value The future value of a single amount or annuity when compounded at a given interest rate for a specified period of time
90. MATCHING Semi-annual compounding The interest or return is accumulated every six months
90. MATCHINGInterest Factor (IF) It is based on the number of periods (n) and the interest rate (i) and whether or not there is more than one cash flow
90. MATCHINGPresent value The discounted value of a future sum or annuity as of today’s value
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Finance Flashcards

Macro Economics Ch. 14: The Basic Tools of Finance

Finance the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk.
Present Value the amount of money that would be needed, prevailingg interest rates, to produce a given future amount of money.
Future Value the amount of money in the future that an amount of money today will yield giving prevailing interest rates.
Compounding the accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future.
Risk Aversion a dislike of uncertainty.
Diversification the reduction of risk achieved by replacing a single risk with a large number of smaller, unrelated risks.
Firm-specific Risk risk that affects only a single company.
Market Risk risk that affects all companies in the stock market.
Fundamental Analysis the study of a compnay’s accounting statements and future prospects to determine its value.
Efficient Markets Hypothesis the theory that asset prices reflect all publicly available information about the value of an asset.
Informational Efficiency the description of asset prices that rationally reflect alll available information.
Random Walk the path of a variable whose changes are impossible to predict.
The interest rate is 7 percent. Use the concept of present value to compare $200 to be received in 10 years and $300 to be received in 20 years. X/(1+r)^N200/1.07^10 = $102300/1.07^20 = $78
Present Value Formula: If “r” is the interest rate, then an amount “X” to be received in “N” years has a present value of X/(1+r)^NEx: Interest rate is 5%, the present value of $200 to be paid in 10 years is $200/(1.05)x^10 or $123. This means that $123 deposited today in a bank account that earned 5% would produce $200 after 10 years.
What benefit do people get from the market for insurance? It spreads out the risks to be shared by multiple people and not just by you alone. It covers your risk of something happening to you by spreading it out.
What two problems impede the insurance market from working perfectly? One problem is adverse selection: a high risk person is more likely to apply for insurance than a low risk person because a high-risk person would benefit more from insurance protection. The second problem is moral hazard: after people buy insurance they have less incentive to be careful about their risky behavior because the insurance company will cover much more of the resulting losses.
What is diversification? Does a stockholder get a greater benefit from diversification going from 1 to 10 stocks or from 100 to 120 stocks? Diversification is the reduction of risk achieved by replacing a single risk with a large number of smaller, unrelated risks. The stock holder would benefit more from diversification going from 1 to 10 because it would reduce the risk a lot more than going from 100 to 120 becasue they’ve already started with a lower risk.
Comparing stocks and government bonds, which type of asset has more risk? Which pays higher average return? Stocks have more risk because their value depends of the future of their firm, and because of the higher risk, shareholders demand a higher return.
What factors should a stock analyst think about determining the value of a share of stock? The future probability of a firm.
Describe the efficient markets hypothesis and give a piece of evidence consistent with this hypothesis. It’s the theory that asset prices reflect all publicly available information of an asset. It says the changes in stock prices should follow a random walk, making them impossible to predict from available information, so choose your stocks randomly.
Explain the view of those economists who are skeptical of the efficent markets hypothesis. Efficient markets hypothesis assumes that people buying and selling stock rationally process the information they have about the stock’s underlying value. But stock prices sometimes deviate from reasonable expectations of their true value. When you evaluate a stock, you have to estimate not only the value of the business but also what other people think the business is worth in the future.
Future Value Formula: (1 + r)^N x (base price) r = 0.07 (1 + 0.07)^10 x $200 = $393.43(1 + 0.07)^20 x $300 = $1160.90
Intristic value means that an item would have value even if it were not used as money.
Federal Reserve System (Fed) Is the central of the U.S Money System.
Functions of Fed in the whole economy: Provides Fiat Currency and Controls money supply withe its monetary policy tools.
Functions of Fed in Banks: Supervises the activities of member banks, serves as depositing institution for banks (hence called Bankers Bank), Serves as a lender of last resort, and serves as cleaning house/agent for banks.
Functions of Fed for the Government: Serves as a fiscal agent for treasury and serves as a government bank.
List of Monetary Policy Tools: Open market operation, reserve required by law ratio, discount rate, and payment of interest on excess reserves on Banks.
Open market operation: Is the puchase/sell of U.S Govt. bonds in the financial market.
Flow chart for open market operation: “fed sells U.S Govt. bonds” —-> “Individuals + Institutions pay Fed through their banks” —–>”Reserves decreases(-)” —–> “Ms (Money supply) decreases(-)” “fed purchases U.S Govt. Bonds” —-> “fed pays Individuals + Institutions through their banks” —> “Reserves increases(+)” —> “Ms increases (+)”
Reserve required by law ratio: Is the minimum amount of reserves the banks must keep in order to comply with Fed regulation.
Flow chart of reverve required by law ration: If rRR decreases —> Ms increasesIf rRR increases —> Ms decreases
Reserve required by law ratio symbol: rRR
Discount rate (rD) Is the interest rate charged by Fed whenever it grants loans to banks.
Discount rate flow chart: If rD decreases —> Ms increasesIf rD increases —> Ms decreases
DD = lialbility RR = required reservesER = excess reserves DD = RR + ER
Formula for finding total money supply (Ms^t) Ms^t = 1 / rRR + rER (DD)
Problems with controlling money supply: The fed has no control over how much banks chose to lend or to hold in the form of excess reserves (ER).The fed has no control over how much households choose to deposit or to hold in the form of currency.
Inflation Is the rise in the overall price level
Price level symbol P
Causes of inflation Demand side causes –> increas
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Finance Flashcards

Principles of Finance

balance sheet A statement that reflects an individual’s or business’s financial position. It shows what is owned (assets) and what is owed (liabilities).
budget A detailed plan to manage the spending and saving of money.
deficit A financial shortage that occurs when liabilities exceed assets or when cash inflows are less than cash outflows.
discretionary expenses Any expenses that are not considered essential to the household or business. Examples include movie tickets, eating out, expensive clothes, and video games.
discretionary income Income that is available after all of the essential financial commitments have been paid
financial health A description of a person’s or an organization’s finances.
financial planner A professional who examines the assets of his or her clients and suggests steps to reach the client’s financial goals.
fixed expenses Expenses that remain the same regardless of the circumstances.
income Money that is received from any source, including the money one earns through labor, for services, from the sale of goods, allowance, disability, inheritance, and investments.
inflows Any incoming money; your income, tips, overtime pay, and any other sources of income that you may have.
insolvency A condition when someone’s liabilities are greater than his or her assets; the inability to pay debts when they are due.
outflows Outgoing expenses; anything that you spend money on.
SMART goal Goals that are specific, measurable, attainable, realistic, and time-bound.
SMART strategy A method used by individuals and even companies to help provide a framework for how a goal should be created.
surplus The money left over when income exceeds expenditure.
take-home pay Also called net pay; the amount that is left of your pay after deductions are made.
variable expense An expense that changes from period to period, such as food or gasoline costs
credit The act of buying something or borrowing money with the promise to repay the lender at a future date
devalue To reduce the value of something.
finance manager An individual who manages money and assets, either for an individual or for an organization.
financial analyst An employee of a bank, a brokerage, a financial advisor, or a mutual fund company who studies companies and makes buy and sell recommendations; the analyst often specializes in a single sector or industry.
financial planner An investment professional who helps individuals set and achieve their long-term financial goals through investments, tax planning, asset allocation, risk management, retirement planning, and estate planning. The role of a financial planner is to find ways to increase the client’s net worth and help the client accomplish all of his or her financial objectives.
inflation The declining value of money due to rising prices.
interest A fee paid for the use of money over time. In other words, it’s the cost of borrowing money. Interest is often expressed as a percentage of the amount borrowed.
investment An item that is purchased with the hope that it will generate income or increase in value in the future.
lender A person, or a public or private group, who makes funds available to another with the expectation that the funds will be repaid, plus any interest or fees.
stock A share of ownership in a company
taxonomy A categorized list of words related to a particular topic.
trade show An event at which goods and services in a specific industry are exhibited and demonstrated.
annual income The total amount of income an individual earns in a year from working, interest income, dividends, gifts, and so forth.
asset Any object of value, including cash, investments, property, and personal possessions.
cash flow The flow of money in and out of a business or a household over a period of time.
income Money that is received from any source, including the money one earns through labor, for services, from the sale of goods, allowance, disability, and inheritance investments.
liability An obligation that legally compels an individual to settle a debt—for example, a mortgage or an electric bill.
bank A depository institution where one can keep and borrow money and take care of financial affairs.
compound interest Interest earned on both the principal amount and any interest already earned.
credit union A cooperative nonprofit financial institution that is privately owned and controlled by its members. It provides depository and lending services to its members.
Federal Deposit Insurance Corporation (FDIC) An agency of the United States that promotes public confidence in the US financial system by insuring deposits in banks and thrift institutions for up to $250,000, by identifying, monitoring, and addressing risks to the deposit insurance funds, and by limiting the effect on the economy and the financial system when a bank or a thrift institution fails.
Federal Reserve The central bank of the United States. “The Fed” incorporates 12 Federal Reserve branch banks located in major cities across the nation, along with all national banks, all state-chartered commercial banks, and some trust companies. It helps to regulate the US monetary and banking system
finance The science of the management of money and other assets; the management of money, banking, investments, and credit.
financial advisor A professional who provides financial planning and advice on financial matters.
financial literacy The ability of individuals to make appropriate decisions in managing their personal finances
financial services industry Financial institutions that help consumers, businesses, and governments manage money. These institutions can be depository or not.
future value What an amount invested today at a particular interest rate will be worth in the future.
insurance company A financial institution that protects persons against the risk of financial loss.
interest A fee paid for the use of money over time. In other words, it’s the cost of borrowing money. Interest is often expressed as a percentage of the amount borrowed.
National Credit Union Administration (NCUA) An independent federal agency that serves to supervise and regulate federal credit unions. It also provides account insurance for many state-chartered credit unions through the National Credit Union Share Insurance Fund.
present value The value of a future cash stream discounted at the appropriate market interest rate.
risk Degree of uncertainty of return on an asset; the possibility of loss.
simple interest The amount of interest based on a principal amount and not on earned interest.
time value of money Money’s potential to grow in value over time; the relationship between time, money, a rate of return, and earnings growth.
annuity Investment in which the investor exchanges a sum of money for a series of equal payments over time. Payments can include interest on the original sum plus income from investments. Annuities contracts generally continue throughout the life of the owner. They are often purchased to provide retirement income and shift the responsibility for investing to an investment company.
bond A loan an investor makes to a government or corporation for a specified amount of time for the purpose of raising capital for the government or corporation. In return the investor receives the principal plus interest.
capital The financial resources that are used to make money, which can take the form of equity or debt.
financial intermediary An institution that acts as a service for those who have extra money to save or lend and channels it to those who wish to invest or borrow.
mutual funds Investment products that combine the money from a large group of investors to buy stocks and other investments.
pension funds Financial products that specialize in gathering payments into retirement funds and investing those payments so that they can accumulate to an amount that provides income at retirement.
savings and loans Depository financial institutions that specialize in home mortgage loans
stock A share of ownership in a company.
thrifts Depository institutions that include savings and loans, as well as savings banks. They specialize in saving accounts and real estate financing.
annual income The total amount of income an individual earns in a year from working, interest income, dividends, gifts, and so forth.
debt-to-income ratio The amount of debt a person or a household has in relation to their income. Lenders use this ratio to decide if more debt can be taken on by the borrower.
earned income Any money that is generated by working.
net worth or wealth A measure of the value of all of the net assets owned by a person, a community, a company, or a country. Net worth for a business or an individual is computed by subtracting personal liabilities from personal assets.
passive income Earnings received from rental property or other business activity where the individual is not actively involved (such as royalties from publishing a book).
portfolio income Income from investments, including dividends, interest, or the sale of a property.
account summary The section of a bank statement that provides a quick overview of account activity.
ATM (automated teller machine) An unattended computerized machine that dispenses money when a personal coded card is used.
automatic payment An arrangement that authorizes a set payment to be automatically withdrawn from a checking or savings account on a specified day.
balance The remaining amount in a customer’s account that represents the amount the customer is able to withdraw.
bank statement An account summary of all financial transactions occurring over a given period of time on an account offered by a financial institution.
certificate of deposit (CD) Record of money deposited in a financial institution for a stated time period at a fixed interest rate.
checkbook A book containing blank checks to be used by the holder of a bank account.
checking account A bank account in which the account holder can withdraw his or her available funds by writing a check.
check register A booklet used to track and balance checking accounts.
credit In banking, money received in an account that results in increasing the account balance.
debit In banking, money paid from an account that results in decreasing the account balance.
direct deposit A method of payment that is electronically deposited into an individual’s account.
electronic banking A service provided by financial institutions that allows customers to manage their banking transactions through computerized network services.
Individual Retirement Account (IRA) A tax-deferred account that allows individuals to plan for their retirement.
money market account A type of savings account that offers higher interest rates, with higher minimum deposit levels than a regular savings account.
reconciliation The process of comparing two sets of records and getting them to correspond.
savings account An account where you receive interest on your deposits, but unlike a checking account that also earns interest, it may have some restrictions.
secured loan A loan that is backed by collateral such as cars, houses, or other assets.
unsecured loan A loan that is not backed by collateral but by the promise of the borrower to repay it.
withdrawal The act of taking money out of an account.
annual fee The once-a-year fee applied to some credit cards.
annual percentage rate The yearly interest charge applied to outstanding credit card balances. It is one part of the cost of credit. It refers to the way the interest is compounded rather than to the stated interest rate.
average daily balance The sum of your balance each day in the billing cycle divided by total number of days in the billing cycle.
bankruptcy A legal action in which an individual (or an organization) is unable to repay debts and therefore must surrender his or her assets to creditors or establish a repayment plan.
bond A loan an investor makes to a government or corporation for a specified amount of time for the purpose of raising capital for the government or corporation. In return the investor receives the principal plus fixed-interest payments periodically for a period of more than one year.
credit The act of buying something or borrowing money with the promise to repay the lender at a future date. In banking, the term also refers to money received in an account that results in increasing the account balance.
credit bureau A credit-reporting agency that checks credit information and keeps files on people who apply for and use credit.
credit card A plastic card with a magnetic strip connected to an account that is used to buy goods or services. Credit cards give borrowers the ability to pay balances over time by applying an interest rate to unpaid balances.
credit rating An assessment of the creditworthiness of an individual. Financial institutions use this rating to evaluate whether a person should be eligible to receive credit.
credit report A record of an individual’s or company’s bill-paying behaviors.
creditor A person or a business to which debt is owed.
debtor A person or a business that owes money or services to a creditor.
debt-to-income ratio The amount of debt a person or a household has in relation to their income. Lenders use this ratio to decide if more debt can be taken on by the borrower. A person’s debt-to-income ratio is determined by dividing his or her total monthly debts by their gross monthly income.
default The failure of a borrower to repay the loan.
FICO Fair Isaac Corporation, founded in 1956 by Bill Fair and Earl Isaac. The most common credit-scoring model used by lenders. A FICO score can range from 200-900.
finance charge A fee representing the cost of credit. It covers the total cost of credit, including but not limited to interest rates, service fees, late fees, application fees, and appraisal fees.
fixed rate An interest rate that doesn’t change.
grace period The period before interest begins to accrue on new purchases. If the balance owed is paid in full, no interest is computed.
interest A fee paid for the use of money over time. In other words, it’s the cost of borrowing money. Interest is often expressed as a percentage of the amount borrowed.
interest rate The cost for borrowing money, expressed as a percentage.
introductory rate A temporary interest rate, frequently called a “teaser rate,” that is offered by the credit card company. Introductory rates are designed to entice borrowers to apply for a specific credit card and often have strict rules that, if violated, cause the rate to adjust to a much higher percentage.
late fee A fee charged when a payment is not received on time.
line of credit A preapproved amount of credit given to an individual or a business.
minimum payment The smallest amount a borrower can pay in a billing cycle to keep the account in good standing.
mortgage A loan used to purchase a home. The property is used as security.
over-the-limit fee A fee charged to credit borrowers who exceed their credit limit.
personal installment loan A type of loan that has a set number of payments and is repaid with interest over a specific period of time.
student loan A type of loan that is used by a student to pay for educational costs.
syndicated loan A large loan in which a group of banks provide funds for a borrower. Syndicated loans are typically used by corporations or even governments and may involve a fixed amount or a line of credit.
variable rate An interest rate that goes up or down depending on the market rate.
annuity Investment in which the investor exchanges a sum of money for a series of equal payments over time. Payments can include interest on the original sum plus income from investments. Annuities contracts generally continue throughout the life of the owner. They are often purchased to provide retirement income and shift the responsibility for investing to an investment company.
blue chip stock The stock of a financially sound company with a history of strong earnings and reliable dividends.
bond A loan an investor makes to a government or corporation for a specified amount of time for the purpose of raising capital for the government or corporation. In return the investor receives the principal plus fixed-interest payments periodically for a period of more than one year.
business risk The level of uncertainty of expected returns due to a business’s poor performance, adverse economic conditions, or other external factors.
capital markets The market for intermediate and long-term investments.
common stock A security representing a share of ownership in a company. Securities representing part ownership in a corporation, providing voting rights and entitling the holder to a share of the company’s success through dividends and/or capital appreciation.
corporate bonds Bonds issued by corporations that typically pay higher interest than government bonds.
debenture bond An unsecured, interest-bearing bond issued by a company or governmental agency.
derivatives Financial instruments whose value depends on the value of something else, such as an asset or an index.
diversification The process of spreading investments across a wide range of securities to reduce risk.
economic risk The investment risk associated with the overall health of the economy.
exchange-traded fund (ETF) A collection of stocks, bonds, or other investment instruments that trade on a stock exchange
financial market A system that allows people to easily buy and sell financial securities. There is a variety of different financial markets.
future A contract that requires the buyer to purchase or sell a certain instrument at a specific time and price in the future.
global investment risk The risk associated with investing internationally. Currency risk, political risk, different taxation laws, and regulatory differences are all a part of global investment risk.
hedge fund A private investment fund that is lightly regulated and uses leverage to invest in many markets
inflation risk The general rise in prices of goods and services in an economy that results in a decline in the real value of money or a loss of purchasing power. The declining value of money due to rising prices.
interest rate risk The changes in the market value of a fixed-income security due to changes in market rates of interest. The risk that interest rates will change.
junk bond A high-risk, high-yield bond of low credit quality.
liquidity risk The ease with which an investment can be bought and sold and/or converted to cash.
market index A method for measuring a particular sector of the stock market; it is used as a benchmark to gauge the performance of a specific investment.
market risk The risk that the value of an investment will decrease due to changes in the market. Stock prices, interest rates, exchange rates, and commodity prices as well as other outside forces can affect market risk.
money market The financial market for short-term borrowing and lending.
municipal bond A bond issued by the state or local government. Municipal bonds have the unique benefit of their interest being exempt from federal taxation.
mutual funds A bond issued by the state or local government. Municipal bonds have the unique benefit of their interest being exempt from federal taxation.
NASDAQ NASDAQ is an acronym for the National Association of Securities Dealers Automated Quotations. NASDAQ was founded in 1971 and is the largest electronic stock exchange in the United States. Unlike the NYSE, it has no physical location and exists entirely in cyberspace.
New York Stock Exchange (NYSE) The NYSE was founded in 1792 and is the oldest and largest securities market in the United States. It is located on Wall Street in New York.
NYSE Amex Equities (formally known as AMEX) An American stock exchange located in New York. Its core business revolves around small to mid-size stocks, options, and ETFs. It has a reputation for holding the most liberal policies concerning company listings.
option A derivative contract that gives the investor the right, but not the obligation, to buy or sell a specific item (commodity, currency, security, etc.) at a fixed price on a specific date.
preferred stock A security representing partial ownership of the company. It is capital stock that provides a specific dividend that is paid before any dividends are paid to common stockholders and that takes precedence over common stock. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders cannot vote.
primary market A market relating to the first sale of new securities.
private equity Ownership of securities of companies that are not openly traded on stock exchanges; very wealthy investors are often interested in private equity investments.
REIT (real estate investment trust) An investment instrument similar to a mutual fund where investors pool their money to invest in real estate and/or mortgage loans.
risk tolerance A measure of an investor’s ability to cope with fluctuations in the value of their portfolio.
secondary market The market where previously issued securities are bought and sold. Stock exchanges such as the NYSE serve as secondary markets.
Series EE savings bonds Bonds offered by the federal government as an alternative to regular savings accounts. They can be purchased in amounts that range from $25 to $5,000. Series EE savings bonds earn interest for up to 30 years.
stock A security that represents partial ownership in a company.
Treasury bill (T-bill) Short-term US government security with a maturity date of one year or less. No interest is paid, but the debt is sold at less than the value and then repaid for full value at maturity.
Treasury bond A debt security of the US Treasury that is issued with a maturity length of 10 years or more. Treasury bonds are normally sold in $1,000 denominations.
zero-coupon bonds Municipal, corporate, or Treasury bonds that pay no annual interest over the life of the bond, are offered at a deep discount to par value, and are redeemed at full value upon maturity. The investor’s return on investment comes when redeeming the bond at its face value. Also called zeros or deep-discount bonds.